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Atlanta: November 2019

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Beige Book Report: Atlanta

November 27, 2019

Summary of Economic Activity
Sixth District business contacts indicated that economic activity expanded modestly since the previous report, and the outlook among contacts remained positive. Tightness in the labor market continued to constrain growth in many sectors. Contacts noted that wage pressures continued to increase for lower-skilled positions. Firms continued to report rising nonlabor costs, and businesses affected by tariffs indicated they were likely to pass along cost increases to customers. Retail sales levels and automobile sales remained steady from October through mid-November. Tourism activity improved since the last report. Residential real estate markets showed signs of improvement, and commercial real estate activity was steady. Manufacturing activity accelerated, and new orders and production levels rose over the reporting period. District bankers noted that financial conditions remained healthy, though the pace of loan growth slowed slightly.

Employment and Wages
Firms continued to report that staffing levels were in line with projections of flat to slightly higher growth in payrolls compared with the prior year. As reported last period, exceptions were in retail, trade, and logistics, where labor force reductions were noted. Contacts in various geographies and industry segments continued to cite labor market tightness as constraining growth. Consequently, firms continued to pursue automation of certain operational processes. Attracting and retaining talent remained another labor market challenge, as employers continued to explore innovative recruiting and retention tactics.

Annual wage increases, on average, remained in the 3-4 percent range; however, contacts reported that wage pressures continued to build for lower-skill positions.

Overall, reports from firms continued to indicate increasing nonlabor costs, albeit at a pace in line with expectations. While some businesses noted pricing power, there were accounts of some firms considering alternatives to raising prices in order to maintain margins and offset increases. However, firms most affected by tariffs indicated they were more likely to pass along cost increases to customers. The Atlanta Fed's Business Inflation Expectations survey showed year-over-year unit costs were up 1.7 percent in October. Survey respondents indicated they expect unit costs to rise 1.8 percent over the next twelve months.

Consumer Spending and Tourism
Retailers noted that consumer spending remained strong and retail sales levels were steady since the last report. Contacts anticipate a healthy holiday season with online sales growth expected to again outpace brick and mortar sales. Automotive sales were unchanged from the previous report.

Tourism and hospitality contacts indicated a higher level of uncertainty from a year ago; however, overall business sentiment remains positive for the balance of the year and into 2020. Overall, tourism activity for the District remained healthy since the last report. Monthly Mississippi casino gross revenues were up for the first nine months of the year compared with the same time frame in 2018.

Construction and Real Estate
This year's gradual decline in mortgage rates helped boost demand for housing throughout the District. Home sales showed signs of improvement and home prices appreciated. Supply remained a challenge, however, as for-sale inventory levels in many markets has not kept up with demand. Declining supply of developed lots for new construction and relatively higher construction costs remained an impediment to improving housing starts. Although lower mortgage rates made housing more affordable, rising home prices and limited supply continued to be a challenge for home buyers looking to purchase in many markets throughout the District.

Commercial real estate (CRE) leasing and sales activity generally remained positive and steady across most District markets and property sectors during the reporting period. Overall, most CRE sectors experienced positive dynamics as rents continued to grow and vacancy trends remained stable or declined at a modest pace. Industry contacts reported continued strength in the multifamily, industrial, hospitality and office sectors. The pace of CRE project construction activity remained healthy. Contacts reported that capital was readily available for most CRE projects via banks and non-bank entities and that lending competition appeared to be accelerating.

Manufacturers indicated that overall business activity accelerated slightly since the last report. New orders and production levels rose, while finished inventories remained relatively flat. Purchasing managers reported that wait times for supply deliveries were slightly longer. Optimism for future production among manufacturing contacts decreased, with only one-fifth of contacts expecting higher levels of production over the next six months, compared to one-third in the last reporting period. Contacts continued to mention trade policy as a potential downside risk to their outlook.

District transportation firms cited varying levels of activity over the reporting period. Freight forwarders saw strong growth in package volume and revenue. Port contacts reported increased freight activity, and some noted record year-over-year increases in container volumes. However, some slowing in breakbulk cargos, such as imported steel, plywood, and non-ferrous metals, primarily due to tariffs, was noted. Inland barge companies reported an increase in demand from year-earlier levels. Railroads saw significant declines in shipments of food products (excluding grain), primary metal products, iron and steel scrap, and coal, which were partially offset by increases in coke and metallic ores; intermodal shipments continued to decline by near double digits. The majority of contacts expect activity over the next year to be flat to slightly up.

Banking and Finance
Conditions at financial institutions cooled slightly but remained healthy. Bankers indicated that loan growth continued, though at a slower pace, particularly for consumer loans and commercial real estate. While there was a slight increase in nonperforming assets, values were still near historic lows. Slower loan growth and increased payoffs added to margin pressures for financial institutions.

Chemical and petrochemical manufacturers described a slight softening in production related to slowing global economic conditions. However, capital investment and hiring is expected to pick up in the near term as facility expansion plans move forward. While demand for pipeline infrastructure persisted, some energy contacts mentioned that new pipeline construction was fraught with challenges and cost overruns. Utilities contacts reported slowing momentum among certain industrial and commercial segments, although their Southeast outlook was positive and capital investment budgets expanded year-over-year. Renewables sales and production activity remained strong as adoption, especially wind and solar, accelerated.

Agricultural conditions remained mixed. Reports indicated parts of the District, particularly in Georgia but also in large parts of Alabama, the Florida panhandle, and Tennessee, experienced drought-conditions ranging from abnormally dry to extreme drought. The November forecast for Florida's orange and grapefruit crops was unchanged from last month but ahead of last year's production. On a year-over-year basis, prices paid to farmers in September were up for corn but down for cotton, rice, soybeans, beef, broilers, and eggs. However, on a month-over-month basis, prices increased for cotton, rice, and soybeans but declined for corn, beef, broilers and eggs.

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