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Southeastern Insights

September 2013

Optimism, but with Increasing Near-Term Apprehension

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 August 1 to September 18.

Business contacts continue to expect near-term growth to be sustained at or slightly above current levels (see chart 1) and remain generally optimistic as they look out two to three years. However, there is an increased level of apprehension regarding the pace of growth in the near term as a result of growing concerns over another damaging debt ceiling debate, heightened geopolitical risks, and uncertainties related to regulations and the Affordable Care Act.

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?

Perhaps the good news is that as contacts make projections over the medium term, their optimism increases significantly (see chart 2). Some contacts cite the following factors as driving the belief of a pickup in activity over the next two to three years:

  • Improving export picture
  • Positive signs of an acceleration in business investment
  • Diminished fiscal drag/increasing clarity with tax and regulatory policies and costs
  • Benefits of productivity enhancements
  • Improving access to credit/capital

Chart 2: What is your medium-term outlook (over the next two to three years) for the rate of growth in your business compared to current rates?

General conditions
Overall, business conditions have changed marginally from the previous cycle. Contacts continue to report increases in sales. The trend for strong auto sales continues as rates on auto loans remain low. However, apparel and electronics retailers are less enthusiastic, with sales either meeting or missing expectations, raising concerns about the strength of the upcoming holiday season. Some contacts speculate that growth in discretionary spending may be being held back by the number of part-time jobs being created rather than full-time employment.

Contacts did not indicate any changes to inventory management. In general, since the recession, most contacts are maintaining lean inventories, especially retailers.

Employment
Looking forward, most contacts expect output and sales to exceed any additional hiring, though strict hiring freezes appear to have ended. Many contacts are slowly adding to payrolls as activity increases (see table). Temporary staffing remains robust, partly reflecting a move to a more permanent use of contingent workers in many companies.

Table 1: Monthly Net Change in Total Employment

Contacts indicate that demand for high-skilled workers, such as engineers and information technology specialists, continues to increase with limited supply; in some cases that is inhibiting growth. Among construction-related contacts, subcontractor skills shortages are noted as preventing businesses from pursuing new contracts and projects (see chart 3).

Chart 3: Employment Momentum by Sector: Sixth District States

Input costs, wages, and prices
Business contacts report that most input costs are stable. The few input costs that are cited as rising were doing so very slowly, often at a pace below expectations. According to the Atlanta Fed business inflation expectations survey in August, increases in costs have remained in the range of 1.3 to 1.7 percent over the past year (see chart 4). Few firms report any pricing power and margins remain tight.

Chart 4: Current Unit Costs

Wages remain in a range that meets the expectations of most contacts. There continues to be some upward pressure on compensation for certain high-skilled workers.

Investment and credit
Expanding firms report that growth is mostly a result of merger and acquisition activity or other increases in market share, as opposed to organic growth. Productivity-enhancing equipment purchases have also been reported as areas of investment.

Larger contacts continue to report stronger levels of performance than that of small businesses. Related to that, large companies indicate having both cash on hand and easy access to credit. In contrast, small business contacts note challenges, though lenders are becoming somewhat more willing to extend credit as loan criteria has slightly loosened. Overall, access to credit has improved, though many contacts indicate, even in a low-rate environment, they prefer to use cash on hand.

In housing, anecdotes about investor activity continue to be shared. However, some markets are beginning to see investors pull out as home prices increase and profit thresholds can no longer be met. A few contacts also report that some institutional investors are shifting from the buy and rent model to a buy, rehab, and flip model, to take advantage of rapidly rising prices.

Outside of refinancing home loans, recent interest rate increases do not seem to be hampering loan demand. Bankers were mostly bullish regarding loan activity, even loans related to commercial real estate and commercial and industrial.

Conclusion
In summary, most of our contacts expect:

  • Near-term slow growth with some acceleration in the medium term
  • Employment improving but lagging the pace of sales
  • Continued stability in input costs, along with limited pricing power.

By Chris Oakley, a vice president and regional executive in the Jacksonville Branch, and Shalini Patel, an economic policy analysis specialist in the Atlanta Fed’s research department