Productivity: The New Badge of Honor for Businesses

Southeastern Insights
May 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 March 21 to May 1.

Business outlook
Our business contacts continued to anticipate moderate growth for this year despite what has been an uneven path of recovery. When asked about the near term, nearly half of Sixth District directors expect growth in their businesses to increase over the next three to six months (see chart 1). While this percentage was relatively unchanged from March, it is an improvement over the one in four seen last autumn.

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?

General conditions
Businesses related to energy, tourism, and real estate have been doing especially well, and activity in the auto sector appeared to be settling at a high level. Industries with more exposure to low-end retail and government spending have moderated from earlier in the year. Firms also indicated that they continue to do more with less, thus altering the hiring tipping point.

The individual and business consumer
For the individual consumer, spending behavior has been mixed. Businesses experiencing increased sales during the first quarter attributed sales growth to seasonal variations such as bonuses and tax refunds, as well as increased consumer confidence. In particular, consumer spending in the high-end luxury market remained strong, as contacts indicated improved home equity and growth in financial markets as factors influencing their behavior. However, entities focused on low-income consumers noted that cooler weather and the expiration of the payroll tax cut were hindering sales. Tourism continued to be an economic driver across the Southeast as evidenced by increased convention attendance and high hotel occupancy rates.

As for business expenditures, our contacts noted a shift in spending patterns as companies reengaged in broad-based advertising campaigns, employee development programs, and increased business travel. At this juncture, sequestration effects were noted as largely industry and geographically focused. Specifically, contacts cited that defense contractors, research intensive universities, and local economies driven by military activity were beginning to experience some negative impact. Although there remains a general concern about the impact of current fiscal policy decisions on demand, businesses are still reasonably optimistic that effects from the expiration of the payroll tax cut and sequestration will prove to be transitory and momentum will pick up later this year.

As described by one contact, having a large number of employees in your organization is no longer considered a “badge of honor” among businesses. Rather, executives today are more likely to brag about the high levels of productivity that their organizations are able to achieve, often with fewer but more talented employees. Additionally, many companies have improved efficiency by meeting increased demand through automation and streamlined processes. This change in approach has altered the metric by which companies compare themselves.

Further challenging the employment landscape, low-skill jobs (which typically have frequent turnover) have become more of a concern as the pool of interested, qualified applicants for those positions continues to shrink. Companies continued to explore means of eliminating some lower-level office positions by replacing them with highly skilled personnel who provide more value and flexibility to professional and administrative initiatives. Additionally, companies continued to move toward the use of contractors and temporary workers instead of bringing full-time staff on board.

Concerns about the impact of health care legislation on labor costs continued to surface as firms stated that the Affordable Care Act was affecting their hiring plans.

Despite the shift in hiring philosophies and approaches, contacts did report an increased level of hiring taking place when companies encounter capacity constraints. Of note, housing and even some commercial activity was reported as spurring hiring in fields such as architecture, engineering, and construction. To illustrate, see chart 2, which shows employment momentum for both professional and business services and construction sectors expanding.

Chart 2: Employment Momentum by Sector: Sixth District Rates

Input prices and wages
Similar to the summary in March, input prices remained stable with year-ahead unit cost expectations remaining in the 1.7 to 2.1 percent range, according to results from our April business inflation expectations survey.

While there has been upward pressure in some commodities, such as lumber, most firms continued to experience fairly stable input costs and very little pricing power. Over the past several months, the consumer spending price deflator (see chart 3) shows consumer price inflation decelerating on a year-over-year basis.

Chart 3: PCE Price Index

In terms of wages, the general consensus has been for wage increases of 2–3 percent this year; however, reports of increases in the 3–5 percent range and the return of bonuses have broadened beyond select trade skilled workers and into the professional ranks. Overall, people’s incomes have risen by only 1 percent on a year-over-year basis (see chart 4). Competition for select trade skills such as welders and truck drivers continued to drive pay rates in those fields. We also have started to hear of increased wage negotiation power and competition for experience at the professional, managerial, and executive levels.

Chart 4: Real Disposable Personal Income

Investment and capital
Our larger business contacts noted having ample cash on hand and readily available credit. However, reports of significant capital investment in sectors beyond real estate and energy remain scattered. Of the companies that were investing in capital, many were largely engaged in merger and acquisition activity as a means to increase capacity and enlarge their customer base. The exception was energy, where investment in both onshore and renewed offshore drilling initiated investment with upstream and downstream industry suppliers.

By Adrienne Slack, a vice president and regional executive in the New Orleans Branch, and Shalini Patel, an economic policy analysis specialist in the Atlanta Fed’s research department