The Atlanta Fed's SouthPoint offers commentary and observations on various aspects of the region's economy.
The blog's authors include staff from the Atlanta Fed's Regional Economic Information Network and Public Affairs Department.
Postings are weekly.
Through the Eyes of a Big Fan
When Janet Yellen was named chair of the Board of Governors of the Federal Reserve System in February 2014, she became the fourth chair in my 30-year career here at the Atlanta Fed's Jacksonville Branch. While I vaguely remember Chairman Paul Volcker once visiting the branch, I was so new to the Bank and pretty naïve as to what the Fed actually did that I don't think I paid much attention back then. Soon after was Chairman Alan Greenspan, a brilliant man who spoke of economic conditions in a manner admittedly a bit hard for me to understand, especially since my Fed career began in an area not focused primarily on studying the economy. Then along came Chairman Ben Bernanke! Finally, someone who spoke in terms that even I could grasp. Couple his arrival with the creation of the Regional Economic Information Network and my foray into the world of economics (and the need for me to pay closer attention), I became an instant fan! I watched with great interest as Chairman Bernanke and the Federal Open Market Committee dusted off many lesser-known tools (as well as unveiling some brand-new tools) in the Fed's toolbox to help stimulate the economy during and after the Great Recession.
So, imagine my thrill at finding out that Chairman Bernanke was going to be a keynote speaker at this year's National Retail Federation's (NRF) annual conference that I had the great fortune to attend! I was like, whoop whoop! (I know, I'm just a big fan at heart!)
The morning of his appearance, I got up at zero-dark-thirty and was the first in line to enter the massive convention hall where he was scheduled to speak. I made a bee-line to the front and scoped out the best seat in the house. And I waited with anxious anticipation. I was like a teenage girl at her first rock concert when he took the stage. I listened intently as he and the president of Saks Fifth Avenue, who is serving as this year's NRF chairman, discussed the fallout from the global economic crisis and current prospects for the U.S. economy and the retail industry. It was amazing to listen to Bernanke speak in a much more casual manner (since now his comments do not necessarily move markets) about the events of the crisis and the actions taken by the Fed. (Remember, he is a scholar of the Great Depression of the 20th century and understood how the Fed could work to avoid the mistakes of the past.)
In addition to Chairman Bernanke sharing insights about the crisis with the audience, he commented on the transparency of the Federal Reserve System by saying, "In the middle of a crisis explaining where, why, and how we do what we do is as important as taking actions." When asked about the current state of the economy, Bernanke indicated that the U.S. economy is enjoying a genuine recovery. However, he has some concern regarding the European Union, noting that the situation should be watched carefully.
He was then asked what he missed most about being Fed chairman. He said that when he was chairman, he was driven everywhere by his security detail, so little things like traffic and finding parking spaces were never a concern. What he misses most, he said, "is not having to find my own parking spaces." He paused briefly and added, "That's all I miss."
How was I lucky enough to see Chairman Bernanke in person? As I mentioned, this was the NRF's annual conference, and one of my responsibilities as an analyst is to follow the retail sector and consumer behavior. So aside from my thrilling moment as a fan, what other insights did I glean at the conference? Well, when I attended the same conference two years ago, the underlying tone among participants was, "How do we get the consumer back to spending?" This year, the participants were upbeat and the focus seemed to be "We've got the consumer back, but how do we keep them back?" One answer was to create an engaging and exciting shopping experience.
Retailers must have been successful because revolving credit is up and consumer confidence is high. Let's take a look at our consumers and their behavior during the 2014 holiday shopping season.
Consumer credit outstanding rose $14.8 billion in December from $13.5 billion in November (see the chart). Nonrevolving credit, which is made up mostly of auto and student loans, rose $9.0 billion. However, the more noteworthy movement is that revolving credit rose a significant $5.8 billion in December from November's decline of $0.9 billion. In my opinion, this increase indicated the consumer was willing to take on debt previously avoided. Revolving credit, composed primarily of credit card loans, showed its strongest growth in eight months (the chart compares month-over-month data).
The Conference Board's survey on current conditions rose significantly to a seven-year high of 112.6 points in January from December's reading of 99.9. The University of Michigan's index rose to 109.3 points in January from 104.8 in December. The Conference Board's current conditions survey is based on the survey participants' view of current economic conditions as it relates to businesses and jobs, while the University of Michigan's survey is based on the individuals' sentiment as it relates to their personal households (see the chart).
