We use cookies on our website to give you the best online experience. Please know that if you continue to browse on our site, you agree to this use. You can always block or disable cookies using your browser settings. To find out more, please review our privacy policy.

Economy Matters logo

About


The Atlanta Fed's SouthPoint offers commentary and observations on various aspects of the region's economy.

The blog's authors include staff from the Atlanta Fed's Regional Economic Information Network and Public Affairs Department.

Postings are weekly.


February 9, 2015

A New Year, a Better Economy?

The optimism expressed by the Jacksonville Branch's contacts in north and central Florida in the latter half of 2014 continued through the holidays and into early 2015. Conditions were described as quite good, and the majority of contacts reported strengthening demand across multiple sectors. Further, reported headwinds for current and future activity decreased noticeably.

Universities noted some challenges with enrollment, which—although negative for the schools—reflects a strengthening economy and an improving job market as prospective students lean toward employment rather than continuing education. Growth in new customer demand for utilities indicates people moving. Several financial institutions cited robust consumer lending, led by an increase in demand for auto loans. Some banks reported double-digit increases in credit card use by consumers. However, they described residential mortgage lending as soft, with inventories of both existing and new homes remaining low. Small business lending was characterized as very strong compared with the same period a year ago. Tourism in central Florida remained robust amid reports of record-setting attendance and revenue at some attractions, along with elevated occupancy rates at area hotels for the last half of 2014. Regarding holiday sales, contacts reported increases over year-earlier levels.

Employment and labor markets
Employment stories were mixed during the past couple of months. Some larger companies reported increases in staff, but others indicated that employment levels have shrunk as a result of efficiency and automation. Struggles to find talent continued to be widespread across higher-skilled jobs, including those in compliance, engineering, underwriting, and actuarial science. Some contacts suggested that some lower-skill jobs are also becoming more difficult to fill. In the Orlando area, service workers were in high demand to meet strong tourism activity, which has resulted in employee churn among employers in the hospitality, retail, and theme park/entertainment industries.

Labor and nonlabor costs and prices
Although few contacts reported wage pressures building, certain jobs continue to command higher salaries as competition for talent increased. For example, we heard that some firms are increasing wages to attract and retain accountants. Also, talented lawyers fresh out of law school seeking positions with large law firms are asking for, and getting, higher wages that not only cover the cost of living but help pay down college debt. However, contacts noted a change in the types of jobs where wage increases were evident, such as entry-level distribution center labor, and they expect that wage pressures will increase. Contacts reported offering a variety of other types of compensation, including performance-based incentive payouts, stock options, and equity increases to retain key employees. Increased offerings of "soft benefits," such as more time off and flex time, were also reported. Most contacts reported merit increases between 2 percent and 3.5 percent. Health care premium increases continued to be mixed across all contacts.

We continued to hear from a majority of contacts that nonlabor input cost increases appeared to be stable or slowing. Companies with contractual agreements of multiple years with customers were reporting some pricing power during renegotiations, although government and defense contractors reported very limited pricing power and have been forced to reduce costs to maintain margins.

Falling gas prices have had a positive effect, giving consumers in particular a psychological boost regarding spending. Travel and tourism contacts in central Florida reported increased passenger traffic and hotel occupancy. Others reported higher activity in auto sales, where product sales have shifted to trucks and SUVs in response to lower fuel prices.

Availability of credit/investment
Credit continued to be readily available for most large companies. Bank and credit union contacts indicated strong demand across most lines of business, with an increased interest in warehousing as the retail sector continued to increasingly use online fulfillment in addition to traditional brick-and-mortar stores. Other financial institutions reported significant improvements in the credit quality of consumers. Contacts cited examples of capital investments in IT (for efficiency and process automation), acquisitions, and infrastructure.

Business outlook
Contacts have expressed increased confidence in their outlook, and most are experiencing and expect further improvement. They cited few domestic headwinds outside of the unknowns related to oil's rapid price decline and the regulatory environment in banking and other industries. We continue to hear more about a possible resurgence of domestic manufacturing, with rising wages in Asia and the lower cost of energy in the Western Hemisphere, which could drive manufacturing to Mexico and to the United States during in the medium term. Contacts with a strong international presence didn't view the strengthening dollar as their biggest worry. Rather, they described demand challenges in certain markets and U.S. tax policy as more worrisome. Overall, contacts during the past three months were upbeat about economic conditions, with the majority forecasting higher growth during the short and medium term.

