Pent-up Optimism?

Southeastern Insights
March 2013

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 January 31 to March 20.

General conditions
Our business contacts continued to express confidence about the growth in their businesses despite ongoing concerns about fiscal policy and the many challenges facing consumers. One measure of this confidence was the fact that half of Sixth District directors anticipate higher growth for their businesses over the next three to six months, consistent with their input since the end of last year (see chart 1). More broadly, most other contacts also noted positive expectations in the current environment, as they “put their heads down” and move forward with growth plans.

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?

Healthy activity in residential real estate sales and an uptick in both residential and commercial construction were noted across the district (see chart 2). Contacts in this sector continued to cite declines in single-family home inventory levels, which in some areas was resulting in an increase in home prices and spurring some new homebuilding. The Atlanta Fed’s Southeast Residential Real Estate Poll reached a new high in January and remained strong in February, despite a reported declining level of desirable lots.

Chart 2: February 2013 New Home Construction

Auto manufacturing and sales also continued to be a source of strength in the district. According to automotive contacts, higher fuel prices were noted as prompting some sales activity as consumers were replacing less fuel efficient vehicles. Energy-related activity was also holding up well. Reports from Gulf Coast refiners indicated that, as domestically produced oil has become increasingly available, they have seen a declining dependence on imported crude for processing, and there is more refined product being exported.

As for overall manufacturing activity in the region, the Southeast Purchasing Managers Index (PMI) produced by Kennesaw State University increased by 2.8 points to 54.7 (see chart 3). A reading over 50 indicates expansion. New orders increased 0.4 point to 55.7 and production increased 2.9 points to 53.8.

Chart 3: Southeast Purchasing Managers Index

Status of the consumer
Tourism continued to remain solid in the Southeast, even in the face of concerns about the strength of the consumer. Headwinds included the expiration of the payroll tax cut, increased fuel prices, a delay in income tax refunds, and increased health insurance premiums for some individuals. Yet even with these challenges, most retail contacts remained reasonably upbeat with the exception of some restaurant respondents who experienced weakness in the first part of the year. Even so, most retail contacts expect a rebound in strength as more salary increase programs are restored and home values and equity prices continue to rise. As noted above, auto sales remained very strong.

The sequester
Beyond some businesses directly impacted by cuts, the sequester does not appear to be affecting decision making broadly, at least not at this point in time. Some business contacts even characterized the situation as a positive over the long term, seeing the cost savings from the sequester as a step toward budget stability. Of course, this sentiment is little comfort to those whose jobs or work hours are directly affected by the cuts.

Job creation
We continued to hear reports of employers remaining hesitant to pull the trigger on hiring. For many firms, investment in productivity-enhancing technology appears to be the preferred use of cash on hand. One contact summed it up by saying, “We formerly characterized our primary business resources as people supplemented by technology; today we see our business as technology, supplemented by people.” Even so, January’s regional employment data showed an addition of 21,200 jobs and an unemployment rate of 7.8 percent (see chart 4).

Chart 4: Contributions to Change in Net Payrolls, by Sixth District State

Input prices for most contacts continued to remain stable. Year-ahead inflation expectations have remained in a tight range between 1.7 and 2.1 percent since the Atlanta Fed’s business inflation expectations survey commenced in late 2011. The March survey reports that firms anticipate 1.9 percent inflation over the next 12 months, the same as in February (see chart 5). While some contacts noted increases in fuel costs and the cost of some construction materials, most contacts believe these increases are temporary. With regard to how these increases are affecting final prices, our transportation contacts have found success in using fuel surcharges to recover some cost increases. However, other contacts continued to note very little pricing power. We continued to hear only scattered reports of occupation-specific wage pressures.

Chart 5: Year-Ahead Unit Cost Expectations

Pent-up optimism?
The sense we continue to get from our business contacts, especially from larger firms, is a hopeful view of growth in the face of a challenging environment. Many contacts indicated, however, that they have felt such optimism at the beginning of the last two years only to experience a swoon in the summer months. What may be different this time, according to some businesses, is a housing recovery that seems to have legs and a labor market that is showing slow, but consistent, improvement. This is resulting in an improved level of confidence, but very few are willing to shout this from the rooftops—perhaps an increasingly strong murmur is a more apt description.

By Chris Oakley, a vice president and regional executive in the Jacksonville Branch, and Shalini Patel, a senior economic research analyst in the Atlanta Fed’s research department