A Nice Start for the New Year

Southeastern Insights
February 2014

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 December 19 to January 29.

Lee Jones, vice president and regional executive at the Atlanta Fed’s Nashville Branch, discusses the southeastern economy.

General conditions
Business sentiment has improved since experiencing a dip in confidence around the time of last fall’s government shutdown. During this FOMC cycle, a significant number of contacts indicated that downside risks to economic growth have significantly diminished and uncertainty has somewhat dissipated. Businesses largely believe that growth-constraining headwinds have abated. Contacts in the manufacturing, hospitality, and construction industries are especially optimistic.

According to the Southeastern Purchasing Managers Survey produced by Kennesaw State University, manufacturers’ optimism rose in December to the highest level since January of last year. The majority of surveyed managers reported expectations of higher production over the next three to six months.

Regional retailers, encouraged by a solid holiday shopping season, also have a generally positive outlook for sales growth. Retailers, as well as our contacts in the hospitality industry, expressed hopes that continued improvement in the labor market and strengthening personal balance sheets will further boost consumer spending this year.

Residential real estate continues to improve in most of the region. According to the Atlanta Fed’s December 2013 business contact poll, sales were either up or flat compared to a year ago for the majority of builders and brokers, and home inventory levels had fallen or were unchanged from year-earlier levels. There was also ongoing recovery in home prices. Increases in home sales, construction, and prices are projected to continue this year, although many contacts expect growth to decelerate from last year’s pace. The poll shows that compared to a year ago, respondents are less optimistic about sales growth and construction over the next three months (see chart 1).

Chart 1: Southeast Builder Construction Expectations for Next Three Months

By and large, we have not heard reports of a notable pickup in hiring. Hiring plans remain generally modest, with an emphasis on revenue-generating positions. According to the latest available data from the U.S. Bureau of Labor Statistics, district payrolls rose a relatively modest 18,000 in December. Hiring activity in construction appears to be notably stronger than other industries (see chart 2). The unemployment rate for the district fell 0.3 percentage point in December, to 6.7 percent, mirroring the national trend, while the unemployment rate in Georgia, Mississippi, and Tennessee remained above the national rate.

Chart 2: Employment Momentum by Sector: Sixth District States

We continue to hear reports about difficulties filling certain positions with people who have the needed skills and experience in a number of industries, including construction, manufacturing, and financial services. Businesses have also begun to raise concerns about a potential surge in retirement activity, as 401K accounts and homes continue to regain the value lost during the financial crisis and more people reach retirement age.

Input prices and wages
Most of our contacts report modest and relatively stable labor and material cost pressures. Contacts in the construction industry are a notable exception—the industry has been facing significant increases in the costs of some materials (see chart 3). Homebuilders also continue to indicate strong upward pressure on labor costs. More than 90 percent of builders polled by the Atlanta Fed in December said that labor costs had increased over the past 12 months, compared with fewer than 80 percent in December 2012 and roughly 40 percent in December 2011.

Chart 3: Producer Price Index

According to the Atlanta Fed’s January business inflation expectations (BIE) survey, costs were up 1.7 percent from a year ago and are expected to pick up slightly to 1.9 percent over the next 12 months (see chart 4).

Chart 4: Year-Ahead Unit Cost Expectations

In general, we continue to hear from businesses that they have little to no pricing power. Approximately 45 percent of respondents indicated that their profit margins were at or above normal in January, a decline from 50 percent in December.

Investment and capital
We are hearing reports that a number of businesses are becoming less risk averse, shifting to what one contact termed “cautious aggressiveness,” with a greater willingness to place bets on capital projects. For example, some companies that used to rent heavy construction equipment are now beginning to buy such equipment instead.

Business outlook
Looking forward, most of our contacts believe that over the next three to six months, sales growth will be either sustained at current levels or will accelerate—a notable improvement from what they expected back in October (see chart 5).

Chart 5: What is your outlook for the rate of growth in your business over the next three to six months compared to current rates?

Looking further out, our contacts are even more bullish regarding their medium-term outlook—the overwhelming majority believes that growth will be higher over the next two to three years.

Overall, the growing sense of optimism among our contacts in the Southeast supports the view President Dennis Lockhart expressed in his recent speech that “compared to previous Januaries, we are entering this year on a more solid economic footing” and that the economy “seems poised to transition to better conditions” in 2014.

By Lee Jones, vice president and regional executive, and Galina Alexeenko, director, Regional Economic Information Network, both in the Atlanta Fed’s Nashville Branch