By Sarah Arteaga, a Regional Economic Information Network director in the Atlanta Fed's Jacksonville Branch, and Chris Oakley, regional executive at the Jacksonville Branch

December 17, 2014

A Timely Talk with Energy Professionals

If you read or watch the news, you've undoubtedly noticed what's happening with the price of oil. But for those of you who may have missed these reports, here it is in a nutshell: the price of Brent crude oil, the international benchmark, has declined more than 40 percent since its peak of over $115 in mid-June (see the chart).

Brent_spot_price

Many reports have discussed what the decline means to the energy industry and economy as a whole. In fact, the Atlanta Fed's very own macroblog published a post that examined the impact on energy investment and overall economic growth. We were also fortunate to be able to discuss this important and timely situation, along with other industry trends, with energy sector representatives last month during our Energy Advisory Council meeting held at the New Orleans Branch. So what did council members think about the declining price of oil? I gleaned a few key takeaways.

Industry effects
Council members reported that the recent drop in the price of oil had led exploration and production firms to reevaluate operational flexibility, cost-management strategies, and extraction technologies. These firms also initiated renegotiations with oilfield service companies for reductions to pricing structures, which a recent report suggested may drop as much as 20 percent.

In addition, council members conveyed their expectation that marginal oil producers may be negatively affected by falling oil prices, as their breakeven point is typically much higher than the larger producers. They shared that foreign oil-producing countries that acquire a majority of their revenues from the world's most traded commodity may also be adversely affected, which is a known concern among many key people inside the industry. The council also pointed out that if oil prices continued to decline or even hold at current levels, capital spending may be affected since firms would have fewer profits to reinvest into production and growth. Some reports indicate that this effect on spending is already beginning to occur. However, some members told us that they anticipate continued steady production in both deepwater and onshore drilling since many of these projects are large scale and long term and have high front-end costs (which in many cases have already been funded). Decisions about future projects may need to be reconsidered, however.

All in all, the Energy Advisory Council meeting was very timely, considering our attempts to understand what was happening globally with the price of oil and its impact on the economy. It will be interesting to learn how the energy industry will have adapted to current events when the council convenes again in March 2015.

Photo of Rebekah DurhamBy Rebekah Durham, economic policy analysis specialist in the Atlanta Fed's New Orleans Branch

September 9, 2014

Small Business Lending in the Sunshine State

No doubt, the lending environment has changed since 2007. Local bankers from the South Florida market discussed some of those changes at a roundtable event held last month at the Miami Branch of the Atlanta Fed. The discussion focused on small business lending activity and how the outlook and behavior of small business owners have evolved since the recession.

The bankers said they have a strong appetite for what they termed "qualified" small business loans and noted that they were competing against each other for good opportunities. This environment has helped put pressure on financial institutions to provide competitive loan terms for small business owners seeking credit. Most of the banks indicated that small business lending was part of a diversification strategy and an important component of their business. In a quarterly senior loan officer opinion survey conducted by the Federal Reserve Board in the second quarter of 2014, loan officers reported easing lending standards and some improvement in small business loan demand relative to a year before (see the chart).

Senior_loanofficers

The roundtable attendees agreed with the survey's findings and noted that the pool of qualified borrowers is currently limited but may expand as banks continue to review their underwriting standards in an improving economic environment.

Although all of the participating bankers were actively engaged in making small business loans, they did indicate that businesses were generally hesitant to take on additional debt and in general were behaving very conservatively. In discussing why business owners were taking on less risk, it was noted that the effects of the recession were still fresh, and most of the bankers felt that uncertainty about the future weighed on the minds of business owners. In addition, findings from the Atlanta Fed's survey of business inflation expectations indicate that business activity for smaller companies is improving but remains below normal levels (see the chart). One banker noted that rising interest rates would indicate to business owners that the economy was strengthening and that rising rates may, in fact, prompt further borrowing.