The Conference Board's measure of expectations rose moderately to 96.4 points in January from 88.5 in December. The University of Michigan's index rose to 91.0 points in January from December's reading of 86.4. The expectations surveys by both entities are based on the same views of the survey participants as the current conditions surveys. However, the forward-looking expectations time frame differs. The Conference Board is looking six months out, and the University of Michigan is looking one to five years out (see the chart).
It appears, for now, that the consumer is increasingly upbeat, which is vital to the strength of the economy. Several District retail contacts recently reported double-digit growth and record-setting volume in 2014. Casual dining establishments saw an uptick in volume as consumers seem to be trading up from fast-food options.
Although total retail sales fell 0.8 percent in January from 0.9 percent in December, core retail sales—those excluding auto, gas, and building materials—rose 0.2 percent in January from December's decline to 0.1 percent, month over month. Retail sales maintained the same pace of growth for December and January rising 3.3 percent year over year (see the chart).
Overall, the consumption sector looks reasonably vibrant. And as one of my industry contacts said, "Every day gets better." It appears that Chairman Bernanke isn't the only one enjoying his current situation.
By Christine Viets, a Regional Economic Information Network analyst in the Jacksonville Branch of the Atlanta Fed
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Southeast Commercial Construction Continues Gathering Steam
Through September 2014, U.S. total private construction spending increased 3.38 percent from the year-earlier level. How did the various categories stack up in terms of their contribution to this year-over-year increase in total private construction spending? The multifamily and nonresidential categories together accounted for 4.34 percent of the change, and new single-family and residential improvements combined to shave 0.96 percent off the change (see the chart).
Does commercial construction activity in the Southeast mirror that of the nation? On a quarterly basis, the Atlanta Fed polls southeastern business contacts engaged in commercial construction to track and better understand regional trends in construction activity. The latest poll results appear to tell a story similar to the one that the national numbers depict.
Most respondents indicated that the pace of nonresidential construction activity and the pace of multifamily construction activity in the Southeast continued to be ahead of the year-earlier level (see the charts).
More than 80 percent of respondents reported a backlog that was similar to or greater than the year-earlier level, signaling that the pipeline of future activity remains fairly robust (see the chart).
The number of respondents reporting that the amount of available credit met or exceeded demand continued to increase from earlier reports. In the third quarter of 2014, 82 percent of contacts indicated that credit was sufficiently available, compared with 68 percent the previous quarter and 78 percent one year earlier (see the chart).
While half of respondents noted that they expect their headcount to remain the same from this quarter to the next, 44 percent of respondents indicated that they were planning to do a modest to significant amount of hiring in the fourth quarter of 2014 (see the chart).
Relative to the previous quarter, fewer contacts indicated that they were having a difficult time filling positions (see the chart).
Most contacts reported some degree of upward pressure on labor costs. When looking across the brackets of labor cost increases, most of the pressure seemed to be concentrated in the category indicating that labor costs are up from 3 to 4 percent versus a year ago. This response marks a shift from prior periods, when the pressure appeared concentrated in the bracket indicating that labor costs were up from 1 to 3 percent. Continuing a trend that we’ve noted over the past few quarters, a growing share of contacts (more than 80 percent) indicated that their labor costs had increased more than 3 percent from year-earlier level (see chart).
The next poll will open on January 5, 2015. If you are a commercial contractor and would like to participate in this poll, please let us know by sending a note to RealEstateCenter@atl.frb.org.
Note: Third quarter 2014 poll results were collected October 6–15, 2014, and are based on responses from 18 business contacts. Participants in this poll included general contractors, subcontractors, lenders, developers, and material fabricators with footprints of varying sizes across the Southeast.
By Jessica Dill, senior economic research analyst in the Atlanta Fed's research department
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Small Business Lending in the Sunshine State
No doubt, the lending environment has changed since 2007. Local bankers from the South Florida market discussed some of those changes at a roundtable event held last month at the Miami Branch of the Atlanta Fed. The discussion focused on small business lending activity and how the outlook and behavior of small business owners have evolved since the recession.
The bankers said they have a strong appetite for what they termed "qualified" small business loans and noted that they were competing against each other for good opportunities. This environment has helped put pressure on financial institutions to provide competitive loan terms for small business owners seeking credit. Most of the banks indicated that small business lending was part of a diversification strategy and an important component of their business. In a quarterly senior loan officer opinion survey conducted by the Federal Reserve Board in the second quarter of 2014, loan officers reported easing lending standards and some improvement in small business loan demand relative to a year before (see the chart).
