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Summary
The pace of economic growth in the Southeast eased slightly in recent weeks, but activity remains at healthy levels and the outlook is upbeat. Comments from retailers about recent sales were more mixed than in our last report. Similarly, reports from manufacturers varied considerably across sectors. The District's single-family construction market continued to slow somewhat, while commercial activity remained robust. Summer tourism numbers have been strong across the region. Loan demand showed solid growth overall, although weakness persisted in the residential market. Labor markets remain tight in almost all areas and sectors. Prices were stable with a few exceptions. Finally, drought conditions have resulted in significant crop losses.
Consumer Spending
Sales growth in the second quarter varied greatly across stores in the region, and this trend continued into July. Most department store and mall merchants noted a slight weakening, whereas sales growth held steady at most discount department stores. Most merchants said that recent sales had merely met or fallen below their expectations. Inventories continued to be balanced. Children's apparel and electronics are selling well, and men's apparel sales remain weak. Looking forward, most retailers expect modest growth in third-quarter sales.
Construction
The District's single-family housing market continued to slow in most areas, but activity still remains at high levels. A majority of contacts reported that construction during the second quarter was slightly below last year's frantic pace but construction strengthened slightly during the early part of July. Over one-half of builders contacted said that new home sales were down compared with last June and that sales continued to soften in July. Most realtors described sales as flat or down slightly compared with last year. Inventories of unsold homes continued to rise in several markets, and the rate of increase in home prices slowed. Most contacts expect activity to continue to soften through the remainder of the year.
Commercial real estate markets remained robust across the Southeast. Occupancies and absorption were described as healthy. Office space remained scarce in several markets, with speculative development continuing but at a slightly slower pace than previously. Lenders are becoming more cautious and are requiring higher levels of pre-leasing. Industrial markets remained tight across most of the region as firms continue to move into the District. The overall outlook is for balanced growth through the remainder of the year, with little risk of a serious downturn.
Manufacturing
Reports from the factory sector were mixed across industries. Energy sector indicators continued to fail to show a sizable rebound, and energy extraction service companies reported only modest growth despite $30 per barrel oil prices. Rising fuel prices and slowing orders forced production cutbacks by a Tennessee heavy truck manufacturer; further layoffs are expected. Nissan Motor Company announced a $1 billion expansion at its vehicle assembly plant and engine factory in Tennessee. The U.S. Air Force ordered its first Alabama-built Boeing Delta IV rocket from the new $400 million plant in Decatur. A Tennessee-based apparel manufacturer will shut down a plant later this summer because of the inability to attract enough workers. Water shortages and high electricity prices resulting from the drought have reportedly slowed operations at some plants in Georgia.
Tourism and Business Travel
The tourism and hospitality sector continued to post solid numbers. South Florida summer bookings were the same or better than last year, and year-to-date tourist tax collections were up by double digits. Fuel price increases have not led to vacation cancellations. Atlanta convention and visitor numbers broke a record in July, sending occupancy rates soaring. Hotel tax collections increased for four consecutive months in Nashville for the first time since 1997. Tourism remained strong along the Mississippi Gulf Coast. Potential hotel overbuilding in Orlando has become a concern.
Financial
Bankers reported that continued solid overall loan growth has compensated for soft demand in the real estate sector. Both consumer and commercial loan demand remained robust. Real estate-secured consumer loan portfolios continued to expand despite flat mortgage demand. District credit quality remained healthy, with few reports of rising levels of non-performing assets.
Wages and Prices
Labor markets remained taut, and signs of easing were scarce. Although some contacts noted that construction workers have become more available in recent weeks, a large Louisiana commercial construction firm expects its labor pool to shrink further in the fourth quarter because of new contracts. Several Florida contacts said that expansion plans have been put on hold because of shortages of essential personnel. Job markets remained tight in Tennessee, particularly for manufacturing. Every hotel in Atlanta was reported as short staffed. Employers continued to offer incentives to attract and retain workers and have increased their usage of temporary agencies and the Internet to find potential employees.
Prices remained stable, with the usual exceptions. Most contacts reported that price increases have been minor outside of energy and health care; however, prices are rising for products linked to oil, such as plastics and resin. Shipping costs have been increasing as firms pass on higher fuel prices. Health care insurance premiums and pharmaceutical prices continued to escalate at double-digit rates.
Agriculture
The drought continued to take a tremendous toll on the District's agricultural production. All of Georgia and parts of Florida have been declared federal agricultural disaster areas, making farmers eligible for low-interest federal government loans. Drought-related losses in Florida are currently estimated at $315 million. An estimated 10 percent of Georgia's cotton crop has already been lost to the dry weather, and pecan production in Georgia may be as much as 50 percent below normal. Corn and peanut crops are also in trouble. Costs increased for District farmers with irrigated land, and prices and export demand remained weak for almost all crops.
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Richmond