Percent_abovebelow

Credit qualification often ultimately comes down to the fundamentals. From a credit perspective, the bankers indicated that they heavily rely on the "five C's" of credit to help evaluate loan applicants: character, capacity, credit, collateral, and capital. The roundtable participants described "character" as one of the most important variables when they consider a request. Companies that weathered the recession were viewed more favorably because it demonstrated the ability to manage a business through difficult times. An owner who has personal credit issues will generally imply potential problems in managing the financial aspect of a business. The bankers cited adequate cash flow and a good balance sheet as important credit qualifications. The lenders noted that they also analyze how businesses position their balance sheets and expenses incurred by the company not related to the business.

Overall, the sentiment among the bankers at the meeting was positive, and for the remainder of the year, they expect continued improvement in lending to small businesses.

By Karen Gilmore, a vice president and the regional executive at the Atlanta Fed's Miami Branch, and Marycela Diaz-Unzalu, a Regional Economic Information Network analyst, also at the Miami Branch

August 15, 2014

Taking Tennessee's Temperature

During the most recent cycle of the Federal Open Market Committee (which ran from June 19 to July 30), the Atlanta Fed's Regional Economic Information Network (REIN) team at the Nashville Branch met with business leaders, including branch directors, to discuss economic conditions.

General business conditions
Our REIN contacts in Middle and East Tennessee remain optimistic about the prospects for their businesses and the general economy. Most have a positive outlook and report solid growth in customer demand.

Our contacts also indicate that manufacturing is expanding robustly, with the sector running at nearly full capacity, especially the auto industry. A large building-materials manufacturer expects faster growth in the second half of 2014 as the construction industry recovers from the weather-related disruptions earlier in the year. In the Nashville area, both the commercial and residential real estate markets are doing well, benefiting from the low interest rate environment, strong net in-migration, and rising household incomes as the employment picture improves.

Employment and labor markets
Employment growth has accelerated in Tennessee during the past year, and growth momentum is strong across most major metropolitan areas in the state (see the chart).

Tnemployment_momentum

Middle Tennessee State University's Business and Economic Research Center produces a heat map of Tennessee's employment growth by industry (based on U.S. Bureau of Labor Statistics data) that nicely illustrates what we've been hearing from our business contacts: namely, employment in construction, professional and business services, and leisure and hospitality has been outpacing growth in other industries.

As the labor market improves, businesses are increasingly sharing stories about the difficulties companies face in finding qualified workers across a broad skill spectrum. In addition, several companies have expressed concern that replacing skilled employees who are nearing retirement age will be challenging. Consequently, companies appear to be expanding internal training programs to deal with existing and potential skill shortages.

In addition to our meetings with business executives, we polled a number of mostly larger firms to find whether they experienced difficulty filling open positions. Out of 21 respondents, two-thirds said yes. Seventy percent of those respondents said that they have raised offer wages to attract new hires.

We also conducted a brief poll of 32 of our construction industry contacts. On the residential side, 75 percent indicated that it is now more or much more difficult to find skilled labor compared to the mid-2000s. Skilled labor availability is even tighter in commercial real estate—nearly 85 percent of respondents said finding skilled workers now is more difficult.

Costs/prices/wages
We have not heard of any pick-up in materials and other nonlabor input costs but, as mentioned above, the shortage of skilled applicants is putting upward pressure on offer wages. Several manufacturing contacts said that they increased their starting wages along with peer companies in their geographic area.

In the construction industry in particular, labor cost pressures on the residential side have increased compared to the mid-2000s for almost two-thirds of respondents to our poll. Moreover, labor cost pressures have intensified for more than three-fourths of the commercial builders we've polled.

Availability of credit and investments
In the same poll, two-thirds of the homebuilders and residential brokers said it is more or much more difficult to obtain financing for construction projects compared with the mid-2000s. And everyone on that panel said that it is more or much more difficult to obtain financing for land/lot development. Financing conditions are a bit easier for commercial builders (see the chart).

Tnconstruction_poll

One national commercial construction firm said that financing conditions are actually easier for them now than 10 years ago. Notably, equity financing is becoming more prominent in a number of sectors as investors are looking for higher returns than they can get at financial institutions, and banks' lending standards remain rigorous.

All this said, the positive sentiment among our business contacts in Middle and East Tennessee could possibly also signal continued improvement in the health of the national economy, given that the structure of Tennessee's economy for the most part resembles that of the United States' as a whole. Be sure to check back here as we'll periodically update the Middle and East Tennessee economy.


