Contacts in the Southeast indicate that the District economy continues to expand at a robust pace and the outlook remains positive. Retail sales have been strong, although growth has eased slightly recently. District builders said that the pace of single-family construction in January was below a year ago, while nonresidential District construction has tailed off in some areas. Factory production and new orders have slowed, but contacts expect manufacturing activity to improve in the near term. Despite continued weakness in some business sectors, overall loan demand remains high, and the outlook for the tourism and hospitality sector is mostly upbeat. Tight labor markets continue to negatively affect the District, and there were scattered reports of accelerating wages.
Reports from retailers around the District concerning January sales were positive, with sales above year-ago levels. However, sales growth in early February was slightly weaker than during the previous month. Most merchants said that recent sales had met or exceeded their expectations. Several retailers noted they made fewer markdowns after the start of the year, boosting profit margins. Inventories were reported to be balanced by the majority of retailers. Sales of children's apparel, jewelry, and home-related products have been strong recently, while sales of men and women's apparel have varied across stores. Most merchants anticipate that first quarter sales will be up slightly compared with last year.
The majority of District builders contacted said that the pace of single-family construction in January declined compared with a year ago. Some noted that harsh winter weather had slowed down construction in their market. During the early part of February, builders noted a slight increase in construction levels, with fewer contacts reporting declining construction on a year-over-year basis. However, new home sales seem to have weakened slightly in early February, with more builders saying that home sales declined from year-ago levels. Over one-half of the builders expect first-quarter construction to decline compared with last year's strong levels and construction growth in the second quarter to be flat. Realtors expect growth in home sales to slow slightly from the first quarter to the second quarter.
Nonresidential construction continued to decline overall. However, activity has not been uniform across the District. Construction accelerated in Florida, Georgia, and Tennessee, whereas activity slowed somewhat in Alabama, Louisiana and Mississippi. Speculative construction continues in several markets, but experts are cautioning that demand for office and retail space in particular will probably wane somewhat this year.
Reports from the factory sector varied across industries. Announcements of large job cuts since our last report include a 2,500-employee reduction at Coca-Cola's Atlanta headquarters; a 2,100-job cut at BellSouth, mostly in Atlanta; and an 800-employee job cut at the Lockheed Martin plant in Marietta, Georgia. Rising interest rates have adversely affected the manufactured housing industry; one contact's sales volume has fallen by 25 percent recently. More positively, a rise in steel prices and improved production performance resulted in the first profitable month in years for an Alabama steel mill. A recovery in the paper market has led regional pulp mills to boost production. Activity is up in the lumber business, but the effects of rising interest rates on construction are expected to moderate the increases. Contacts report that the outlook for the District's energy extraction industry is very strong in light of current oil prices.
Tourism and Business Travel
The outlook for the tourism and hospitality sector is mostly upbeat. Advance bookings for hotels and motels in south Florida for February through April were reported as strong. However, reservations at Panama City hotels and motels for Spring Break are down by 40 percent compared with a year ago. Year-to-date convention bookings are up by double-digits from a year ago in New Orleans. Casino gross gaming revenues were up by 13 percent from a year ago in Mississippi.
Despite continued weakness in some sectors, loan demand remains high overall and the availability of investment capital is unchanged for most businesses. Commercial loan demand continues to be particularly strong, while consumer and automobile loan demand remain robust. Mortgage loan volume and applications and refinancing activity continue to be depressed. Credit quality is reported as healthy overall.
Wages and Prices
Tight labor markets continue to adversely impact the District, and there were scattered reports of accelerating wages. Technological improvements are easing the labor shortage for some District firms, and other companies are increasing in-house training to deal with the lack of qualified workers. Many contacts indicated that overtime is being used to cover staffing gaps but expressed concern that employees can only work so much. High-tech firms in the region are reportedly spending a lot of time and resources just to maintain staffing levels and fulfill contract obligations. Some businesses are being forced to offer reduced levels of service because of a shortage of workers. One Atlanta area restaurant reportedly posted a help-wanted sign that said, "Now hiring-must have a pulse." There were a few reports of easing shortages of construction workers in the District.
More contacts than previously noted increasing prices. District farmers are particularly concerned about rising oil prices, which have boosted prices for fertilizer and some other petroleum-based raw materials.