Spring Is in the Air

Southeastern Insights
March 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 January 30 to March 19.

Chris Oakley, vice president and regional executive at the Atlanta Fed’s Jacksonville Branch, shares his perspective on the regional economy.

General conditions
On balance, Sixth District business conditions improved modestly from February to mid-March. Design and construction contacts noted a pickup in activity driven by manufacturing, health care, and financial services. However, retail and office construction growth was expected to lag due to an oversupply in some markets and a lack of available credit for speculative building. Although expectations among most industrial contacts were positive, one auto manufacturer indicated that the pace of auto production will slow somewhat as demand returns to its longer-run trend.

Contacts noted that the impact of the extreme winter weather conditions on the economy during the first quarter of the year varied by sector. Most contacts—especially construction contacts, manufacturers, and distributors—indicated that some negative impacts would be offset over time; however, the cost of production and delivery would likely increase due to overtime and transportation network delays. Even in areas not affected by the wintry mix, businesses with a regional or national footprint noted disruptions in activity. Service-related contacts, such as restaurants and entertainment providers, were pessimistic and noted that lost sales will most likely not be recovered. Some contacts, especially those in Florida, noted an increase in business as both tourism and unplanned trip extensions because of weather delays resulted in an unexpected boost in the hospitality sector. Other contacts cited an uptick in sales of weather-related hardware and repair services for equipment damaged by extreme weather.

Employment levels steadily progressed throughout the Southeast; however, there were no reports of any plans for significant new hiring in the near term (see chart 1).

Chart 1: Payroll Employment by State

Contacts continue to complain about difficulties in filling high-skilled jobs in areas such as information technology, compliance, and accounting. Management roles and skilled construction workers have more recently been added to the “difficult to fill” list. Companies reported increasing levels of retirements due to demographics, improved 401(k) balances, and access to pre-Medicare funded health care via the Affordable Care Act (ACA). Over time, these retirements may well result in new employment opportunities.

Recently, contacts were queried on the decision-making process for hiring full- versus part-time employees. Those businesses that experienced demand surges, either seasonally or during certain times of day or particular days of the week, indicated that they most likely would utilize part-time workers. Generally, however, there was a bias among contacts toward hiring more full-time workers due to demand for skills needed and the cost of training and development. Not surprisingly, there was also a sense that full-time workers were more likely to be loyal to the employer than part-timers. It does not appear among most contacts that the recession affected this decision-making process, although contacts stated that there was more scrutiny given toward any new hiring and an increased likelihood of staffing via contract or temporary help before filling positions permanently.

Wages and prices
Most contacts across the Sixth District indicated little wage pressure outside of those “difficult to fill” positions. While merit increases continue to be reported in the 2–3 percent range, contacts in Georgia and Florida noted that many municipalities have resumed merit increase programs for the first time since the recession.

With regard to the ACA, large company contacts expressed little concern about the law; however, smaller businesses noted a significant rise in premiums and more eligible employees electing coverage, resulting in higher benefit costs. A developing employment risk, especially among food services contacts, was the movement toward raising the minimum wage. Given the challenges employers in this industry already face with health care related costs, they noted that any cost increase would result in an acceleration of the use of automation to replace workers.

Nonlabor inputs were reported as increasing very slowly with the exception of increased costs of developed land, construction materials, and food. Contacts continued to report very little pricing power, though attempts to push some increases through seem to be increasing. According to the Atlanta Fed’s business inflation expectations survey, current unit costs were up 1.8 percent in February, compared to a year ago (see chart 2).

Chart 2: Current Unit Costs

Credits and investments
In the residential real estate market, availability of credit and demand were described as being in balance. Large and well-capitalized companies had no issues accessing credit and appeared to be more comfortable in ramping up capital expenditures. Stories about big-ticket refinancing were also common. Small businesses continued to refrain from accessing bank credit. Often, examples of incremental new lending activity for banks appeared to be the result of taking business from competitors and were typically not due to new business formation.

Contacts increasingly expressed concerns about a bifurcated recovery with low- and even some middle-income customers holding back on spending. Small retailers in many markets have been struggling, and multiple restaurant contacts indicated a “trading down” among their traditional middle-class customer base as disposable incomes are squeezed. Weather-related energy use in the early part of the year is expected to affect consumers as a greater proportion of their income is committed to paying power bills (see chart 3).

Chart 3: Real Personal Consumption Expenditures: Goods and Services

Business outlook
Reports indicated that the outlook among most Sixth District business contacts remains optimistic and activity will accelerate at a moderate pace in 2014. Many cited an absence of headwinds as contributing to the upbeat sentiment. Just over half (53 percent) of district directors expect a higher rate of growth in the short term (see chart 4); 70 percent see higher levels of growth in the next two to three years (see chart 5).

Chart 4: What is your outlook for the rate of growth in your business over the next three to six months compared to current rates?

Chart 5: What is your medium-term outlook (over the next two to three years) for the rate of growth in your business compared to current rates?

Some 99 percent of district directors indicated they are somewhat or very confident in their outlook, perhaps a reflection that some of the headwinds in the economy have dissipated (see chart 6).

Chart 6: How confident are you in your outlook?

Over the coming months, our team will be closely monitoring the extent of the hoped for bounce back from any weather-related slowing. We will also continue to gauge the strength of the underlying economic momentum in the Southeast.

By Chris Oakley, a vice president and regional executive in the Jacksonville Branch, and Shalini Patel, an economic policy analysis specialist in the Atlanta Fed’s research department