Federal Reserve Bank of Atlanta · Beige Book

Federal Reserve Bank of Atlanta

Summary of Economic Activity

T1Business contacts in the Sixth District indicated that economic activity continued to expand at a modest pace from mid-November through December. Labor markets continued to gradually improve, and wage pressures were muted, on balance. T2Nonlabor costs related to construction and supply chains rose further over the reporting period. T3Although retail contacts reported overall holiday sales were subdued, ecommerce activity remained strong. Auto dealers noted sales declined since the previous report. Tourism and hospitality activity softened. T4Residential real estate demand remained strong, but challenges in commercial real estate markets persisted. T5Overall manufacturing activity rose moderately. T6Banking conditions remained stable, but some contacts noted an uptick in delinquencies, mostly with residential mortgages.

Employment and Wages

On balance, contacts noted that employment levels and hours worked rose over the reporting period. However, labor conditions were strained in several parts of the District as COVID-19 cases rose and absenteeism slowed activity. T7Labor markets continued to remain bifurcated with low turn-over and small steady improvements occurring among higher skilled positions where most can work remotely, while markets for positions that require in-person work (many of which are low-skilled) were tighter and had higher turnover. Looking ahead, many employers anticipate adding to headcounts as the pandemic subsides and demand increases. However, because of efficiencies realized during the pandemic, staffing levels for some firms are not expected to return to pre-pandemic levels.

Most contacts also agree that flexible work arrangements will be a part of their staffing model going forward, allowing them to retain and attract higher-quality talent, and for some, reducing their real estate footprint.

Despite high demand for low-skilled workers, most employers resisted raising wages, though many increased referral, signing, and productivity bonuses to attract and retain workers. The upward pressure on wages at the lower end of the pay-scale, along with challenges to sourcing the required skills, accelerated talks of increasing automation. In Florida, the majority of employers expect little impact from the mandated increases to minimum wage as market forces have already begun to push wages to $15 per hour or will before the 2026 deadline.

Prices

Consistent with previous reports, input costs, particularly for lumber, aluminum, and steel, continued to rise notably. Transportation, shipping, and packaging costs increased as well. More contacts mentioned an ability to pass through increased costs to retailers and consumers. The Atlanta Fed's Business Inflation Expectations survey showed year-over-year unit costs increased significantly to 1.7 percent on average in December, up from 1.3 percent in November. Year-ahead expectations remained relatively unchanged at 2 percent.

Consumer Spending and Tourism

Retailers reported that, as expected, holiday sales were softer than in the previous year. Brick-and-mortar stores continued to struggle, while on-line sales were strong. Contacts expressed having little visibility into 2021 as some expect consumer spending behavior to change as a result of the pandemic. After experiencing a slight recovery in vehicle sales levels during the Fall, auto dealers reported softening demand through the end of the year, which was largely attributed to a resurgence in COVID-19 cases.

Travel and tourism activity softened since the previous report. Contacts noted that properties affected by recent hurricanes, primarily in Alabama, had not completed repairs as quickly as anticipated, which led to canceled reservations. Drive-to destinations across the District continued to experience solid activity; however, some contacts anticipate that surges in COVID-19 cases would dampen demand in the near term.

Construction and Real Estate

Home sales throughout the District remained strong as low interest rates continued to fuel demand. Existing home inventory remained extremely low in many markets, continuing to place upward pressure on home prices. The pace of new home construction continued to lag behind demand and lumber and labor costs remained a concern for builders. However, builders noted the ability to pass along rising costs to buyers through higher home prices. Though down from peak levels, mortgages either in forbearance or in delinquency remained elevated throughout the District, especially in rural areas of Alabama, Mississippi, and Louisiana, as well as urban markets in South and Central Florida, and North Georgia.

Commercial real estate (CRE) activity continued to be impacted by the pandemic. Hospitality, which was especially hard hit earlier in the year, experienced declining occupancies over the reporting period. The retail sector remained challenged due to a combination of rising ecommerce activity and an oversupply of retail space. Low levels of tourism and travel were reported as having a notable impact on activity across the hospitality and retail sectors. The number of new CRE borrowers seeking relief continued to moderate. Recent CRE asset valuations confirmed that values have deteriorated and may be creating impediments to new lending along with tighter underwriting standards.

Manufacturing

Manufacturing contacts reported a moderate rise in overall business activity since the previous report. While new orders increased only slightly, production levels rose at a stronger pace. Contacts indicated that finished inventory levels had fallen, while purchasing managers described delivery times as getting somewhat longer. Expectations for future production levels increased notably, with over half of contacts expecting higher levels of production over the next six months.

Transportation

Transportation firms reported increased levels of activity since the previous report. Freight forwarders experienced robust volumes and increased revenue due to sustained growth in ecommerce activity. Air cargo contacts noted year-over-year revenue growth as capacity constraints pushed up rates and congestion in Asian seaports drove some cargo, particularly high-dollar goods, to air transportation. Distribution of the COVID-19 vaccine is expected to bolster activity for both air cargo carriers and freight forwarders in the near term. Railroads reported considerable improvements in total traffic, including double-digit growth in intermodal freight and increased shipments of grain, food products, non-metallic minerals, iron and steel scrap, and waste and nonferrous scrap. Nevertheless, some industry contacts do not expect a recovery to pre-pandemic levels until 2022 or beyond.

Banking and Finance

Conditions at financial institutions remained stable. Loan balances across most portfolios continued to trend downward, attributed to economic uncertainty, concerns about credit quality, and collateral valuations. Deposit levels remained elevated, and financial institutions continued to hold higher balances in cash accounts and their securities portfolios. Although a majority of loans modified earlier in the year have exited forbearance arrangements, credit quality did not significantly deteriorate. Still, financial institutions reported some higher noncurrent balances, primarily associated with residential mortgages.

Energy

Weak demand for crude oil, fuels, and other energy products persisted over the reporting period. Refinery output remained low, resulting in further consolidation among refiners. Industry contacts reported increasing optimism surrounding COVID-19 vaccine news, which has helped to strengthen crude oil prices, although concerns about oversupply diminished some of that confidence. While many planned petrochemical processing expansion projects and liquified natural gas export terminal construction projects remained stalled, some contacts reported renewed interest in moving projects forward. Within the utilities sector, contacts noted energy usage remained sensitive to COVID-19 conditions. Nevertheless, investments remained solid in renewables, grid modernization, and other infrastructure.

Agriculture

Agricultural conditions were mixed. While drought-free conditions prevailed in most of the District, some abnormally dry conditions were reported. Some counties in Alabama, Florida, Louisiana, and Tennessee were designated as natural disaster areas due to losses suffered from earlier hurricanes and storm damage. December production forecasts for Florida's orange and grapefruit crops were down from the previous report's forecasts and below last year's production. The USDA reported year-over-year prices paid to farmers in November were up for corn, cotton, and soybeans but down for rice, cattle, broilers and eggs while milk prices were unchanged. On a month-over-month basis, prices increased for corn, cotton, rice, soybeans, cattle, broilers, and milk but decreased for eggs.

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