Federal Reserve Bank of Atlanta · Beige Book

Federal Reserve Bank of Atlanta

Summary of Economic Activity

Business contacts in the Sixth District indicated that economic activity expanded moderately, on balance, from mid-February through March. Labor market tightness and wage pressures persisted. Some nonlabor costs continued to rise and T1the conflict in Ukraine is expected to put additional pressure on commodities. Firms' pricing power was sustained. Retail activity was robust, but auto sales were down. Tourism activity strengthened. Housing demand was strong, though persistently low inventory levels, higher home prices, and rising mortgage rates constrained sales and further diminished affordability. Commercial real estate activity was mixed. Manufacturing saw continued solid demand. Conditions at financial institutions were steady, and consumer lending improved.

Labor Markets

T2Most contacts continued to report tight labor market conditions. T3Some firms reported proactively raising wages to reduce turnover or increasing the frequency of raises to keep in step with the market. Many noted that high turnover has been driven largely by workers chasing higher wages or workers' desire for greater flexibility. Several contacts who had previously resisted hybrid and remote scheduling began offering workplace flexibility to attract or retain staff. Government-funded and charity-based entities were especially challenged with reacting to market wage increases. To recruit and retain staff, employers reported offering more hybrid work arrangements, providing retention bonuses, and making part-time positions available to lure back retirees.

Expectations about accelerating wage increases were mixed. Some firms anticipate wage growth will increase this year across the board, while others plan to be more targeted with raises. More contacts noted that inflation is creating upward pressure on wages. Among those planning to hold the line on wage increases this year, it was noted that sustained higher inflation could push them to re-think their plans.

Prices

T4District contacts continued to note rising input costs, particularly for materials like lumber and steel. The conflict in Ukraine, in addition to impacting fuel costs, is expected to put upward pressure on other input costs such as nitrogen and wheat. Contacts reported implementing various mitigations to ongoing supply chain constraints affecting costs, including investments in technology to improve efficiency, consolidation of shipping routes or loads, and renting warehouse space to store more inventory. Margins largely remained elevated and pricing power was consistent with recent reports, though more contacts expressed concerns over the potential of further price increases dampening demand. The Atlanta Fed's Business Inflation Expectations survey showed year-over-year unit cost growth was relatively unchanged at 4.1 percent, on average, in March. Firms' year-ahead inflation expectations increased significantly to 3.8 percent, on average, up from 3.6 percent in February.

Consumer Spending and Tourism

T5District retailers reported solid demand during the reporting period. However, some softening is expected over the next few months amid expectations of smaller tax refunds (due to the advance in child tax credits) and rising gas prices. Automotive unit sales were down, and prices increased over the reporting period as a result of continued supply constraints.

Tourism contacts reported robust spring break activity and cited Florida's beaches as a top destination. Hotel average daily rates and occupancy levels were up over 2019 levels. Some improvement in business travel and conventions was reported, although this segment continues to lag leisure travel.

Construction and Real Estate

Though demand for housing remained robust during the reporting period, T6rising costs and limited inventory continued to suppress sales. Cost inflation in the construction of new homes persisted as supply chain disruptions and labor shortages challenged homebuilders. Contacts reported that declining home ownership affordability was a growing concern for buyers. Nashville, Atlanta, Tampa, and Orlando experienced the sharpest declines in affordability over the past year, as mortgage rates rose and home prices in these markets reached record levels.

District commercial real estate (CRE) conditions remained mixed. Activity in the multifamily, industrial and tech-related (data centers, etc.) sectors experienced continued significant upward momentum. The office sector improved modestly as more employers reopened, but contacts indicated that elevated levels of sublease space could hinder market rent growth until absorbed. Contacts continued to report healthy competition among CRE lenders; however, some lenders reported a modest increase in underwriting standards. Smaller banks and non-bank lenders have been identified by market contacts as the more aggressive of CRE lenders.

Manufacturing

Manufacturing activity was consistent with the previous report. Contacts noted continued strong demand, though rising input and labor costs put pressure on margins for some. According to the Atlanta Fed's Business Inflation Expectations survey, T7most manufacturers surveyed reported moderate to severe supply chain disruptions including supplier delays, difficulties locating alternate suppliers, production delays and delays in the delivery/shipping of final inventories. Most respondents expect these disruptions to continue over the next 6-12 months. Manufacturers also reported that production levels were hindered primarily by a lack of workers and supply availability. Manufacturing contacts expect further strengthening in demand, but concerns over supply chain disruptions, labor shortages, and rising input costs remained.

Transportation

Transportation activity was mixed over the reporting period. Some District ports reported continued double-digit growth in container volumes resulting from a shift in cargo by shipping lines from the west coast to the east coast. Demand for industrial space increased, but capacity remained tight despite an increase in new warehouse construction. Air cargo contacts noted growing freight volumes; however, new COVID lockdowns in China diminished air carriers' ability to move cargo in and out of the country. Railroads saw a significant decrease in total rail traffic year to date as compared with year-earlier levels, led by double-digit declines in petroleum and petroleum products, motor vehicles and parts, metallic ores and coal. Intermodal volumes also fell.

Banking and Finance

Conditions at District financial institutions remained stable. Loan growth improved, with consumer lending experiencing the strongest growth among loan portfolios. Deposit balances were flat. Some banks reported increases in short-term borrowings to fund the stronger loan growth. Asset quality remained strong. Delinquency rates were stable for most portfolios and net charge-offs held steady. With the increase in loan growth, provisions for loan losses also slightly increased.

Energy

T8Activity continued to strengthen across energy sectors. Drilling increased as global demand boosted exports of crude and natural gas and kept prices elevated. Energy contacts noted that oil that would typically be sent to domestic storage hubs was being routed to the Gulf Coast for export. However, some contacts reported that labor and equipment availability challenges hindered oil and gas production. Refinery operations across the region were largely at full capacity. Utility contacts reported that the tight natural gas market kept the price of electricity elevated; still, demand for power across customer segments was stable. Investment in renewables continued to grow, particularly solar power projects and offshore wind planning in the Gulf of Mexico; however, contacts expressed concern about potential disruptions to domestic solar power manufacturing and development projects resulting from tightness in parts availability related to reduced imports.

Agriculture

Agricultural conditions remained mixed. Parts of the District experienced moderately dry conditions. On a month-over-month basis, Florida's orange crop and grapefruit productions were down 5 percent in February and both forecasts were below last year's production. Agriculture contacts noted fertilizer and chemical costs have doubled recently and are expected to remain elevated over the next six months. The conflict in Ukraine is expected to have a "profound effect" on commodity prices going forward, especially for potash, a critical component of fertilizer.

For more information about District economic conditions visit: www.frbatlanta.org/economy‐matters/regional‐economics