Federal Reserve Bank of Atlanta
Summary of Economic Activity
Economic activity in the Sixth District declined slightly since the previous report. Labor markets and wages grew modestly. Prices grew modestly, and firms' pricing power diminished. Low- to moderate-income consumers and small businesses remained financially challenged. Consumer spending weakened amid growing price sensitivity. Leisure travel continued to slow while business travel improved; spending at hotel properties declined. Demand for housing fell amid a persistent lack of affordability, and housing starts contracted. Commercial real estate activity was mixed. Activity in the transportation sector weakened. Manufacturing activity declined. Loan volumes grew slowly. Energy activity increased.
Labor Markets
Employment in the Sixth District increased modestly over the reporting period. Most firms continued to report improvements in talent availability. A few noted labor reductions, mostly in the form of cutting regular and overtime hours and, in a minority of cases, layoffs. However, several firms said that further weakening of demand could result in future layoffs. While many firms reported that they will continue to fill vacant positions, several noted that they were slowing the pace of hiring for the remainder of the year. Only a few indicated they would be staffing up in anticipation of future growth.
Most contacts indicated that wages grew modestly as wage pressure continued to ease. However, some employers noted ongoing wage pressure for certain specialized positions where hiring challenges persisted.
Prices
On balance, prices grew at a modest pace. Increased container rates pushed freight costs higher. Other nonlabor input cost increases moderated, with several contacts speculating that food costs have likely plateaued. Labor and insurance costs remained the greatest expense for firms, but those increases also diminished. Pricing power continued to wane, with increased reports of promotions or targeted price cuts at the consumer level. The Atlanta Fed's Business Inflation Expectations survey showed year-over-year unit cost growth ticked down to 2.7 percent, on average, in July from 2.8 percent in June; firms' year-ahead inflation expectations for unit cost growth remained relatively unchanged at 2.4 percent, on average.
Community Perspectives
Organizations serving low- and moderate-income consumers said that clients' economic experiences were largely unchanged over the reporting period. Contacts specifically supporting small businesses reported that many of their clients faced moderately more difficult financial conditions. Challenges stemmed from an elevated cost of capital, higher cost of inputs, and decreasing financial support from the federal government. Elevated wage expectations among qualified workers also presented a financial strain for many small businesses, as labor is often their single largest expense.
Consumer Spending and Tourism
Consumer spending declined modestly since the previous report. While most retailers did not feel that demand had fallen to concerningly low levels, many reported lower customer traffic and shrinking ticket sizes. Contacts reported diminished discretionary spending but solid spending on essentials. Consumer price sensitivity continued to rise, leading retailers to increase promotions. While still most notable in lower income groups, shopping for deals and budgeting became more evident among higher income shoppers. Retailers observed more trade-downs, bulk purchases, and a shift to shopping at outlets. Auto dealers noted a modest decline in demand, as consumers delayed big-ticket purchases.
Travel and tourism activity continued to grow at slight pace, on net, since the previous report. Hospitality contacts noted that while leisure travel was slower than expected, business and group travel increased. On-property spending on services, food, and beverage fell below expectations. Industry contacts expect flat demand for the remainder of the year.
Construction and Real Estate
Housing activity continued to slow as the continuing lack of affordability hampered sales, despite the decline in mortgage rates. As home prices in most markets neared record highs, the pace of sales slowed modestly, remaining flat or slightly below year-ago levels. Inventories increased sharply, especially in Florida, resulting in less upward pressure on home prices and an elevated share of homes selling below the asking price. Homebuilder sentiment deteriorated as demand for new homes declined moderately. Incentives offered to new homebuyers remained above seasonal norms while builders pulled back on starts to avoid a build-up of speculative inventory.
Commercial real estate (CRE) activity remained mixed. Vacancy rates rose in the office, industrial, and multifamily sectors. While reporting modestly declining multifamily and industrial starts, CRE contacts noted an increase in "clicks-to-bricks" investment, where online sales are supplemented with a brick-and-mortar presence, driving more sales both in-person and online. Firms reported a slight uptick in property sales transaction volumes, especially for smaller office properties. Increasing CRE loan maturities continued to create challenges for lenders. Underwriting standards remained tight, making access to loans challenging.
Transportation
Transportation activity declined modestly, on balance, over the reporting period. Inland barge carriers reported that overall demand had slowed, and shipments of construction materials declined significantly. Demand for leased industrial space declined, and new warehousing construction remained low. Trucking demand was mixed, but mostly down. Freight volumes at District ports declined slightly but remained strong. Railroads saw a decline in automotive and steel shipments; total rail traffic, however, increased. Most transportation contacts described activity as underperforming against expectations.
Manufacturing
Manufacturing activity declined modestly in recent weeks. New orders of consumer products slowed, and manufacturers responding to the Atlanta Fed's Business Inflations Expectations Survey noted a decline in sales levels. Manufacturers of some retail goods noted that wholesalers were reverting to just-in-time inventories amid growing uncertainty and softening consumer spending. There were also reports of declines in orders of heavy equipment and of inputs for construction. However, some manufacturers, particularly producers of materials for infrastructure projects and pharmaceuticals, continued to see strong demand.
Banking and Finance
Loan volumes at Sixth District financial institutions grew modestly. Asset quality remained stable, though segments of their portfolios, such as commercial real estate, commercial and industrial, and consumer lending, continued to soften. However, many institutions remained selective in their credit risk appetite. Earnings showed improvement driven by new loan volume and higher asset yields as compared to funding costs. Borrowing declined modestly as banks reduced reliance on more expensive liquidity sources. Cash balances increased moderately due to balance sheet repositioning.
Energy
The pace of activity grew moderately across most energy sectors. Energy contacts reported that Gulf of Mexico crude oil production remained robust. Refiners and petrochemical processors noted that carbon capture and storage projects continued to grow moderately. Utility company contacts described steady activity across residential, small commercial, and large industrial customers. Economic development across the Southeast continued to drive demand for power. One utility reported existing data center electricity usage grew by 17 percent in recent months, and high-velocity growth in power demand over the medium- and long-term is expected to increase demand for various forms of electricity supply, including natural gas turbines, solar, wind, and battery energy storage systems.
For more information about District economic conditions visit: https://www.atlantafed.org/economy-matters/regional-economics.