The roundtable attendees agreed with the survey's findings and noted that the pool of qualified borrowers is currently limited but may expand as banks continue to review their underwriting standards in an improving economic environment.
Although all of the participating bankers were actively engaged in making small business loans, they did indicate that businesses were generally hesitant to take on additional debt and in general were behaving very conservatively. In discussing why business owners were taking on less risk, it was noted that the effects of the recession were still fresh, and most of the bankers felt that uncertainty about the future weighed on the minds of business owners. In addition, findings from the Atlanta Fed's survey of business inflation expectations indicate that business activity for smaller companies is improving but remains below normal levels (see the chart). One banker noted that rising interest rates would indicate to business owners that the economy was strengthening and that rising rates may, in fact, prompt further borrowing.
Credit qualification often ultimately comes down to the fundamentals. From a credit perspective, the bankers indicated that they heavily rely on the "five C's" of credit to help evaluate loan applicants: character, capacity, credit, collateral, and capital. The roundtable participants described "character" as one of the most important variables when they consider a request. Companies that weathered the recession were viewed more favorably because it demonstrated the ability to manage a business through difficult times. An owner who has personal credit issues will generally imply potential problems in managing the financial aspect of a business. The bankers cited adequate cash flow and a good balance sheet as important credit qualifications. The lenders noted that they also analyze how businesses position their balance sheets and expenses incurred by the company not related to the business.
Overall, the sentiment among the bankers at the meeting was positive, and for the remainder of the year, they expect continued improvement in lending to small businesses.
By Karen Gilmore, a vice president and the regional executive at the Atlanta Fed's Miami Branch, and Marycela Diaz-Unzalu, a Regional Economic Information Network analyst, also at the Miami Branch
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The View from South Florida
The Miami Branch of the Atlanta Fed is responsible for gathering economic information from Florida's 13 southern counties, plus the travel and tourism industry for the entire Sixth District. We gather this information from business executives, community leaders, the Miami Branch's board of directors, and the Travel and Tourism Advisory Council via the Regional Economic Information Network, all of which helps support the formulation and implementation of sound monetary policy.
Business contacts in South Florida have reported continuously improving business sentiment since January 2014, with the most upbeat reports coming in June and July.
General business conditions
During the last Federal Open Market Committee cycle, which ran from June 19 to July 30, contacts in the private sector reported robust demand in most industries, although government spending remained soft in South Florida. Several small business contacts discussed their capital expenditure projects that are under way to help meet increased consumer demand. Although these contacts acknowledged that the availability of credit has improved, they noted that the process of obtaining a loan from a traditional lender takes longer now than before the recession, partly the result of increased due diligence. As a result, according to our contacts, small businesses are using internal cash flow, nontraditional banks, or private investors to finance their growth.
The tourism sector continued to report increases in consumer spending, and retail contacts reported that lower-income consumers tend to avoid discretionary expenditures. Contacts in real estate sales and construction in South Florida report ongoing significant expansion.
Contacts indicated increases in mergers and acquisitions, facilitated in part by the low interest rate environment. However, the near-term implication of these mergers and acquisitions could be a reduction in available jobs since cost synergies are generally an important element of these transactions.
Employment and labor markets
Business contacts continue to report a concern with a skills gap between job seekers and available job opportunities. Some contacts report expanding their training and development offerings for employees. However, most are requiring applicants already to possess experience in their field. According to the attendees of a human resources roundtable, the skills gap is especially prominent in specialized fields (for example, mechanics, plumbers, and welders). Many specialists attribute the discrepancy to the social emphasis that every high school graduate should pursue a four-year degree. Also, business contacts continue to express concerns that immigration laws are hindering the relocation of talent from abroad.
Some wage pressures are being reported at various levels, and some employers are making small midyear adjustments. Most contacts report hiring highly skilled talent at higher salaries and also adjusting the wages of current highly skilled employees during their regular review cycle. Some contacts expressed concern that rising health care costs passed down to employees could suppress real wage growth.
Costs, prices, and wages
Business contacts in the manufacturing sector reported increases in input costs, and they expect that they will incur additional increases before the end of the year. Most have been able to pass the increases on to their customers. Tourism contacts continued to report price increases for hotel rates, food, and attractions, and these increases were passed on to customers with no impact on consumer demand.
Availability of credit and investment
Business contacts indicated that most of their contacts are investing in capacity expansion, anticipating improved demand, and some of them indicated that any capital expansion is the result of delayed investment. The requirements to qualify for a mortgage are much more stringent than before the recession, making the process for home buyers, particularly first-time home buyers, a challenge.
