The Times They Are a-Changing (But Not as Much as We’d Like)

Southeastern Insights
December 2013

Lesley McClure, vice president and regional executive at the Atlanta Fed’s Birmingham Branch, gives an update on the region’s economy.

It appears that the pessimism reported by our contacts during the last cycle has abated and the expectations for near-term growth have returned to levels we observed back in September. Although our contacts no longer fear a stall or a reduction in the rate of growth, they are still not convinced that it will accelerate significantly. Most of our directors anticipate continued slow growth (see chart 1), a sentiment widely shared by our business contacts.

Chart 1: What is your outlook for the rate of growth in your business over the next 3 to 6 months compared to current rates?

Heading into the holiday season, most retailers planned for modest growth over last year, and results are anticipated to be in line with those expectations. Inventories are being managed closely to maximize sales and improve profit margins. Early reports were not encouraging, although poor weather and a shortened holiday shopping season appeared to be playing a role.

Our contacts continue to report that cost pressures remained contained and that input and labor costs were largely stable, with the strongest exception to this sentiment being rising health care costs. Most contacts reported merit increases in the range of 1 to 3 percent; we continue to hear about wage pressure for skilled and professional workers in energy, construction, information technology, and logistics, resulting in above-average increases and higher starting pay for those jobs. Some manufacturing and commodities contacts indicated they have no ability to increase prices with commodity and energy prices at their current levels (see chart 2).

Chart 2: Spot Commodity Price Index - All Commodities

Results from the Atlanta Fed’s November survey on business inflation expectations show that, on average, unit costs are expected to rise 1.9 percent over the next 12 months (the same as October’s result). This reading remains within the historical range of 1.7 to 2.1 percent (see chart 3).

Chart 3: Year-Ahead Unit Cost Expectations

The most recent employment data indicate that firms in the Sixth District increased net payrolls by almost 68,000 jobs in October (see chart 4), with Florida showing the fastest pace of payroll growth at 44,600 jobs. Notable gains by industry in Florida include construction (+10,500), retail (+9,900), professional and business services (+11,300), and leisure and hospitality (+11,000). As we spoke with our contacts, we did not detect a significant pickup in hiring, but likewise, we did not hear about staff reductions. As in prior cycles, we heard reports of businesses’ drive to employ technology and utilize overtime and contract labor as an alternative to increasing permanent staff. Contacts in manufacturing, construction, professional, and energy sectors report continued difficulty in finding qualified workers.

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

Real estate
Although the pace of housing sales has slowed somewhat, most banking and builder contacts expect continued growth for 2014. The Atlanta Fed’s November Construction and Real Estate survey indicated that the majority of brokers and builders reported that home inventory levels were down from one year earlier (see chart 5), supporting home price appreciation in November (see chart 6).

Chart 5: November 2013 Southeast Home Inventory vs. a Year Earlier

Chart 6: November 2013 Home Price vs. a Year-ago

Manufacturing/capital investment
The Southeast Purchasing Managers Index, which measures regional manufacturing activity, shows a reading of 52.2 for November. That represents a modest increase of 1.8 points over October’s results, with gains in both production and new orders and a slight decrease in the employment observation (see chart 7). The employment indicator still reads above 50, which generally indicates payrolls are growing.

Chart 7: Southeast Purchasing Managers Index

A number of capital-intensive businesses were going forward with capital expenditure plans in 2014. Although large construction related firms are not constrained by credit availability, a number of them expressed concern about midmarket builders, developers, and subcontractors for which credit conditions are tighter and financial circumstances more tenuous.

Looking ahead
While some contacts expressed concern that any increases in health care premiums may restrain improvement in consumer spending, and others worried about how the new Qualified Mortgage rules may impact the housing market, the medium-term outlook continues to be positive. In the meantime, the Federal Reserve will continue to monitor numerous economic indicators and keep communication lines open with our business contacts, and we will continue to share our perceptions with you here at Southeastern Insights.

By Lesley McClure, vice president and regional executive, and Teri Gafford, director, Regional Economic Information Network, both in the Atlanta Fed’s Birmingham Branch