January 11, 2012 Federal Reserve Districts Sixth District--Atlanta

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Sixth District business contacts described economic activity as expanding at a modest pace from late November through December. Reports from most sectors were positive, yet expectations remained guarded. Holiday sales were described by most retailers as generally positive and the pace of sales was stronger than last year by most accounts. Auto sales remained strong as well. Tourism-related spending was solid as international visitors continued to bolster activity. Weakness persisted in the residential real estate sector as both brokers and homebuilders continued to report downward pressure on prices for new and existing homes. Commercial contractors noted a slight improvement in demand compared with earlier in the year. Most manufacturers and transportation contacts noted positive activity, especially related to exports. Bankers noted that deposit growth continued to outpace loan demand. Employment growth was positive but tepid across the District as employers remained cautious with regard to hiring. Concerns over increased input costs eased further as most commodity prices leveled off and business' inflation expectations remained in check. Few contacts reported having significant pricing power. Consumer Spending and Tourism District retail contacts noted that sales and traffic in late November and December were up from a year ago. Post-Thanksgiving reports were generally positive; nearly sixty percent of contacts polled indicated that sales were better than the same time period last year. Almost half of contacts reported that inventory levels were up slightly compared to last month, but most were satisfied that current levels were appropriate. High-end and outlet stores were specifically identified as doing well and were posting improved profits. Most merchants polled expect overall sales to improve over the next three months. Auto dealers indicated that sales continued to be strong because of pent-up demand and are better positioned to obtain financing; the pace of sales during early November and December was reportedly the strongest in over two years. Hospitality contacts reported that holiday activity slightly exceeded cautiously optimistic projections. Occupancy and room rates were up throughout the District. South Florida in particular experienced greater travel activity from Canada and South America. Airport traffic remained above year-ago levels in most major District cities with international travelers helping boost overall arrivals in many Florida destinations. Cruise line reservations remained solid into the first quarter of 2012 as international passengers took advantage of deals. Business travel improved over year-ago levels, although reservations were being made closer to departure dates. Real Estate and Construction Residential brokers indicated that sales continued to soften in late November and December but remained ahead of last year's weak levels. However, sales growth varied somewhat across the region. Florida brokers reported that sales growth, measured year-over-year, rebounded in November after moderating slightly in the previous two months. These sales continued to be driven by international and cash sales. Elsewhere in the District, most brokers reported that sales were similar to weak levels seen a year ago. Many contacts noted that appraisals remained problematic. Inventories declined on a year-over-year basis. Brokers continued to report downward pressure on home prices across most of the District. Many anticipate modest sales growth over the next several months with the most positive expectations coming from Florida brokers. Reports from District homebuilders indicated that new home sales and construction activity growth, measured year-over-year, were flat to slightly up. Builders also continued to report downward pressure on home prices with most reporting that prices were flat or down on a year-over-year basis, in spite of inventories that remained below year-earlier levels. Builders indicated a strong pickup in buyer traffic compared with the same time period as last year. Homebuilders anticipate new home sales and construction to improve modestly in the coming year. The majority of District commercial real estate contacts continued to report improving demand from earlier in the year. Brokers indicated modest improvements in demand for space with some noting that rent concessions had abated. Contractors continued to report improvements in construction activity from earlier in the year. However, financing remained challenging and most projects were build-to-suit. The outlook among contacts improved modestly from early November with most contractors and commercial real estate brokers anticipating that construction activity will improve slowly during 2012. Manufacturing and Transportation On balance, District manufacturing contacts showed notable improvements in both levels of new orders and production in November after reporting several months of decelerating activity. In addition, more contacts reported improving expectations for future production than in previous reports. Export manufacturers and auto producers, in particular, reported strong activity. Auto producers noted that recent flooding in Thailand would likely have a modest, negative impact on production of some models as several plants in that region were damaged or forced to curtail operations for several weeks. Reports from transportation industry contacts remained positive in late November and December. Port authorities cited volume increases over last year with notable strength in exports. Trucking firms continued to report increased demand for their services but were struggling to meet customer needs because of a significant shortage of long-haul drivers. Banking and Finance Liquidity levels at depository institutions remained high as many banks reported strong deposit growth coupled with continued weak loan demand. Some banking contacts noted that they cut loan prices to attract new customers and offered loan concessions proactively to retain existing clients. There was also little demand for new housing loans, although bankers reported mortgage refinancing and automobile loan activity increased. In terms of commercial lending, loan growth among community banks and credit unions was primarily limited to owner-occupied enterprises, while some larger banks reported growth in areas such as energy and healthcare. Availability of credit/capital was not an issue for most large firms because of positive cash flow, adequate cash reserves, or a strong, long-standing relationship with their bank. Small business contacts, however, continued to report difficulty in obtaining credit from banks and some have turned to non-bank institutions for financing. Employment and Prices Contacts across most sectors continued to report modest hiring activity across much of the District. Most of the hiring has been temporary in nature and tied to seasonal employment. However, there were some scattered reports among healthcare and hospitality contacts in South Florida that hiring was occurring as a result of increased demand or expansion. Agriculture contacts reported labor shortages across Alabama, citing newly enacted immigration legislation as the culprit. Firms also noted reluctance towards adding new full-time employees because of uncertainty surrounding healthcare reform, a large pool of both over and under qualified applicants, and because productivity enhancements have made several positions redundant. Contacts were generally not as concerned with input costs as they had been in previous months, noting that commodity prices had leveled off or eased somewhat. Notable exceptions included reports of restaurants facing elevated food costs and ongoing price pressures from high transportation and shipping costs. Many businesses reported slightly improved margins in late November and December. However, with the exception of high-end apparel retailers and hospitality contacts, firms reported having little pricing power. In the Atlanta Fed's monthly business inflation survey of firms in the Sixth Federal Reserve District, respondents indicated in December that their inflation expectations for the coming year are 1.9 percent, down slightly from November. Looking forward, businesses indicated that costs for materials and labor may influence them to raise prices. Respondents did not expect changes in productivity, sales, or margin adjustments to have a significant influence on prices over the coming year. Natural Resources and Agriculture Energy industry contacts indicated that they continued to add to their workforces and that plans to invest in increased production capacity were proceeding. Permitting for shallow water rigs in the Gulf of Mexico picked up slightly. The first lease auction for deepwater exploration since last year's Gulf oil spill occurred in December with 191 tracks being sold for $337.7 million. While much of the District witnessed various degrees of drought ranging from "abnormally dry" to "exceptional" in late November and December, both Georgia and Louisiana experienced the most severe conditions. Demand for cotton was flat as a result of global economic concerns and competition from synthetic fibers. Prices for cattle and hogs continued to increase because of strong foreign demand. Several regional agritourism contacts noted plans to expand next year. Return to top Richmond Chicago