Banking contacts all report being well capitalized and having sufficient money to lend. Large banking contacts report that loan production has increased, although they are not afraid to turn down clients—their rejection rate is higher than prerecession levels. According to contacts, some small banks are taking on more risk by extending the duration of loans and becoming more aggressive on deals the larger banks are unwilling to finance. Alternative lenders are offering a "merchant cash advance" product, which is a high-priced commercial product geared primarily to small businesses for short-term financing.
Overall, as 2014 progresses, business contacts continue to report positive activity and demand with growing enthusiasm. Tourism throughout the region is thriving, with record-breaking reports from South Florida and a very optimistic outlook for the remainder of the year.
By Marycela Diaz-Unzalu, a Regional Economic Information Network analyst in the Atlanta Fed's Miami Branch
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The Cream of the Crop
The Atlanta Fed’s Agriculture Advisory Council convened recently for another lively discussion and, as always, we learned a great deal. While last year’s overarching agriculture story was “all about the drought,” this year’s conversations were more about “cool and wet.” Council members told stories of delayed planting or replanting, but participants acknowledged that some of that wet and cool weather contributed to good yields, although there is some frost risk for late planted/harvested crops.
Generally speaking, exports for many southeastern agriculture products are expected to increase. This includes beef, poultry, wood/biomass, grains, cotton, and rice. Members also hope for continued strong demand from China for yellow pine saw timber. We continued to hear reports of significant downside risks for cotton. Should China release its large cotton inventory onto the market, cotton prices and exports would be adversely affected.
Regarding investments, council members reported replacing equipment in the timber industry, as well as farming implements such as irrigation equipment as well as storage augmentation. As one council member said, “We are improving what we have rather than expanding.” Additionally, some farmers are replacing smaller, labor intensive equipment with larger, more modern equipment. While these acquisitions improve production efficiency, they also address difficulties in finding labor. Reports persist of paperwork burdens with the E-verify program and the high cost of housing people participating in the H2A guest-worker program.
Overall, farm product prices are down, and headline consumer price index (CPI) is trending down. The chart below shows CPI trends and the price index for all farm products over time.
Although overall farm product prices are down, some specific commodity prices are helping regional agriculture producers, especially those in the cotton, rice, beef, hog, and poultry sectors, which are all showing higher year-over-year prices. Soybeans and corn prices are trending down, although lower corn prices are good news for protein producers whose use corn for feed. Florida citrus growers continue to have problems with citrus greening, and although they believe a solution is forthcoming, the problem is not yet resolved. Meanwhile, the cost of production is higher than normal, but lower yields have resulted in higher prices for citrus products. Lumber prices, which are down from the first half of 2013, are still well above recession-era lows (see the chart).
Land rents are being actively negotiated. Landlords, seeing recent good yields, are negotiating future rents based on these higher yields. Timberland prices were reported as being flat or down, but several council members reported higher farmland prices. Increased costs tied to regulatory compliance and the impact of the Affordable Care Act were both mentioned as having ongoing negative impact on general business conditions.
Council members also discussed how agriculture has changed over time, moving away from small and midsized farms that depended on the subsidy system toward farm consolidation. As one participant said, “Two generations ago, you managed your farm with a little spiral notebook and a pencil in your front pocket. The next generation used a legal pad. Now computers and business plans are the norm.” Members noted that young people are getting degrees and are eager to join the ranks of modern farmers. Some have interests in local organic farming, but others see big agriculture changing and want to be a part of the transition.
Another topic of discussion was the growth of agritourism, which includes such realms as local sourcing, sustainable sourcing, and even destination weddings. An EconSouth article titled "Agritourism Takes Root in the Southeast" reported on this growing trend back in 2011, and it’s one that is helping farmers and rural economies tap into the region’s dynamic tourism market.
So as farmers complete fall planting, finish their harvests, and prepare for winter, we here at the Fed continue to watch, listen, and learn. While farm price and production reports remain essential in our analysis of the agriculture sector, our Agriculture Advisory Council meetings give us the breadth and depth of the story that is agriculture in the South.
As for me, I am thankful to understand a little more about how what ends up on my plate gets there. When I visit the season’s pumpkin patches and tree farms, I know I am in for a lot of fun, but I will also be looking behind the curtain to learn more about the fascinating business that is agriculture.
