July 25, 2007 Federal Reserve Districts Sixth District--Atlanta

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Reports from District contacts painted a mixed picture of the District economy during June and early July. In the consumer sector, retail sales were uneven and vehicle sales were generally lackluster, whereas tourism activity was positive. Weak home sales and high inventory levels were leading to further reductions in construction. For the most part, the pace of nonresidential development remained positive. Manufacturing activity was generally stable, except for continued declines in sectors related to housing construction. Freight industry contacts reported weak demand from the housing construction and auto sectors. Labor markets remained tight, particularly for specialized occupations in healthcare and education, and in skilled trades. Price reports varied. Some building contacts reported lower timber costs, while others commented on rising fuel costs. Despite recent rains, the drought has severely limited the outlook of District crops and livestock. Consumer Spending and Tourism Most reports from District retail merchants noted that sales in June were uneven across stores, but on balance similar to a year earlier. Contacts also noted that sales were below plan. Additionally, most reported that inventories were flat to slightly up compared with a year ago. Retailers were cautiously optimistic going forward; most anticipate modest sales growth over the next several months. District vehicle sales were mostly lackluster. Contacts reported that foreign brands outperformed domestic brands, and this was attributed to stronger demand for fuel-efficient models. However, some import distributors reported that the pace of vehicle sales in the District lagged behind other regions. Another contact noted that new vehicle registrations were much lower than last year, with Florida having the weakest performance. Most reports indicated that tourism activity was holding up better than they had expected given high gasoline prices. Summer visitor numbers were described as good by contacts at north Florida hotels, and were stable in Miami and along the Alabama coast. With the Hard Rock Casino opening in July, and the recently completed addition to the Island View, the Mississippi Gulf Coast tourism market continues to recover. However, some New Orleans contacts noted that convention attendance has been lower than expected. Real Estate Most District homebuilders and Realtors reported that new and existing home sales continued to be below year-ago levels in June. Although construction continued to decline, inventories remained high across much of the District. Numerous reports pointed to declines in asking prices and increases in use of other incentives to try and stimulate sales. More positively, reports suggest that single-family home sales have stabilized in some Florida markets, and while weakness remained pronounced in Georgia, a few contacts noted a slight pickup in sales during June. Florida homebuilders anticipate flat sales over the next few months compared with a year ago, while the majority of Realtor contacts expect sales to decline further. Construction in most areas of the District is expected to remain well below the year-ago levels. Reports from District commercial contractors indicated that the pace of non-residential development in the second quarter was flat to slightly down in Florida compared with a year ago, and increasing moderately elsewhere. Overall, most contractors outside Florida anticipate that activity will exceed year-ago levels for the remainder of the year. Manufacturing and Transportation Reports on manufacturing were mixed in June and early July. The lumber business remained sluggish, with producers in most states continuing to be adversely affected by weak demand for residential construction materials. Also reflecting the building slowdown, a concrete and cement maker experienced a 33 percent decline in sales. Apparel producers continued to cut payrolls, close facilities, and move operations offshore. More positively, contacts in the defense/aerospace industries see growth continuing. District shipbuilding activity is also expanding. Several trucking companies that service building suppliers reported lower freight demand and less ability to pass on cost increases. Through mid-June, freight traffic at major regional railroads declined because of lower shipments of forest products and motor vehicles. Banking and Finance Commercial and industrial lending was described as strong in most parts of the District. Banking contacts continued to report reduced residential construction lending, and there were some reports of homebuilders facing financial distress. Higher foreclosure rates were reported in parts of the District, but overall, bank mortgage credit quality remained good. Deposit growth was described as stable. Employment and Prices Labor markets in most areas remained tight, and this was putting upward pressure on wages. Healthcare providers continued to struggle to fill vacancies, and education professionals were said to be in short supply. Contacts at accounting and information technology firms reported that positions were hard to fill. Also, some construction industry contacts noted ongoing shortages of skilled workers such as electricians and carpenters. Hotel and manufacturing contacts said they are using overtime as well as staffing services to meet peak demand needs. Residential and commercial builders noted less upward pressure on material inputs. Several contacts noted that competition for business was causing them to continue to absorb increases in the cost of labor, energy, as well as business and health insurance. Agriculture and Natural Resources Precipitation in early July did little to change the uncertain outlook for District farmers affected by severe drought conditions. Soil moisture shortages were very critical in most District areas. The lack of rains will significantly impact the corn and cotton crops in Alabama, and the peanut crop in Alabama, Florida, and Georgia. Pasture conditions were also poor, and some farmers liquidated their herds because of the lack of available grazing and hay. In Florida, tree destruction from past hurricanes as well as spreading diseases has resulted in a downward revision for this season's orange crop. Deep water drilling activity remains high in the Gulf of Mexico, continuing to push up demand for rigs, equipment, and personnel. Refinery utilization rates in the Louisiana Gulf Coast area were maintained at high levels. Return to top Richmond Chicago