Southeastern Insights
November 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 September 18 to October 29.
General business conditions
Input from our REIN contacts and directors continued to be mostly positive. On balance, demand improved slowly and optimism appeared to be spreading to locales that were previously noted as less upbeat, such as southern Mississippi.
While reports from retail contacts were mixed, many noted that lower- to middle-income households remain conservative with their discretionary spending. However, declines in gasoline prices are expected to ease some of the financial strain and possibly lead to increased spending on discretionary items. Several retailers are projecting strong holiday sales, which corresponds with reports by logistics contacts that companies are building up inventories of consumer goods.
Regional manufacturing continued to expand for the ninth consecutive month in September. According to Kennesaw State University's Econometric Center, the Southeast PMI fell to 55 points. However, the index was only 1.7 points lower than August and still solidly above the 50 threshold (see chart 1). A reading above 50 indicates expansion in the manufacturing sector, while one below 50 indicates a contraction.
Residential real estate activity continues to be mixed. Solid activity in south Florida's real estate market appeared to be driving prices up, but housing improved only moderately throughout the rest of the District.
The Atlanta Fed's quarterly survey of commercial brokers and builders indicated that there is an increase in commercial construction that is fairly broad based. Properties that seem to be lagging are hotel, office, and retail (see chart 2).
Employment
The Sixth District added 39,900 net jobs in September, and the unemployment rate declined 0.1 percentage point from 6.9 percent to 6.8 percent (see the table and chart 3). While there are pockets of job growth in the District, contacts continued to indicate an ongoing reluctance to hire.
The most notable change in hiring conditions since our last post is reflected in stories about the increasing challenges of filling lower-level, low-skill jobs, in addition to the usual difficult-to-fill positions. There were also reports of increasing turnover across the region, especially with lower-level jobs.
Input costs, wages, and prices
The majority of contacts and directors expressed little concern over input costs. Some commodity prices, which had been a source of upward pressure earlier in the year, softened since the last report.
Looking forward, the latest business inflation expectations survey indicated that, on average, firms anticipate unit costs to rise 1.9 percent over the coming 12 months, down two-tenths of a percentage point from the September reading (see chart 4).
Broadly speaking, firms indicated that the ability to pass through price increases remains difficult; however, in select sectors such as transportation, contacts report some success.
In terms of wages, we saw little evidence of a broad-based acceleration in wages among most job types (outside of trucking, construction, banking, and information technology) and in most locations. There were, however, increased reports of mounting pressures on low-skilled jobs like housekeepers and warehouse workers. Where there is pressure, some employers report altering total compensation packages by increasing incentive pay or enhancing benefits structures rather than raising base pay.
Investment and credit
Credit and capital across the District seemed to be readily available to qualified businesses with some constraints still being reported for small businesses. Lending activity, year over year, was reported as higher than the previous report, with several references to strong demand for business loans and commercial real estate loans. Competition for quality loans was characterized as fierce and in some markets, pricing was very aggressive. Broadly, contacts anticipate continued strengthening in loan demand.
Companies are generally being very cautious about taking on new debt. Several contacts expressed a focus on deleveraging and accumulating cash for future investment opportunities. There is increased activity in capex across a broad group of industries, especially the energy sector.
Business outlook
On balance, the outlook over the short and medium term is for slow but steady growth. Recently, concerns about weakness internationally, geopolitical events, and financial market volatility surfaced, though no direct impact had yet occurred. Downside risks appeared to have increased somewhat.
Directors' and contacts' near-term outlook for the rate of business growth over the next three to six months remains steady with an expectation for those levels to stay the same or improve. It is important to note that a number of directors pointed out that growth at the "same" level is considered positive as they were already seeing healthy activity (see chart 5).
Expectations for higher growth over the next two to three years increased slightly with most contacts expecting levels of growth consistent with what they are currently experiencing (see chart 6).
Over the course of the second half of this year, some contacts have reported signs of "normalization" in business activity. Is this becoming a more widespread sentiment? What are you seeing in your industry and region?
By Chris Oakley, vice president and regional executive, and Sarah Arteaga, director, Regional Economic Information Network in the Jacksonville Branch