By Teri Gafford, a Regional Economic Information Network Director in the Atlanta Fed’s Birmingham Branch
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Atlanta Fed's Beige Book points to modest growth, rising caution
The Summary of Commentary on Current Economic Conditions by Federal Reserve District—commonly known as the Beige Book—is a report is published by the Federal Reserve eight times per year. Each Federal Reserve Bank gathers anecdotal information on current economic conditions in its District through reports from Bank and branch directors and interviews with key business contacts, economists, market experts, and other sources. The Beige Book summarizes this information by District and sector.
Below is a summary of the Atlanta Fed's July 18 Beige Book:
- Reports from Sixth District business contacts indicated that economic activity expanded at a modest pace in June and early July. The outlook among most firms remained cautiously optimistic, although the majority of contacts acknowledged that risks were weighted to the downside.
Consumer spending and tourism
- District retail sales activity improved slightly in June and early July, but merchants reported that consumers remained very conservative.
- Tourism activity and business travel remained strong, and the outlook among contacts was positive for the rest of the year.
Real estate and construction
- District residential brokers indicated that home sales were flat to slightly higher compared with year-ago levels. Brokers also reported that the decline in inventories has helped stabilize home prices in many areas. The sales outlook among brokers remained positive with most anticipating continued modest year-over-year home sales gains.
- District homebuilders reported that new home sales and construction rose modestly compared with year-ago levels. Contacts noted that multifamily construction remained robust. The majority indicated that new home inventories declined further on a monthly and an annual basis. In the near term, homebuilders expect sales and construction to post modest gains compared with a year earlier.
Manufacturing and transportation
- Manufacturing contacts indicated that the pace of new orders and production growth remained positive but had moderated.
- According to railroad contacts, intermodal activity continued to strengthen. Double-digit increases in shipments of petroleum products, motor vehicles, and equipment were reported; however, movement of grain, metallic ores, and nonmetallic minerals declined.
Banking and finance
- Banking contacts noted some improvement in residential mortgage lending and auto loans continued to be a source of strength. Commercial and industrial lending remained soft.
- Regional employment growth remained positive but muted. Employers continued to cite uncertainty regarding future economic conditions as a reason for limiting hiring, and recent economic volatility appears to have exacerbated these anxieties.
- Contacts continued to note difficulty in finding qualified applicants for many highly technical positions. The skills mismatch problem has been especially hard on low-wage individuals, according to community and economic development contacts.
Prices and wages
- Firms responding in June to the Atlanta Fed's Business Inflation Expectations survey reported a decline in unit cost expectations for the second consecutive month. Survey respondents indicated that, on average, they expect labor and material costs to rise 1.7 percent over the next 12 months. That figure is down from 1.8 percent in May and 2.1 percent in April.
- Business contacts reported that lower prices for natural gas and refined oil products were reportedly providing some cost relief. Wage pressures remained modest, although some employers noted that they were increasing starting pay for workers with high-demand skill sets.
Natural resources and agriculture
- Contacts continued to report that investment in expanding and maintaining existing transportation infrastructure would be necessary to accommodate increases in domestic oil and natural gas production.
- Varying levels of drought conditions had expanded through much of the District, resulting in stress to some crops. However, the June tropical storm helped some areas.
The next Beige Book will be published August 29.
By Shalini Patel, a senior economic research analyst in the Atlanta Fed's research department
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Employment: Bad news nationally is really bad news for the Southeast
Last week and earlier this week macroblog discussed recent reports from the labor market: the June employment report and the May Job Openings and Labor Turnover Survey, commonly known as JOLTS. The analysis points out that recent data from the labor market have been, well, rather disappointing.
I would argue that a disappointing labor market at the national level is amplified here in the Southeast. Why? The downturn in employment during the recession was deeper in this region than in most other areas in the country, and the job recovery has been more anemic here than anywhere else.
Here's a look at what I mean:
Looking at the Atlanta Federal Reserve District, we see that this region shed 10.1 percent of total employment during the downturn (the red bar) and has only gained 2.3 percent during the recovery. I use the terms "downturn" and "recovery" liberally: what the chart represents is each District's employment loss from its peak to when job losses ended (downturn) and gains since employment levels stopped falling (recovery). Only the Chicago Fed and San Francisco Fed regions saw larger downturns, but none have seen a more feeble recovery than we here in the Atlanta region.
So when we see national labor market trends that show weakness in employment gains, it is particularly bad news here in the Southeast.
By Mike Chriszt, an assistant vice president in the Atlanta Fed's research department
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