Slow Growth with a Dash of Uncertainty and Caution

Southeastern Insights
November 2013

Southeastern Insights provides a broad summary of economic intelligence gathered through our network of business contacts and other sources throughout the Southeast during the latest Federal Open Market Committee (FOMC) cycle. This report covers the period from September 19 to October 30.

As a complement to Southeastern Insights, Adrienne Slack, vice president and regional executive at the Atlanta Fed's New Orleans Branch, discusses the regional economy.

General conditions
Contacts reported that business activity continued to grow at a slow pace. For their short-term outlook, slightly over half of our contacts expect growth in their businesses to be sustained at current levels while only 29 percent expect higher growth over the next three to six months (see chart 1).

Chart 1

While most business contacts anticipate continued slow growth in the short term, several contacts noted that uncertainty from the effects of the debt ceiling, government shutdown, Affordable Care Act, sequestration, and regulatory environment are having an impact on consumer and business confidence. Many contacts reported that all of these uncertainties have led to decision-making paralysis, causing businesses to "just sit on their hands" until confidence returns. The optimism we noted in our previous FOMC cycle seems to have taken a back seat to uncertainty for the time being.

Mixed reports from labor markets, combined with renewed uncertainty, have not strengthened employment trends since the previous cycle and have caused many business leaders to delay decisions about hiring new employees. Similar to the last cycle, we continued to receive feedback from contacts that companies looking to hire expressed concern that their inability to find qualified labor is inhibiting business expansion. However, that labor shortage issue is unique to industries such as energy, information technology, auto, and construction. Overall, very few companies reported adding to employment levels as a result of organic growth, regardless of how robust that growth was. Some companies cited paying overtime before hiring new employees unless the new hires were expected to generate revenue.

Consumer spending
Retail industry reports were mixed, yet most contacts described a decline in sales and demand following a slower than expected summer and back to school season. Some retailers also indicated they plan to hire fewer seasonal staff and are less optimistic about the upcoming holiday season. A bright spot in consumer spending continues to come from the strength of high-end consumers; however, their spending has not been significant enough to offset the scaling back by low- to mid-end consumers.

Contacts continued to report stable pricing with no major concerns about inflation; cost pressures were mostly well contained. Results from the Atlanta Fed's survey on business inflation expectations show that, on average, unit costs are expected to rise 1.9 percent over the next 12 months. The reading remains within the historical range of 1.7 to 2.1 percent (see chart 2).

Chart 2

However, isolated industries that reported minimal cost increases did note that they were able to pass through the increases to their customers (such as fast food, grocery stores, and some construction). Overall, margins remained tight.

Reports indicate wage increases remained stable (mostly in the 2–3 percent range) across most industries. However, there were scattered reports of upward wage pressures for high-skilled workers.

Trade and transportation
Transportation contacts reported some slowing in growth in recent months. A trucking company contact remarked, "Freight is not robust by any means." The port in Miami noted minimal cargo growth and a slowing of exports; however, the Port of New Orleans reported strength in exports of chemicals and energy, with the lower Mississippi River doubling its exports from a year ago. The outlook for demand among transportation contacts over the next three to six months is for higher levels of activity based on recent trends and the upcoming peak season for holiday shipping.

The travel and tourism sector noted that the hospitality industry has been growing at a fast clip. Growth in business and leisure travel has more than made up for declines in government travel over the past year. The third quarter saw steady gains in tourism and the fourth quarter is likely to continue to be fairly strong, though it may not outpace the third. The outlook for tourism activity for next year remains optimistic based on reports of advanced bookings.

Manufacturing/capital investment
The Southeast Purchasing Managers Index's reading of 48.5 for September decreased 2.1 points from August's reading of 50.6 (see chart 3). The reduction was not dramatic, but the series has been trending down since April and entered contractionary territory for the first time since the end of last year.

Chart 3

Regarding capital expenditures, contacts noted that when investment was occurring, it was geared toward replacement of equipment rather than growth of their businesses. Firms also indicated that this type of activity was happening in industries positioned to benefit from low natural gas prices, such as industrial construction and manufacturing.

Real estate
Housing markets continue to improve in the region. The Atlanta Fed's Construction and Real Estate Survey indicated that home sales remained ahead of the year-earlier level in September but growth continued to slow (see chart 4).

Chart 4

Both brokers and builders continued to report home price gains in September (see chart 5).

Chart 5

However, buyer traffic dropped, which some suggested was a result of seasonal factors and rising interest rates (see chart 6).

Chart 6

Looking ahead
While our contacts expressed some uncertainty and caution, their medium-term outlook is that the economy will continue to improve. The Federal Reserve will continue to monitor a number of economic indicators, keeping an eye out for signs of improvement. Atlanta Fed President Dennis Lockhart mentioned some of these indicators in a speech on September 23.

By Gail Psilos, director, Regional Economic Information Network in the New Orleans Branch, and Shalini Patel, an economic policy analysis specialist in the Atlanta Fed's research department