Photo of Galina Alexeenko By Galina Alexeenko, a Regional Economic Information Network director in the Atlanta Fed's Nashville Branch

February 9, 2015

A New Year, a Better Economy?

The optimism expressed by the Jacksonville Branch's contacts in north and central Florida in the latter half of 2014 continued through the holidays and into early 2015. Conditions were described as quite good, and the majority of contacts reported strengthening demand across multiple sectors. Further, reported headwinds for current and future activity decreased noticeably.

Universities noted some challenges with enrollment, which—although negative for the schools—reflects a strengthening economy and an improving job market as prospective students lean toward employment rather than continuing education. Growth in new customer demand for utilities indicates people moving. Several financial institutions cited robust consumer lending, led by an increase in demand for auto loans. Some banks reported double-digit increases in credit card use by consumers. However, they described residential mortgage lending as soft, with inventories of both existing and new homes remaining low. Small business lending was characterized as very strong compared with the same period a year ago. Tourism in central Florida remained robust amid reports of record-setting attendance and revenue at some attractions, along with elevated occupancy rates at area hotels for the last half of 2014. Regarding holiday sales, contacts reported increases over year-earlier levels.

Employment and labor markets
Employment stories were mixed during the past couple of months. Some larger companies reported increases in staff, but others indicated that employment levels have shrunk as a result of efficiency and automation. Struggles to find talent continued to be widespread across higher-skilled jobs, including those in compliance, engineering, underwriting, and actuarial science. Some contacts suggested that some lower-skill jobs are also becoming more difficult to fill. In the Orlando area, service workers were in high demand to meet strong tourism activity, which has resulted in employee churn among employers in the hospitality, retail, and theme park/entertainment industries.

Labor and nonlabor costs and prices
Although few contacts reported wage pressures building, certain jobs continue to command higher salaries as competition for talent increased. For example, we heard that some firms are increasing wages to attract and retain accountants. Also, talented lawyers fresh out of law school seeking positions with large law firms are asking for, and getting, higher wages that not only cover the cost of living but help pay down college debt. However, contacts noted a change in the types of jobs where wage increases were evident, such as entry-level distribution center labor, and they expect that wage pressures will increase. Contacts reported offering a variety of other types of compensation, including performance-based incentive payouts, stock options, and equity increases to retain key employees. Increased offerings of "soft benefits," such as more time off and flex time, were also reported. Most contacts reported merit increases between 2 percent and 3.5 percent. Health care premium increases continued to be mixed across all contacts.

We continued to hear from a majority of contacts that nonlabor input cost increases appeared to be stable or slowing. Companies with contractual agreements of multiple years with customers were reporting some pricing power during renegotiations, although government and defense contractors reported very limited pricing power and have been forced to reduce costs to maintain margins.

Falling gas prices have had a positive effect, giving consumers in particular a psychological boost regarding spending. Travel and tourism contacts in central Florida reported increased passenger traffic and hotel occupancy. Others reported higher activity in auto sales, where product sales have shifted to trucks and SUVs in response to lower fuel prices.

Availability of credit/investment
Credit continued to be readily available for most large companies. Bank and credit union contacts indicated strong demand across most lines of business, with an increased interest in warehousing as the retail sector continued to increasingly use online fulfillment in addition to traditional brick-and-mortar stores. Other financial institutions reported significant improvements in the credit quality of consumers. Contacts cited examples of capital investments in IT (for efficiency and process automation), acquisitions, and infrastructure.

Business outlook
Contacts have expressed increased confidence in their outlook, and most are experiencing and expect further improvement. They cited few domestic headwinds outside of the unknowns related to oil's rapid price decline and the regulatory environment in banking and other industries. We continue to hear more about a possible resurgence of domestic manufacturing, with rising wages in Asia and the lower cost of energy in the Western Hemisphere, which could drive manufacturing to Mexico and to the United States during in the medium term. Contacts with a strong international presence didn't view the strengthening dollar as their biggest worry. Rather, they described demand challenges in certain markets and U.S. tax policy as more worrisome. Overall, contacts during the past three months were upbeat about economic conditions, with the majority forecasting higher growth during the short and medium term.

