Regional Economy Continues to Expand at a Moderate Pace
Southeastern Insights provides a broad summary of economic intelligence gathered through our network of business contacts and other sources throughout the Southeast during the latest Federal Open Market Committee (FOMC) cycle. This report covers the period from March 13 through April 25.
Information gathered through our Regional Economic Information Network is delivered to Atlanta Fed President Dennis Lockhart throughout the FOMC cycle. Our regional executives, who operate out of the Atlanta Fed's six locations and are the primary gatherers of business intelligence, participate in meetings designed to keep President Lockhart informed of regional economic developments. Also incorporated in this input is intelligence from our Advisory Councils, Boards of Directors, and Community and Economic Development staff.
Feedback from our contacts in the Southeast remained generally positive regarding economic performance from mid-March through April. Worries about the sustainability of the recovery appear to have abated somewhat. However, few of our business contacts anticipate growth to accelerate in the near term. In addition, many businesses expressed concern regarding the impact of higher energy prices on the outlook. The ongoing financial stresses emanating from Europe are another concern. Importantly, we did not hear much from our contacts about business plans being significantly altered because of these potential downside risks.
Many of our business contacts supported the idea that recent employment gains were related to firms' "catching up" and restaffing to levels that were more in line with current needs, having cut back payrolls severely during the recession and the early stages of the recovery. While companies continue to turn to part-time, temporary, and contract workers to meet short-term needs, their outlook for hiring full-time employees is a bit more tempered. In fact, some staffing firms noted that a variety of businesses were aggressively hiring contract labor. Hiring by manufacturing firms remained largely positive, and reports from the health care and hospitality sectors were especially buoyant, although there appears to be some seasonal effect with regard to the latter.
Many firms continue to report difficulty finding qualified applicants for skilled positions. Some contacts in the agricultural sector and many in the trucking business are also experiencing difficulty finding qualified employees. One large manufacturer addressed the lack of qualified workers by bringing back retirees on a contract basis to help train new hires. Firms also indicated a growing concern about retaining top employees. Some companies have implemented programs to retain top talent, and many firms have reinstituted merit pay programs for their most valuable staff.
A handful of firms speculated that should demand pick up more than expected, they might not be able to find qualified labor to meet a rise in orders and/or sales. A few companies saw this as a potential constraint to growth going forward.
Though most contacts continued to report having little pricing power, more firms recounted successful attempts or plans to pass on price increases since our last report. Increased transportation costs, especially those resulting from higher gasoline and other fuel prices, were reportedly passed on to customers without much difficulty.
The inflation expectations of businesses in the Southeast for the coming year rose to 2.1 percent in April, up from 2 percent in March, according to our most recent business inflation survey. Firms also reported that their unit costs had risen 1.9 percent compared to this time last year, which is 0.1 percentage point higher than their assessment in March.
Looking forward, firms' expectations for non-labor costs rose in April, with 57 percent predicting a moderate upward influence on prices coming from materials and other non-labor costs over the next year. Eighteen percent predicted a strong upward influence from those costs—the highest percentage since the survey was launched in October 2011. Firms anticipate labor costs will put little or only moderate upward pressure on prices in the year ahead.
Consumer spending in the Southeast remained positive. Mild weather appeared to bring forward some sales, and some contacts anticipate a degree of payback after the strong first quarter. Auto sales have been especially strong, and industry sources expect sales to remain solid going forward.
Regional consumer confidence measures offered a mixed view, with the University of Florida's monthly measure dropping two points to 73 in April, but Middle Tennessee State University's consumer confidence rising in its most recent report compared to the previous one. In addition, business sentiment measured by the University of Alabama's Business Confidence Index™ (ABCI) climbed six points to 56.8 on the second quarter 2012 survey.
Tourism remains strong in the region. While our contacts in the hospitality sector do not anticipate continued gains at the rate experienced last year, strong levels of overall tourism are expected to continue this year. All contacts noted that a significant surge in gasoline prices, above current elevated levels, would pose a threat to this outlook.
Indeed, gasoline prices were cited as a concern by many of our contacts, but few report significant changes in consumer behavior stemming from higher pump prices. The notable exceptions were reports from contacts in rural and lower-income areas. Higher gasoline prices are already having an impact on spending in these areas.
The Bank's Center for Real Estate Analytics conducted a survey in early April of 150 of our contacts in the real estate and construction sectors. According to the survey respondents and input from our Boards of Directors and our Real Estate Advisory Council, sales of new and existing houses were improving in the Southeast.
Besides normal seasonal trends, contacts attributed the increase in sales and buyer activity to attractive pricing and increasing levels of consumer confidence. While low mortgage rates were cited as an influential factor, rates have been low for some time and were not considered to be the sole reason behind the recent rise in activity. An overall improvement in the credit quality of mortgage applicants was also noted as contributing to the improvement in the housing sector. Interest in home buying is increasing modestly, reportedly from first-time home buyers, as evidenced by a growing number of people participating in home buyer education programs.
Contacts who reported that their local housing market has improved view the improvement in housing fundamentals as being sustainable. Cash investors and foreign buyers are playing a large role in some Florida markets, especially in the Miami-Dade County area.
Single-family construction was picking up slightly in prime locations, while multifamily building activity continued to be healthy. Home sales were increasing at a faster pace in more desirable locations with better rated school districts. Generally, home prices were stabilizing or experienced more modest price declines than they have over the past several years.
Manufacturing activity across the region remained healthy. The Southeast Purchasing Managers Index (PMI) produced by Kennesaw State University declined three points in March from February, but remained very strong with a reading of 61. New orders and production components decelerated modestly, but like the overall PMI remained at robust levels of 68 and 65.6, respectively.
Several large auto manufacturers announced plans to add to payrolls and increase production. A major industrial equipment producer and two midsized manufacturers announced plans to expand their presence in Georgia. Production and investment in the energy sector remain very strong.
Transportation contacts continued to report volume growth across most segments. Rail reports noted significant volume increases in shipments of automobiles, steel, and forestry products. Domestic coal shipments slowed because of the effects of warmer weather and lower natural gas prices. A port contact indicated strong container volumes and increases in steel imports. The majority of transportation contacts reported substantial investment spending in anticipation of future demand.
More broadly, most contacts in several sectors noted they were increasing capital investments focused on cost-saving technology, but there also appears to be growing interest in making strategic investments to increase market share. That said, there remains enough apprehension surrounding the outlook that some of these investments continue to be held back. We have also heard that regulatory and compliance costs are diverting capital as well.
Around this time last year, we were receiving reports that were similar to what we are picking up now from our contacts—that is, the economy was expanding at a moderate pace and the outlook, although not free from downside risks, was positive. Although we are all wary of a repeat of 2011's summer swoon, most observers do not expect the economy to derail in 2012. The fact that payroll employment gains in our six-state region declined in March to a gain of 13,400 jobs from February's increase of 31,300 has not altered the view that the regional economy remains on a moderate growth track.
Much in the same way, the slowdown in job gains nationwide has not altered the Atlanta Fed's view of the overall U.S. economy either. Indeed, Atlanta Fed President Dennis Lockhart noted in a recent press briefing, reported by Bloomberg News, that
"I would have preferred to see double" the number of jobs, Lockhart said. "It was in that sense disappointing." Still, "it was one month's number. It could very well have been affected by weather. The number is subject to revision. We don't know yet whether there will be revisions down the road."
"So I think it is way too early to conclude the economy is sputtering and that the employment progress we have made is stalling out."
By Mike Chriszt, a vice president in the Atlanta Fed's research department, and Shalini Patel, a senior economic research analyst.