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Southeastern Insights

August 2013

Modest Growth and Optimism Continue in the Summer

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 June 20 to July 31.

Business outlook
The outlook among our business contacts across the Southeast remained optimistic. Most industries continued to see positive growth, and the majority of contacts expect overall activity to be sustained at current or higher rates in the next three to six months (see chart 1).

Chart 1: What is your outlook for the rate of growth in your business over the next three to six months compared to current rates?

Looking further out, our contacts were even more upbeat, with a majority anticipating business activity and revenue to be higher over the next two to three years. This growth is expected to be driven by a combination of company-specific factors, such as the introduction of new product lines and service enhancements, and overall improvement in economic conditions as the real estate market continues to recover, credit availability increases, and consumer sentiment improves. Our contacts’ confidence in their growth projections appears to have strengthened further amid some reduction in uncertainty about the future business environment.

General conditions
Business sentiment across the majority of industries represented by our contacts has been largely unchanged, compared to the last FOMC cycle.

Residential real estate has been recovering at a solid pace in the district as home sales, prices, and new construction continue to grow. According to the Atlanta Fed’s Construction and Real Estate Survey, half of the responding brokers said that sales were up significantly in June compared to a year ago, while more than half of builders said sales were up slightly. The outlook for home sales and construction growth over the next several months remained positive, according to the poll results. Compared to a year ago, more brokers and builders expect sales to be up in the next three months. However, in some markets, contacts have questioned the durability of the recovery in the sector. These contacts expressed concern that the rebound in home prices is mainly driven by constrained supply and that demand alone may not be vigorous enough to sustain future growth. Still-limited credit availability for many developers and smaller builders has been noted as one of the main factors slowing supply growth. Both builders and brokers in our Construction and Real Estate Survey continue to report sustained declines in home inventories (see chart 2).

Chart 2: June 2013 Southeast Home Inventory vs. a Year Earlier

Manufacturing activity in the district has also been strengthening. The Southeastern Purchasing Managers Index produced by Kennesaw State University indicated expansion in the manufacturing sector, with growth in new orders and production accelerating. A number of our manufacturing contacts, especially larger companies and those in the auto sector, reported higher demand for their products.

Activity in the energy sector remains robust and substantial capital investment is expected across the Gulf Coast. Significant capital investment is also being made in the utility sector, as coal-fired plants are replaced with natural gas and nuclear generation.

Contacts across the Southeast report that the impact of the sequestration on the private sector to date has been limited mainly to organizations that depend on federal funding or government contracts. However, concerns about the potential negative impact of sequestration on the broader economy appear to have increased among some of our contacts as they saw a pickup in furloughs in July. We have begun to hear stories of slowdowns in a few areas with high concentrations of federal spending.

Employment
We have not detected any major shifts in hiring plans. Payroll growth has slowed somewhat in the district over the past few months, with payrolls increasing by 10,100 in May and 14,600 in June compared to the average gains of 33,400 for the first four months of the year. However, the June payroll number was held back by a 15,700 decline in government jobs in Tennessee. The outsized decline in Tennessee’s government employment in June has been reported in past years as well, so the overall payroll growth for the district may not have been as weak in June as the headline number suggests. The unemployment rate in the district held at 7.6 percent in June, the same as the national rate. However, half of the southeastern states (Georgia, Mississippi, and Tennessee) still have unemployment rates significantly higher than the national rate.

Looking at major industries, construction employment in the district had the strongest momentum in June amid the ongoing recovery in the real estate sector. On the opposite side of the hiring spectrum, government payrolls continued to decline and the government sector remained the laggard among major industries in terms of employment momentum (see chart 3).

Chart 3: Sixth District Employment Momentum by Industry: June 2013

In terms of labor supply, contacts continue to report difficulty finding qualified workers for certain high-skilled positions in information technology (IT), engineering, and accounting, as well as some low-skilled jobs. Our business contacts reported an increase in firms hiring away talent from competitors.

Input prices and wages
Growth in input costs has been muted for most of our contacts as price inflation for crude and intermediate materials remains relatively subdued (see chart 4).

Chart 4: Producer Price Index

According to our July business inflation expectations (BIE) survey, costs were up 1.8 percent from a year ago and are expected to grow at the same pace in the next 12 months. Businesses continued to note tight margins and very little pricing power. Contacts who recently saw their input costs decline due to the moderation in some commodity prices do not generally intend to pass on lower costs to their customers, preferring to hold on to higher margins. Wage pressures remain low, except for the industries where workers are in short supply such as IT and construction. Wage increases in the 2 to 3 percent range are still standard, with the distribution of increases weighted toward workers whose skills are in high demand.

Investment and capital
Companies continue to invest in automation to improve efficiencies and reduce costs. Also, there have been reports that manufacturers that practiced the “fix it when it breaks” approach during the downturn and recent recovery are now engaging in regular maintenance again. However, reports of major capital expansions are still rare with the exception of firms and suppliers in the energy and automotive sectors.

Most businesses we’ve talked to are not changing their borrowing decisions in response to the recent rise in interest rates. However, we’ve heard reports that companies have begun more actively to engage in interest rate hedging and have been increasingly asking for longer-term fixed loan rates. As one contact noted, “The fear of missed opportunity is a great motivator to take action.”

All in all, the view from regional data and intelligence shared by our business contacts indicates that the southeastern economy continues to expand at a modest pace. We continue to watch closely for signs that the optimism expressed in polls and our conversations with business leaders translates into additional activity and hiring.

By Lee Jones, vice president and regional executive in the Nashville Branch, and Galina Alexeenko, director, Regional Economic Information Network in the Nashville Branch