By Sarah Arteaga, a Regional Economic Information Network director in the Atlanta Fed's Jacksonville Branch, and Chris Oakley, regional executive at the Jacksonville Branch

December 17, 2014

A Timely Talk with Energy Professionals

If you read or watch the news, you've undoubtedly noticed what's happening with the price of oil. But for those of you who may have missed these reports, here it is in a nutshell: the price of Brent crude oil, the international benchmark, has declined more than 40 percent since its peak of over $115 in mid-June (see the chart).

Brent_spot_price

Many reports have discussed what the decline means to the energy industry and economy as a whole. In fact, the Atlanta Fed's very own macroblog published a post that examined the impact on energy investment and overall economic growth. We were also fortunate to be able to discuss this important and timely situation, along with other industry trends, with energy sector representatives last month during our Energy Advisory Council meeting held at the New Orleans Branch. So what did council members think about the declining price of oil? I gleaned a few key takeaways.

Industry effects
Council members reported that the recent drop in the price of oil had led exploration and production firms to reevaluate operational flexibility, cost-management strategies, and extraction technologies. These firms also initiated renegotiations with oilfield service companies for reductions to pricing structures, which a recent report suggested may drop as much as 20 percent.

In addition, council members conveyed their expectation that marginal oil producers may be negatively affected by falling oil prices, as their breakeven point is typically much higher than the larger producers. They shared that foreign oil-producing countries that acquire a majority of their revenues from the world's most traded commodity may also be adversely affected, which is a known concern among many key people inside the industry. The council also pointed out that if oil prices continued to decline or even hold at current levels, capital spending may be affected since firms would have fewer profits to reinvest into production and growth. Some reports indicate that this effect on spending is already beginning to occur. However, some members told us that they anticipate continued steady production in both deepwater and onshore drilling since many of these projects are large scale and long term and have high front-end costs (which in many cases have already been funded). Decisions about future projects may need to be reconsidered, however.

All in all, the Energy Advisory Council meeting was very timely, considering our attempts to understand what was happening globally with the price of oil and its impact on the economy. It will be interesting to learn how the energy industry will have adapted to current events when the council convenes again in March 2015.

Photo of Rebekah DurhamBy Rebekah Durham, economic policy analysis specialist in the Atlanta Fed's New Orleans Branch

September 9, 2014

Small Business Lending in the Sunshine State

No doubt, the lending environment has changed since 2007. Local bankers from the South Florida market discussed some of those changes at a roundtable event held last month at the Miami Branch of the Atlanta Fed. The discussion focused on small business lending activity and how the outlook and behavior of small business owners have evolved since the recession.

The bankers said they have a strong appetite for what they termed "qualified" small business loans and noted that they were competing against each other for good opportunities. This environment has helped put pressure on financial institutions to provide competitive loan terms for small business owners seeking credit. Most of the banks indicated that small business lending was part of a diversification strategy and an important component of their business. In a quarterly senior loan officer opinion survey conducted by the Federal Reserve Board in the second quarter of 2014, loan officers reported easing lending standards and some improvement in small business loan demand relative to a year before (see the chart).

Senior_loanofficers

The roundtable attendees agreed with the survey's findings and noted that the pool of qualified borrowers is currently limited but may expand as banks continue to review their underwriting standards in an improving economic environment.

Although all of the participating bankers were actively engaged in making small business loans, they did indicate that businesses were generally hesitant to take on additional debt and in general were behaving very conservatively. In discussing why business owners were taking on less risk, it was noted that the effects of the recession were still fresh, and most of the bankers felt that uncertainty about the future weighed on the minds of business owners. In addition, findings from the Atlanta Fed's survey of business inflation expectations indicate that business activity for smaller companies is improving but remains below normal levels (see the chart). One banker noted that rising interest rates would indicate to business owners that the economy was strengthening and that rising rates may, in fact, prompt further borrowing.

Percent_abovebelow

Credit qualification often ultimately comes down to the fundamentals. From a credit perspective, the bankers indicated that they heavily rely on the "five C's" of credit to help evaluate loan applicants: character, capacity, credit, collateral, and capital. The roundtable participants described "character" as one of the most important variables when they consider a request. Companies that weathered the recession were viewed more favorably because it demonstrated the ability to manage a business through difficult times. An owner who has personal credit issues will generally imply potential problems in managing the financial aspect of a business. The bankers cited adequate cash flow and a good balance sheet as important credit qualifications. The lenders noted that they also analyze how businesses position their balance sheets and expenses incurred by the company not related to the business.

