Federal Reserve Bank of Atlanta · Beige Book

Federal Reserve Bank of Atlanta

Summary of Economic Activity

Economic activity in the Sixth District expanded at a moderate pace, on net, from January through mid-February. Demand for workers remained strong, and labor market tightness endured. T1Upward pressure on wages was widespread, especially for lower-paid positions and skilled trades. Nonlabor costs grew, and firms' pricing power increased. Retail sales were healthy, but auto sales remained constrained by lack of supply. T2Tourism activity softened somewhat due to the surge in the Omicron variant, though advance bookings were strong. Demand for housing remained robust, but sales were constrained by low inventory levels. Activity in commercial real estate was mixed. Manufacturing activity was strong. Conditions at financial institutions were stable, though residential mortgage delinquencies rose somewhat.

Labor Markets

T3Demand for workers remained strong over the reporting period and tightness in the supply of labor persisted. However, many contacts indicated labor market conditions have eased modestly since the beginning of the year. Poaching of employees lessened somewhat. Most firms continued to hire to fill vacant positions while others looked to grow headcounts to meet strong business demand. A high-end restaurant noted moving to a scheduling system that utilizes employees' preferences for work, allowing them to "shift surf" among several restaurants to accommodate personal schedules and maximize income, which ultimately resulted in staffing shortages at some establishments. Reports also indicated a significant shortage of skilled technicians resulting in long waits for service calls and repairs to commercial equipment and vehicles. Several firms noted that while there was a spike in absenteeism related to the Omicron variant surge and more employees were impacted, the new variant moved through more quickly than earlier variants.

Although upward pressure on wages was widely reported, particularly at the lower end of the pay scale and among skilled trades, bonuses were used to attract and retain employees as firms tried to hold the line on wage increases. Some contacts noted that positions which offered flexibility were easier to fill. Wages are expected to continue to rise this year, but there is a great deal of uncertainty around the pace of growth.

Prices

District contacts noted increasing input costs over the reporting period, with considerable growth in the cost of freight, raw materials, and labor. T4Many contacts continued to describe supply chain issues, particularly a dearth of available labor, as the driving factor behind rising costs. The concerns over pricing power noted in the previous report eased, with most firms seeing higher margins from price increases with little to no impact on demand. Most contacts expect costs to remain elevated through at least the end of the year. The Atlanta Fed's Business Inflation Expectations survey showed year-over-year unit cost growth increased slightly to 3.7 percent, on average, in January. T5Firms' year-ahead inflation expectations remain unchanged at 3.4 percent, on average.

Consumer Spending and Tourism

District retailers reported little change from the previous report. T6However, with the expiration of the advance on the child tax credit and the anticipation of smaller tax refunds, some softening in activity is expected over the next few months. Demand for vehicles remained strong, limited only by availability. Some contacts reported that trucks and trailers were pre-sold and just pending delivery.

Travel and hospitality contacts reported a slight softening in activity during the first few weeks of January due to the Omicron variant surge. Advance bookings for leisure travel were reported to be strong through the second quarter. While business travel and conventions are expected to improve during the first half of 2022, this segment remains well below pre-pandemic levels.

Construction and Real Estate

T7Demand for housing continued to outpace supply in the District. Many markets remained attractive to buyers relocating from more expensive regions of the country, such as the Northeast and West Coast. Rising interest rates motivated many buyers to purchase or refinance before rates moved higher, leading to increased mortgage originations. Credit quality among borrowers remained healthy, with lenders indicating stronger demand and looser standards for non-qualified and jumbo mortgages. Low inventory levels suppressed sales and pushed home prices higher throughout the District, putting further downward pressure on affordability. Homebuilder contacts indicated steady demand from non-primary buyers (i.e., investors, second home buyers) as well as continued cost pressures on materials and labor.

Commercial real estate (CRE) activity was mixed. Conditions in the industrial real estate sector remained robust. 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. After a robust year, multifamily activity slowed due to seasonality; however, occupancies remained at healthy levels. Contacts continued to report robust competition among CRE lenders; however, some reported a modest tightening of underwriting standards. Smaller banks and non-bank lenders have been identified by market contacts as the more aggressive of CRE lenders.

Manufacturing

T8District manufacturers experienced continued strong demand and healthy pipelines over the reporting period, with several noting historically high sales levels, profitability, and improved margins. Several contacts reported ongoing delays in the procurement of components and spare parts, particularly from China. T9The outlook for manufacturers, while optimistic about demand, was somewhat to the downside amidst growing geopolitical risks, continued supply chain constraints, and inflation.

Transportation

Transportation activity in the District strengthened, on balance, since the previous report. Demand for trucking services remained strong amid persistent shortages of drivers, trailers, and chassis. In some markets, warehousing was reported to be at capacity. Sea ports, most notably in Florida, experienced growing container volumes and new cargo vessel business as shipping lines shifted to east coast ports to avoid congestion on the west coast. The outlook among transportation contacts remains positive, with most expecting continued strong demand through the first half of 2022.

Banking and Finance

T10Conditions at District financial institutions were stable over the reporting period. Loan growth across most portfolios was obscured by the number of forgiven commercial and industrial Paycheck Protection Program loans. Credit cards and other consumer loans experienced strong growth. Deposits slowed and institutions increased borrowings to provide additional liquidity. Institutions experienced some increases in delinquencies, particularly in the residential portfolio, but overall delinquencies remained below historical levels.

Energy

Demand for energy products strengthened since the previous report, resulting in increased activity across energy sectors. Oil and gas production picked up across the region and contacts indicated that liquefied natural gas (LNG) export projects had returned after pandemic-driven delays. At the same time, domestic demand for LNG soared as a result of extremely cold weather in parts of the U.S. Utilities contacts reported that demand for power was up across customer segments. Energy industry contacts continued to describe efforts to develop lower carbon energy feedstocks and products, such as biofuels.

Agriculture

Agricultural conditions remained mixed. The southern parts of Louisiana and Mississippi experienced moderately dry conditions, while the rest of the District experienced mostly normal conditions. The January production forecast for Florida's orange crop was down from last year's production while the grapefruit forecast was unchanged from last year's production. However, while damages are still being assessed, it was reported that recent cold snaps in Florida are expected to have a material adverse impact on citrus crop yields. The USDA reported year-over-year prices paid to farmers in December and on a month-over-month basis, were up for corn, cotton, rice, soybeans, cattle, broilers, eggs, and milk.

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