Members of the Atlanta Fed's Regional Economic Information Network (REIN) have been out in the District gathering grassroots information about the southeastern economy, and we want to share some of the recent insights they've gleaned about several important sectors. Here are our key takeaways, which we will elaborate upon in this article:
- Demand is weaker but not weak.
- Some contacts' outlooks are growing more cautious.
- The labor market continues to achieve balance.
- Inflation is slowing.
Demand and investment
In an Economy Matters article last December, our REIN team noted that many business contacts across the Southeast noted a "normalization" in demand from pandemic-era robustness, an easing of labor market tightness and wage pressures, moderating costs and prices, and signs pointing to further normalization in 2024.
Businesses' outlooks for 2024 were generally positive, with very few contacts mentioning expectations of a significant downturn. Most firms continued to describe demand conditions as approaching "steady state" and shared expectations for low growth rates in the first half of the year with potential for a pickup in the second half.
As 2024 got under way, economic trends remained consistent with the last half of 2023—most firms reported demand was healthy but softening, cost growth slowed and pricing power moderated, and labor markets saw more stabilization. Early in 2024, expectations for interest rate cuts contributed to optimism, as some firms believed that rate cuts would lead to a rapid increase in business spending, largely because of a lot of investor money on the sidelines. However, others also noted that investment plans had already built in a softening of monetary policy. As the second quarter approached, firms shifted from the expectation for a rapid shift in demand in response to rate cuts, no longer anticipating an outsized "unleashing" of pent-up demand amid lower rates. Consumer-facing firms were reporting generally healthy demand with expectations for flat or slight positive growth in 2024.
As the year progressed and conditions stayed largely consistent with reports from 2023, contacts mentioned that some consumers were trading down. Reports of slightly softening consumer spending were concentrated among low-income consumers, while firms catering to middle- and higher-income consumers saw robust demand. Bankers reported that delinquencies, while increasing slightly, were at or below prepandemic levels. Many large firms with access to cash funding claimed to be moving forward with growth and investment, while lending conditions limited investment opportunities for some small businesses.
Around the middle of 2024, reports of some softening in demand or increased budgeting among middle- and high-income consumers surfaced, and consumer-facing contacts further emphasized the strain of lower-income consumers along with growing pessimism in consumer sentiment. The trend of slowing growth alongside healthy demand in the business-to-business space was remarkably consistent across sectors. The main exceptions were spending related to government infrastructure and energy projects and single-family construction, with the latter having picked up at the beginning of the year and remained strong. The sectors experiencing the most weaknesses were transportation and warehousing, multifamily, and autos. The rate of slowing among firms varied widely across industries, with many seeing continued resilience and others seeing more significant softening.
In the second half of the year, most contacts noted little change in investment plans. Interest rates continued to deter much nonessential capital spending. While higher rates mostly affected smaller firms, reports increased of larger firms slowing capital spending—or, in a minority of cases, even halting investment altogether. However, some firms moved forward with capital spending, expecting future rate cuts to help reduce costs as projects advanced. Most firms expected more measured upticks in investment to follow rate cuts.
Current demand could be characterized as soft but not weak, amid growing concerns about firms' outlooks for the second half of 2024. Many firms have become slightly more pessimistic about activity softening more significantly over the course of the rest of the year, and some noted they are employing tighter expense-management approaches and positioning to be able to pivot quickly to further reduce costs should conditions warrant.
Labor
Through the first half of 2024, the labor market was fairly steady. At the beginning of the year, many firms noted that they were well staffed, with appropriate headcounts. Hiring remained strong in healthcare as greater availability of labor allowed many healthcare contacts to hire more full-time workers and rely less on contract workers. However, some difficulty finding workers remained, particularly in jobs with specialized or high-demand skills such as those often needed in manufacturing, construction, and some hospitality work.
After years of high turnover, firms have reported throughout 2024 that turnover has largely moderated and hiring is easier, leading to more moderate wage increases. Many firms reported early in the year that they expected 2024 wage increases to be in line with prepandemic rates, and confidence in this expectation has grown throughout the year.
As the year has progressed, business owners began to note some slowing in hiring, as softening demand led them to be more conservative with headcounts. Late in the second quarter, there was a slight uptick in reports of firms considering reducing their workforce this year in response to slowing demand. Most did not expect these to be aggressive reductions and believed they could sufficiently cut headcount through normal attrition. Many contacts described managing staffing levels conservatively as a way to restrain labor costs. Significant workforce reductions are not currently the dominant approach, nor do such reports appear to be increasing among contacts. Of those describing reducing headcount this year, most plan to take a moderate approach, one largely driven by attrition. Only a few contacts described plans in the near term for aggressive attrition or layoffs as a way to achieve more significant headcount reductions
Many firms note that investments in automation (including AI) have begun to yield greater efficiency. But many of these efforts are in their early stages and not yet providing significant offsets for labor shortages or elevated labor costs.
Costs and pricing
The majority of contacts across sectors have continued to report that cost increases have slowed or stalled in 2024, with some even seeing costs fall. Reports of slowing inflation have been particularly pronounced in the goods sector but were also prevalent in the services sector. Businesses and consumers alike have shown increased price sensitivity. Decreased pricing power has limited firms' ability to pass along increases. Contacts described margins as decreasing but still generally healthy by historical standards, and many still have room to take on cost pressures. A major exception to this moderation in price growth continues to be insurance costs, which provide persistent cost pressures.
Outlook
As we enter the second half of 2024, firms report currently solid conditions but cautious outlooks for the rest of the year. Many have revised down slightly their forecasts from the beginning of the year, often describing expectations ranging from low growth to flat performance. However, most firms do not expect a sudden, drastic decline.
Although most firms are currently holding headcount steady, and some continue to hire, an increasing number are reporting more conservative stances around headcount or are ready to pivot to making labor reductions if demand weakens further. On the bright side, firms are confident that inflation is coming down, and they continue to express some optimism, even amid more uncertainty, for a healthy finish to 2024. While many report they would welcome a return to less restrictive monetary policy, most no longer believe that an interest rate cut would unleash a large amount of pent-up demand or investor spending.
By Sarah Arteaga, REIN director in the Atlanta Fed's Jacksonville Branch, and
Roisin McCord, REIN director in the Atlanta Fed's Birmingham Branch