Southeastern Insights
December 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 October 29 to December 17.
General business conditions
Input from our REIN contacts and directors continued to be quite positive. Economic performance over the cycle was viewed as steadily improving, and the outlook for 2015 signaled continued growth and optimism.
Retail contacts were upbeat regarding holiday sales, which met or surpassed expectations in November. Many contacts indicated businesses began promoting sales ahead of the typical Black Friday, which may have pulled sales activity forward. Online purchases were noted as shifting some sales away from brick-and-mortar stores, though notable year-over-year gains in volume were reported from both segments.
Tourism remained a bright spot in the region. Industry contacts shared that to date, lower gas prices have resulted in higher average spending at many tourist destinations as opposed to an observable increase in bookings.
Regional manufacturing expanded for the 11th consecutive month in November, according to Kennesaw State University's Southeast Purchasing Managers Index (PMI). The index increased to a reading of 58.3 in November from 56.5 in October. The PMI remains solidly above 50, which signifies expansion in the manufacturing sector. A reading below 50 indicates a contraction (see chart 1).
Contacts noted that the automobile industry, in particular (carmakers, tire manufacturers, and other firms that support the industry), continued to grow at a healthy pace.
Real estate activity continued to be mixed. According to commercial construction contacts, multifamily performed well, office and industrial continued to increase with very little speculative building, and demand for commercial space heated up. The residential story was slightly different, with contacts indicating that the overall pace of activity slowed somewhat. The Atlanta Fed's monthly poll of brokers and builders suggested that both regional home sales and construction activity were flat to slightly up in November from year-ago levels (see charts 2 and 3).
Employment
Generally, contacts reported that the reluctance to hire appeared to be waning in the face of continued increases in demand. In fact, data from the U.S. Bureau of Labor Statistics revealed the Sixth District added 49,500 jobs on net in November and the unemployment rate declined 0.2 percentage point from 6.6 to 6.4 percent (see charts 4 and 5).
Job gains were fairly widespread across sectors, and the largest net gain occurred in the trade, transportation, and utilities sector, with 16,400 jobs added. Within the sector, retail alone contributed 13,400 jobs. Other sectors in the District that saw big payroll increases were government (+9,800), financial activities (+9,000), and leisure and hospitality (+7,400).
Reports of high turnover rates were more prevalent this cycle, with many firms offering improved benefits, notably health care, as an employee retention device. In addition, the conversion of part-time workers to full-time accelerated as businesses tried to meet increased product demand and boost employee loyalty. However, there were also reports in certain sectors such as retail and quick-service restaurants of firms increasingly using technology to manage and optimize the scheduling of part-time workers.
Input costs, wages, and prices
Input cost pressures remained a nonissue for most firms, with the exception of those in commercial construction. Moreover, November's business inflation expectations survey indicated that, on average, firms anticipate unit costs to rise 2.0 percent over the next 12 months, up a tenth of a percentage point from the October reading (see chart 6).
A growing number of firms reported acceleration in compensation budgets for the coming year. Some firms conveyed they were increasing starting pay or moving pay above minimum wage in an effort to attract and retain their workforce. Conversely, several employers also reported that where possible, they were holding down base pay and instead adding benefits or performance bonuses. With respect to wages, contacts noted that wage pressures moved further beyond the usual suspects we've reported for some time (that is, engineers, skilled trades workers, truck drivers, and information technology professionals), and many contacts indicated they expect pressure to grow in 2015.
Other than prices related to transportation, real estate, and food, contacts reported it remains difficult to pass along price increases. However, there were a few more stories about improving pricing power, particularly when long-term contracts were being renegotiated.
Energy industry contacts shared that the recent drop in the price of oil had affected business processes and decisions, leading firms operating in the exploration and production space to reevaluate operational flexibility, cost management strategies, and extraction technologies. These firms also initiated renegotiations with oilfield services companies for reductions to pricing structures.
Investment and credit
A growing number of firms revealed new capital investment plans and greater forward movement with existing plans. According to energy contacts, however, decisions about large future investment projects moving forward will likely be thoroughly examined, considering the declining price of oil. Large-scale and long-term projects already under way are expected to continue, due to high front-end costs, which in many cases have already been funded. And for the first time in several years, the energy sector reported some pull back in investment plans as smaller firms were under earnings pressure with the declining price of oil. Contacts from the tourism, commercial construction, and manufacturing sectors also reported accelerating capital investment.
Credit conditions continue to ease. Established companies reported no credit-related impediments and some smaller businesses cited easier credit availability.
Business outlook
Our directors and contacts remain optimistic about their short- and medium-term outlooks. Directors' near-term growth projections had their strongest showing since we began the measurement two and a half years ago, with 70 percent expecting higher growth over the next three to six months than current growth rates. Additionally, this was the third consecutive cycle in which no director conveyed expectations for lower growth (see chart 7).
Overall, signs from our directors and contacts point to solid business activity and economic growth in 2015. Do you agree with this sentiment? What are the expectations in your business or industry?
By Adrienne Slack, vice president and regional executive, and Rebekah Durham, economic policy analysis specialist, Regional Economic Information Network in the New Orleans Branch