Federal Reserve Bank of Atlanta
Summary of Economic Activity
The economy of the Sixth District grew slowly from mid-November through December. Labor availability and employee retention continued to improve, but hiring slowed for some firms, and wage pressures eased further. Nonlabor costs moderated for the most part, and pricing power slipped. Holiday retail sales were mixed; auto sales were strong. Travel activity was healthy, but spending at hotels continued to slow. Despite declines in mortgage interest rates, the housing market remained encumbered by the lack of affordability. Commercial real estate activity was sluggish. Transportation activity remained weak. Lending grew for certain types of loans, but consumer lending declined. Activity in the energy sector was robust. Agriculture conditions were mixed.
Labor Markets
Labor markets continued to cool, and some employers slowed hiring. Most contacts continued to report that labor markets had softened from earlier in the year amid more available labor and stronger retention rates. Many indicated that staffing levels had improved from a year ago; however, hiring in the leisure and hospitality sector remained challenging. Additionally, the lack of affordable housing was cited as an impediment to attracting workers to some areas. Weaker demand for products and services caused some employers to reduce hours or slow hiring which they expected to continue through the first half of 2024. One firm said that they were choosing to hold positions open and were "slow walking" new hires, as they sought to supplement productivity with Generative A.I. across all business lines and functions.
Most firms indicated that wage pressures continued to ease, and more modest wage growth is expected in the coming year.
Prices
Nonlabor input cost increases moderated over this reporting period. Firms cited improvements in supply chain predictability, contributing to lower freight and shipping costs. Construction costs were mixed; lumber costs decreased while concrete increased. Food product costs declined. The easing of some input costs was offset by persistent growth in labor and insurance costs, and most firms held consumer prices steady even amid diminishing pricing power. The Atlanta Fed's Business Inflation Expectations survey showed year-over-year unit cost growth decreased significantly in December to 2.9 percent, on average, from 3.2 percent in November; firms' year-ahead inflation expectations for unit cost growth remained relatively unchanged in December at 2.4 percent, on average.
Consumer Spending and Tourism
Consumer spending generally continued the trend of normalization from the pandemic's strong pace of growth. Holiday sales were mixed. In line with pre-pandemic trends, contacts reported managing inventories more closely and many offered customary promotions and discounts. Auto sales remained strong, On average, retailers' outlook remains positive for the first half of 2024.
Holiday travel activity was characterized as healthy, on balance, by tourism and hospitality contacts. Spending on merchandise, food, and services in hotels, however, decreased compared with the same time last year. Contacts are cautiously optimistic about travel demand in the first quarter, but characterize the environment as normalizing back to pre-pandemic levels.
Construction and Real Estate
Although mortgage rates retreated during the fourth quarter of 2023, home sales in the District were slow to respond, as most markets remained unaffordable for median income earners. Homeowners also faced challenges with other rising costs, such as property insurance. Florida, with strong demand generated from out-of-state buyers, is the only Sixth District state reporting increases in existing home sales compared with a year ago. Inventories of homes for sale, though still tight, were boosted by new construction. Sales strategies varied by homebuilder; smaller builders focused on reducing home sizes, while larger builders reported buying down interest rates to generate demand.
The Sixth District's office market continued to encounter negative absorption rates and diminishing occupancies. Leasing activity at the end of 2023 dropped to 2020 levels, creating a "tenant's market," where landlords were forced to offer incentives. Market conditions are expected to remain challenged in 2024 as new construction is delivered. Other property segments experienced weakening conditions as well; contacts in industrial markets reported that the amount of square feet in the pipeline is running well ahead of absorption, resulting in higher vacancy levels. Contacts expressed concerns over rising commercial real estate loan maturities in 2024.
Transportation
Transportation activity remained muted over the reporting period. Railroads reported declines in year-to-date total traffic; intermodal shipments were down significantly. Trucking firms cited continued softness in freight volumes, which is expected to continue well into 2024. Some carriers anticipate that additional trucking capacity will be taken offline in the next year as small owner-operators fold, and large carriers reduce capacity amid deteriorating demand. A few logistics contacts hinted at re-emerging supply chain constraints resulting from drought conditions in the Panama Canal, as shippers are forced to deploy to the Suez Canal, extending lead times for products from China and southeast Asia.
Manufacturing
Manufacturing activity slowed slightly. Some contacts reported declines in new orders and backlogs of work, along with rising finished goods inventories and faster supplier delivery times. The Manufacturing Sector Report of the Atlanta Fed's Business Inflation Expectations Survey showed that for the majority of respondents, demand had decreased or was on par with year-earlier levels. The outlook is cautiously optimistic but concerns such as inflation, interest rates, and geopolitical uncertainty were mentioned.
Banking and Finance
Lending at Sixth District financial institutions increased since the previous report, especially for multifamily and home equity loans. Consumer lending contracted overall, alongside a rise in delinquencies in credit cards, auto loans and unsecured personal loans. Demand and large time deposit balances continued to increase as banks paid higher interest rates on deposits. However, these higher funding costs have led to earnings concerns. Hence, some banks restructured securities portfolios and reinvested proceeds into higher-yielding securities to protect margins.
Energy
Energy contacts reported historically high levels of crude oil production and record amounts of gas flow to liquefied natural gas export plants. Contacts also continued to report planning and development of industrial decarbonization and renewable energy projects; however, a few contacts noted that some of these projects are being delayed by federal approval processes. Utility contacts reported growing electricity demand, especially in the industrial and commercial segments, attributed to clean energy transitions at production facilities and hospital and healthcare projects, respectively.
Agriculture
Low cattle supply led to higher cattle prices, but consumers substituting less expensive proteins prevented full pass-through of prices. Domestic demand for chicken rose, but demand was down overall as cases of avian flu led to additional export restrictions and lower egg supply. Milk prices rose amid growing domestic demand for dairy, but low export levels continued to depress the market. There was little change in demand or supply for row crops, but demand for cotton remained weak.
For more information about District economic conditions visit: https://www.atlantafed.org/economy-matters/regional-economics.