The following is the text of the Federal Reserve Board’s Sixth District-- Atlanta.
SIXTH DISTRICT - ATLANTA Summary
Reports from Sixth District business contacts indicated that the pace of economic activity expanded at a moderate pace in late February through March. Expectations remained generally positive across most sectors, although contacts expressed concern regarding the impact of higher energy prices on the outlook.
Retailers mostly indicated sales were growing at a modest pace and auto sales remained strong. Leisure and hospitality businesses reported robust activity in all segments except cruise lines. Homebuilders and brokers experienced improvements in sales of new and existing homes while multifamily construction remained strong. General contractors noted slow improvements in commercial construction conditions. Manufacturers and transportation contacts reported positive production trends, on balance. Loan demand remained relatively weak according to community bank contacts. The share of firms reporting they were hiring continued to increase, although many contacts continued to express a preference for part-time or temporary contract workers. Most contacts continued to report having relatively little pricing power. However, the proportion of firms saying they were successful in their attempts to pass on price increases rose since the last report.
Consumer Spending and Tourism
Most contact reports on consumer spending were generally positive. Sales of home appliances, furniture, and autos were solid, while apparel was more mixed. Most retailers remained optimistic that sales would improve over the next three months, but noted that the impact of higher gasoline prices posed a downside risk to their sales outlook.
Tourism activity remained strong and contacts were optimistic about the outlook for leisure and hospitality spending in the summer. Occupancy rates were up in many areas and South Florida continued to be boosted by visitors from South America and Canada. Convention activity continued to improve as well. Similar to retail, tourism contacts expressed concern about higher fuel costs and the potential impact on domestic travel to many regional tourist destinations. There continued to be a modest drop off in bookings on some cruise lines, which was attributed mostly to the recent disaster off the coast of Italy.
Real Estate and Construction
The majority of residential broker contacts reported that home sales exceeded the year earlier level in late February and March. More than two-thirds of the brokers indicated that sales met or exceeded their expectations. Florida contacts noted strengthening sales, particularly in South Florida markets. Many noted that inventory levels across the District continued to decline on a year-over-year basis and, in spite of this, home prices were flat to slightly down compared with a year ago. The outlook among brokers for sales growth remained positive, with most anticipating modest year-over-year gains over the next several months.
The majority of homebuilder contacts reported that new home sales and construction rose modestly during late February and March compared with a year earlier. Similar to brokers, builders also noted that home price declines abated somewhat and new home inventories continued to decline on a year-over-year basis. Contacts observed that multifamily construction remained robust across much of the District and new projects continued to be announced. Over the next several months, homebuilders anticipate sales and construction to be flat to slightly up compared with a year ago.
Most commercial real estate contacts indicated that conditions continued to improve slowly in the region. Contractors noted a slight improvement in demand, but the market remained very competitive and overall activity remained at low levels. Commercial real estate brokers continued to report modest improvements in demand, mostly for class A space in urban markets. Some reported that businesses have become more willing to move ahead with lease plans. Rent concessions continued to be noted with several brokers reporting that rates have begun to stabilize; however, longer leases were reported which included generous tenant improvements. The outlook among contacts was a bit more positive than previously reported, but most contractors and commercial real estate brokers continued to anticipate that activity would improve slowly this year.
Manufacturing and Transportation
Manufacturing activity across the Sixth District improved compared with the last report. Most contacts reported an increased level of both new orders and production. Several large auto manufacturers announced plans to hire more workers to meet increased demand for their products. A major industrial equipment producer and two medium-sized manufacturers announced plans to increase their presence in Georgia. Most manufacturers also indicated some increase in non-labor input costs.
Transportation contacts continued to report volume growth across most segments with the exception of air cargo, which is being hindered by slowing global demand and rising fuel costs. A railroad contact noted significant volume increases in automobiles, steel, and forestry products. Domestic coal shipments slowed because of the effects of warmer weather and lower natural gas prices. A port contact indicated strong container volumes and increases in steel imports. The majority of transportation contacts reported substantial investment spending in anticipation of future demand.
Banking and Finance
Contacts at community banks indicated liquidity levels remained high, a result of increasing deposit balances and relatively soft loan demand. Some contacts acknowledged a slight increase in demand for C&I and commercial real estate loans in some metropolitan areas, and a general rise in demand for automobile loans. In rural areas, however, low property valuations were said to be hindering overall loan activity. The demand for mortgages varied widely by market and some community bank contacts indicated that they have exited the mortgage origination market altogether. Lending standards at these institutions have remained largely unchanged. Smaller institutions noted tough competition from larger banks for credit customers. Many of these contacts expressed concern that regulatory compliance costs were affecting profit margins.
Employment and Prices
Overall hiring trends were positive, but growth remained relatively modest in late February and March. While business contacts noted some increased optimism about the economic outlook, most firms continued to approach expansion plans with considerable caution. Among firms adding to payrolls, many were utilizing temporary or contract hires in order to contain costs and retain flexibility. Reports indicated that smaller businesses were looking to rebuild margins before proceeding to adjust their payrolls. Several businesses, including trucking related firms, asserted that they were faced with a lack of qualified labor. One large manufacturer addressed the issue of the lack of qualified workers by bringing back retirees on a contract basis to help train new hires.
Though most contacts continued to report having little pricing power, more firms recounted successful attempts or plans to pass on price increases since the last report. Increased transportation costs, including those resulting from higher gasoline and other fuel prices, were reportedly passed on to consumers without much difficulty. According to the firms surveyed in the Atlanta Fed’s March Business Inflation Expectations survey, unit costs were expected to rise two percent for the year ahead, up slightly from February. According to the businesses surveyed, profit margins, though still below normal, have begun to improve. Firms expect modest improvement in margins over the next year.
Natural Resources and Agriculture
Investment in transportation infrastructure for oil and natural gas continued to increase; however, contacts noted that more investment is needed to accommodate recent increases in domestic and Canadian energy production. District refining contacts noted that the capacity to process the heavier grades of crude oil that are increasingly available is limited, despite recent investment in additional refinery capacity. While conditions improved in parts of the District, much of Georgia and Florida continued to experience varying degrees of drought. Contacts also reported that Florida citrus growers continued to fight greening disease. Prices paid to farmers for poultry and soybeans were up from the previous reporting period. Contacts continued to report concerns regarding available labor supplies in Georgia and Alabama, attributing this to the tougher immigration laws.