Overall, the sentiment among the bankers at the meeting was positive, and for the remainder of the year, they expect continued improvement in lending to small businesses.

By Karen Gilmore, a vice president and the regional executive at the Atlanta Fed's Miami Branch, and Marycela Diaz-Unzalu, a Regional Economic Information Network analyst, also at the Miami Branch

August 15, 2014

Taking Tennessee's Temperature

During the most recent cycle of the Federal Open Market Committee (which ran from June 19 to July 30), the Atlanta Fed's Regional Economic Information Network (REIN) team at the Nashville Branch met with business leaders, including branch directors, to discuss economic conditions.

General business conditions
Our REIN contacts in Middle and East Tennessee remain optimistic about the prospects for their businesses and the general economy. Most have a positive outlook and report solid growth in customer demand.

Our contacts also indicate that manufacturing is expanding robustly, with the sector running at nearly full capacity, especially the auto industry. A large building-materials manufacturer expects faster growth in the second half of 2014 as the construction industry recovers from the weather-related disruptions earlier in the year. In the Nashville area, both the commercial and residential real estate markets are doing well, benefiting from the low interest rate environment, strong net in-migration, and rising household incomes as the employment picture improves.

Employment and labor markets
Employment growth has accelerated in Tennessee during the past year, and growth momentum is strong across most major metropolitan areas in the state (see the chart).

Tnemployment_momentum

Middle Tennessee State University's Business and Economic Research Center produces a heat map of Tennessee's employment growth by industry (based on U.S. Bureau of Labor Statistics data) that nicely illustrates what we've been hearing from our business contacts: namely, employment in construction, professional and business services, and leisure and hospitality has been outpacing growth in other industries.

As the labor market improves, businesses are increasingly sharing stories about the difficulties companies face in finding qualified workers across a broad skill spectrum. In addition, several companies have expressed concern that replacing skilled employees who are nearing retirement age will be challenging. Consequently, companies appear to be expanding internal training programs to deal with existing and potential skill shortages.

In addition to our meetings with business executives, we polled a number of mostly larger firms to find whether they experienced difficulty filling open positions. Out of 21 respondents, two-thirds said yes. Seventy percent of those respondents said that they have raised offer wages to attract new hires.

We also conducted a brief poll of 32 of our construction industry contacts. On the residential side, 75 percent indicated that it is now more or much more difficult to find skilled labor compared to the mid-2000s. Skilled labor availability is even tighter in commercial real estate—nearly 85 percent of respondents said finding skilled workers now is more difficult.

Costs/prices/wages
We have not heard of any pick-up in materials and other nonlabor input costs but, as mentioned above, the shortage of skilled applicants is putting upward pressure on offer wages. Several manufacturing contacts said that they increased their starting wages along with peer companies in their geographic area.

In the construction industry in particular, labor cost pressures on the residential side have increased compared to the mid-2000s for almost two-thirds of respondents to our poll. Moreover, labor cost pressures have intensified for more than three-fourths of the commercial builders we've polled.

Availability of credit and investments
In the same poll, two-thirds of the homebuilders and residential brokers said it is more or much more difficult to obtain financing for construction projects compared with the mid-2000s. And everyone on that panel said that it is more or much more difficult to obtain financing for land/lot development. Financing conditions are a bit easier for commercial builders (see the chart).

Tnconstruction_poll

One national commercial construction firm said that financing conditions are actually easier for them now than 10 years ago. Notably, equity financing is becoming more prominent in a number of sectors as investors are looking for higher returns than they can get at financial institutions, and banks' lending standards remain rigorous.

All this said, the positive sentiment among our business contacts in Middle and East Tennessee could possibly also signal continued improvement in the health of the national economy, given that the structure of Tennessee's economy for the most part resembles that of the United States' as a whole. Be sure to check back here as we'll periodically update the Middle and East Tennessee economy.


Photo of Galina Alexeenko By Galina Alexeenko, a Regional Economic Information Network director in the Atlanta Fed's Nashville Branch