Prices and Business Investment Heat Up as Summer Approaches

Southeastern Insights
June 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 May 1 to June 18.

General conditions
Our directors and contacts across the region reported moderate growth in business activity over the last FOMC cycle, which many contacts attributed to a strengthening economy rather than simply a rebound from a weak first quarter.

Contacts reported the consumer environment as improving gradually across most of the District, particularly in major metropolitan areas, although some retail contacts expressed a general wariness about the durability of consumer spending.

Banking contacts indicated that loan demand continued to improve, with some growth coming from increased credit line usage and corporate borrowing as businesses took advantage of low interest rates. These contacts also shared that competition, particularly related to pricing and structure, was strong, but many contacts continued to say they’re facing regulatory challenges.

Real estate contacts reported that residential construction activity remained positive. Results from the Atlanta Fed’s monthly survey of residential brokers and homebuilders indicated that there was a slight decrease in the number of builders who reported a rise in construction activity in May; however, activity remained ahead of year-earlier levels (see chart 1). The survey also revealed that home prices continued to appreciate and inventories remained low compared with year-ago levels.

Chart 1: May 2014 Southeast Construction Activity

Automotive contacts noted that manufacturers and their suppliers were operating at or near full capacity or will be in the near future. According to the Southeast Purchasing Managers Index (PMI), produced by the Econometric Center at Kennesaw State University, overall manufacturing activity continued to expand. The May index reflected an overall reading of 59.8 (a reading over 50 indicates expanding activity, see chart 2), though the index was slightly below the prior month’s level.

Chart 2: Southeast Purchasing Managers Index

Large businesses’ visibility—that is, a firm’s ability to predict confidently future business conditions—improved over the short term. The improvement was enough to initiate capital projects for some of these contacts. We heard reports of capital investment plans from a variety of sectors, such as steel and chemical manufacturing, transportation, health care, construction, and some retail. Cash and nontraditional financing continued to play a major role in capital investment funding. However, the story was different for small businesses where uncertainty continued to weigh heavily on business decisions and those firms’ appetite for risk.

Costs, prices, and wages
Firms noted price increases in construction materials, commercial leasing, auto lending, hotel rooms, food, and trucking services. A notable change from previous cycles was that a growing number of contacts indicated their firm was able successfully to implement price increases. However, many contacts admitted that passing along these increases was a challenge that required a great deal of negotiating with customers, and those contemplating doing so were concerned about their customers’ willingness to accept the new prices.

The Atlanta Fed’s most recent business inflation expectations (BIE) survey indicated that firms’ unit costs were up 1.9 percent compared to this time last year (see chart 3) and, on average, they expect unit costs to rise 2.0 percent over the next 12 months, up slightly from May’s reading (see chart 4).

Chart 3: Current Unit Costs Chart 4: Business Inflation Expectations

Wage growth was largely constant, with most contacts still reporting increases in the 2–3 percent range, with the exception of some high-skill, low-supply fields. Construction contacts across the region specifically expressed evidence of significant wage pressures.

Employment and hiring
On balance, firms reported modest improvements in hiring, though most remain cautious in their approach. Recent data confirm this growth; in May, the District added 15,000 net jobs, following a net increase of 62,400 in April. Florida, which was responsible for adding the largest number of payrolls in the District for the past several months, subtracted 17,900 payrolls, on net. The remaining District states had gains in May (see chart 5).

Chart 5: Contributions to Change in Net Payrolls, by Sixth District State

Contacts continued to express difficulty filling certain skilled positions, specifically in the fields of information technology, construction, and trucking.

Additionally, our contacts shared that firms have renewed investment in employees through leadership development and training programs, which they had put on hold the last few years.

Business outlook
The outlook of our directors and contacts improved this FOMC cycle. Our directors continued to anticipate the same or even higher growth over the next three to six months (see chart 6).

Chart 6: What is your outlook for the rate of growth in your business over the next three to six months compared to current rates?

Our directors also expressed continued optimism over the medium term, that is, over the next two to three years (see chart 7).

Chart 7: 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?

All in all, our directors and contacts were upbeat about a strengthening economy and shared information that points to progress; most notably, heated-up capital investment and some added ability to increase prices. We will continue to engage with our directors and contacts to follow these and other developments and will report back after the next FOMC meeting in July.

Please visit SouthPoint for additional regional economic updates and information.

By Adrienne Slack, vice president and regional executive, and Rebekah Durham, economic policy analysis specialist, Regional Economic Information Network, both in the New Orleans Branch; and Shalini Patel, an economic policy analysis specialist in the Atlanta Fed’s research department