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 expanded at a modest pace in June and early July. The outlook among most firms remained cautiously optimistic, although the majority of contacts acknowledged that risks were weighted to the downside.
Retailers noted that sales improved slightly, but cautioned that consumers appeared to be conservative in their purchases. Auto dealerships reported continued strong sales. The hospitality sector continued to experience steady growth as occupancy and room rates continued to rise. Most brokers and homebuilders reported modest increases in sales and prices from very low levels of activity, while contractors stated that the apartment sector remained strong. Manufacturing firms indicated that production continued to expand, but at a much more moderate pace than earlier in the year. Bank lending activity increased slightly for residential real estate, while auto loan activity remained robust. Employment growth for the District was subdued and employers remained cautious about future hiring. Lower energy prices have eased pricing pressures for many firms and wage pressures remained modest.
Consumer Spending and Tourism. District retail sales activity improved slightly in June and early July, but merchants reported that consumers remained very conservative. Several discount retailers and auto dealers signaled strong sales, while most department stores conveyed more modest activity. Restaurant and food service contacts reported that demand had softened a bit, but sales at higher-end establishments remained strong.
Tourism activity and business travel remained strong and the outlook among contacts was positive for the rest of the year. Occupancy and room rates were up in many parts of the District. Recent reports on convention bookings and theme park attendance were also solid. Concerns shared earlier in the year regarding rising fuel costs and the potential impact on travel and spending had abated. However, concerns were shared about the potential impact of economic and financial stress abroad and the effect that would have on international travel, especially to Florida. There continued to be a drop off in cruise line bookings compared with earlier in the year.
Real Estate and Construction. District residential brokers indicated that home sales were flat to slightly up compared with year-ago levels. Reports indicated strong sales at the middle price points, while several brokers noted that declining inventories of foreclosed homes were limiting investor-driven sales. Brokers also reported that the decline in inventories has helped stabilize home prices in many areas. Most brokers reported that home prices were flat to slightly up compared with a year earlier. However, contacts continued to note some downward pressure on home prices resulting from low purchase offers and appraisals that were coming in well-below asking and offering prices. The sales outlook among brokers remained positive with most anticipating continued modest year-over-year home sales gains.
District homebuilders reported that new home sales and construction rose modestly compared with year-ago levels. The majority indicated that new home inventories declined further on a monthly and an annual basis. Most builders reported that new home prices were flat to slightly up compared with a year earlier. Price gains were strongest among Florida builders. Contacts noted that multi-family construction remained robust. In the near-term, homebuilders expect sales and construction to post modest gains compared with a year earlier.
Apartment sector gains drove improvements in the District’s commercial real estate markets as occupancies rose and rental rates increased. The region’s office and industrial sectors saw small improvements as vacancy rates moderated somewhat; however, reports on District retail real estate continued to be more mixed. The majority of commercial contractors said that construction activity was flat on a year-over-year basis. The majority of contacts anticipate a modest increase in private commercial construction activity through the remainder of the year, while public works projects are expected to decelerate.
Manufacturing and Transportation. Manufacturing contacts indicated that the pace of new orders and production growth remained positive, but had moderated. A major European-based aircraft manufacturer announced it will locate its first American manufacturing facility in Alabama. A Florida manufacturer, closely tied to the construction industry, reported improved but volatile business conditions based on increases in construction of multi-family dwellings, healthcare facilities, and construction at ports.
According to railroad contacts, intermodal activity continued to strengthen. Double-digit increases in shipments of petroleum products, motor vehicles, and equipment were reported; however, movement of grain, metallic ores, and nonmetallic minerals declined. A logistics contact indicated slowing activity, particularly in the retail sector, and had lowered projections slightly for the remainder of the year. Trucking contacts reported softening volumes, and forecasts for the upcoming shipping season were slightly less robust than earlier in the year.
Banking and Finance. Banking contacts noted some improvement in residential mortgage lending. Auto loans continued to be a source of strength, while commercial and industrial lending remained soft. Contacts reported significant competition among lenders for credit-worthy customers. Bankers indicated that low interest rates, coupled with a limited number of qualified borrowers, continued to squeeze bank margins.
Employment and Prices. Regional employment growth remained positive, but muted. Employers continued to cite uncertainty regarding future economic conditions as a reason for limiting hiring and recent economic volatility appears to have exacerbated these anxieties. Small stores with very low price points reported doing well and were expanding with significant hiring plans across the District. Contacts continued to note difficulty in finding qualified applicants for many highly- technical positions, and some reported problems finding candidates for some lower-skilled positions. Many manufacturing and trucking contacts continued to note challenges in attracting applicants with necessary skills. The skills mismatch problem has been especially hard on low-wage individuals, according to community and economic development contacts.
Firms responding in June to the Atlanta Fed’s Business Inflation Expectations survey reported a decline in unit cost expectations for the second consecutive month. Survey respondents indicated that, on average, they expect labor and material costs to rise 1.7 percent over the next 12 months. That number is down from 1.8 percent in May and 2.1 percent in April. Firms also reported that their unit costs had risen 1.6 percent compared with this time last year, which is unchanged from their assessment in May. Business contacts reported that lower prices for natural gas and refined oil products were reportedly providing some cost relief. Wage pressures remained modest, although some employers noted that they were increasing starting pay for workers with high- demand skill sets.
Natural Resources and Agriculture. Contacts continued to report that investment in expanding and maintaining existing transportation infrastructure would be necessary to accommodate increases in domestic oil and natural gas production. Contacts have noted a steady increase in capital expenditures on refineries for upgrades and expansions. Deep-water permits for offshore drilling have increased. Varying levels of drought conditions had expanded through much of the District resulting in stress to some crops. However, the June tropical storm helped some areas. Compared with last year, June’s prices paid to farmers were down for cotton and corn while prices for oranges, beef, and soybeans increased.