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 economic activity continued to expand at a moderate pace in April and May. Reports were somewhat more positive than the previous report, and expectations remained generally optimistic across most sectors. However, uncertainties surrounding the potential impact of developments in Europe weighed on the outlook.
Most retailers noted a modest increase in sales activity, and auto sales remained strong. Positive reports from the hospitality sector included healthy occupancy and room rates, and future bookings were solid. Brokers and homebuilders noted higher sales compared with last year, and commercial real estate contacts stated they were seeing improvements led by gains in the apartment segment. Manufacturers cited modest growth in new orders and production. Bankers asserted that the demand for refinancing mortgages continued to increase slowly. Hiring activity was positive, but muted. Firms continued to note difficulty filling specialized positions. Most businesses indicated having little pricing power; however, an increasing number of firms said that they have been able to successfully pass on price increases, especially those tied to energy costs.
Consumer Spending and Tourism. Reports from District retailers indicated that consumer spending improved in April and May. Merchants anticipate that sales will continue to grow at a modest pace in the near term. The auto sector remained strong, and regional dealers expect sales to remain solid going forward. Despite the recent slide in gasoline prices, merchants remained wary of the potential impact on personal spending. That said, few retailers reported significant changes in consumer behavior with the exception of those operating in rural areas.
Leisure and business travel contacts continued to report robust activity and a solid outlook for the remainder of 2012. Occupancy and room rates exceeded expectations and convention bookings remained strong. Reports also showed that a number of hospitality-related capital investment projects were underway in several areas across the District. Florida continued to be bolstered by visitors from South America and Canada. Cruise-line bookings were down slightly compared with the last report. High fuels costs were identified as a downside risk to the summer travel season, but hospitality contacts were somewhat less concerned than they were earlier in the year. They were more concerned, however, about a potential decline in visitors from Europe.
Real Estate and Construction. The majority of residential brokers said that home sales exceeded year-ago levels in April and May with many reporting that sales exceeded expectations. Strengthening sales, mostly from cash buyers and investors, were noted by most Florida contacts. Brokers observed that inventory levels across the District continued to decline. The majority of contacts reported that home prices were flat to slightly up on a year-over-year basis. The sales outlook among brokers remained positive with most anticipating year-over-year gains, albeit from very low levels of overall activity, over the next several months.
District homebuilders reported that new home sales and construction rose modestly compared with a year earlier. Builders indicated that home price declines continued to abate. The majority indicated that new home inventories declined further on a year-over-year basis. Contacts noted that multifamily construction remained robust and new projects continued to be announced. In the short-term, homebuilders expect sales and construction to be flat to slightly up compared with a year earlier.
Improvements in the District’s commercial real estate markets were led by gains in occupancy and solid rental growth in the apartment sector. Overall, small improvements were noted in the region’s office and industrial sectors as vacancy rates moderated somewhat; however, reports on District retail real estate were more mixed. Although flat on a year-over-year basis, the majority of commercial contractors said that year-to-date construction activity was slightly ahead of activity in last year’s fourth quarter. Backlogs were down from a year earlier. Most contacts anticipate a modest increase in private construction activity through the remainder of the year, while public works projects are expected to decelerate.
Manufacturing and Transportation. The District’s manufacturing sector continued to expand modestly in April and May. Manufacturers reported growth in new orders and production, but noted that employment growth had slowed somewhat. A District auto manufacturer announced plans to add a third shift to meet increased global demand for their products. Auto producers continued to note concern about economic and financial conditions in Europe, a significant market for the region’s auto exports.
Railroad contacts noted continued volume growth in shipments of automobiles, metals, and forest products, along with strong intermodal demand. Shipments of coal, construction-related aggregates, and chemicals continued to moderate, however. Reports indicated that elevated diesel prices were allowing railroads to maintain a competitive edge over trucking. At District ports, imports of construction-related steel was reportedly strengthening.
Banking and Finance. Lending standards remained largely unchanged since the last report, but banking contacts indicated that more applicants were qualifying for loans. Most District bankers commented that demand for refinancing mortgage loans continued to increase; more applicants had ample cash for down payments or enough equity in their homes to meet the loan requirements. Credit availability increased and competition among lenders for loans remained strong. Some bankers mentioned improvements in the general creditworthiness of borrowers and appraisal valuations.
Employment and Prices. Regional employment growth remained positive, although contacts noted that uncertainty regarding future economic conditions was a major headwind for additional job creation. Employers continued to express difficulty hiring for specialized positions, such as those in information technology and engineering. Trucking contacts also noted continuing trouble finding qualified labor to meet new federal regulations and some manufacturers cited difficulties finding trained operators and welders. Skilled auto mechanics also appeared to be in short supply. Firms noted the importance of efforts by government and academic institutions to coordinate training programs with large employers. Contacts also indicated that private training programs funded by trade associations or industry groups were being developed to train workers where larger public programs were not available.
Though most contacts continued to indicate 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 being passed on to consumers without much difficulty. Firms responding in May to the Atlanta Fed’s Business Inflation Expectations survey reported that unit costs were expected to rise 1.8 percent for the year ahead, down from an average of 2.0 percent over the previous three month period. According to businesses surveyed, materials costs had subsided somewhat since April, though they are still expected to have a moderate upward influence on prices over the coming year. Despite continuing reports that sales levels are below what they consider to be normal, contacts anticipate little to moderate upward price pressure from improving sales levels over the next 12 months.
Natural Resources and Agriculture. Contacts noted that more investment is needed in transportation infrastructure to accommodate recent increases in domestic and Canadian energy production. District refining contacts indicated that the capacity to process heavier grades of crude are limited and despite investment in additional refinery capacity, a number of recent and planned refinery closures elsewhere in the country could imply that existing facilities may have difficulty meeting demand for distillate fuels, like diesel and jet fuel. Permits for offshore drilling have increased in recent months. Drought conditions worsened in most of Florida and Georgia and parts of Alabama. Prices paid to farmers for oranges were up and a contact reported these higher prices were dampening demand. Prices paid for soybeans were up on a year-over-year and month- over-month basis because of strong global demand and decreased supplies coming from South America.