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.
It's Mostly Sunny in Florida
Jacksonville, Florida. Photo by Kendrick Disch
In a February SouthPoint post about economic conditions in north and central Florida, we reported that our contacts' optimism in late 2014 had carried into the new year. Since then, the Regional Economic Information Network team at the Jacksonville Branch has noted an overall improvement in activity and continued positive sentiment.
General business conditions continue firming
Feedback throughout the winter months was quite upbeat. Most contacts felt that an improving economy and labor market were driving growth. In early spring, although feedback remained positive, the messages became more mixed, with some contacts indicating a plateau in growth—most notably, transportation and retail contacts cited challenges from severe weather in various markets. However, bankers noted reasonable momentum with consumers and businesses; real estate contacts saw robust activity with increasing sales and prices at all price points; and homebuilders and commercial construction firms noted much stronger levels of activity. Tourism remained vibrant. Though the consumer inched along, restaurants reported revenue increases that they believe were the result of lower gas prices influencing discretionary spending. As spring progressed, activity continued along an upward, albeit slow, trajectory.
By midsummer, a small number of contacts reported demand was flat, and transportation contacts reported that activity—especially related to the movement of energy-related materials—declined notably since the first quarter. However, a majority of other contacts noted improved activity. Some began to add to capacity to meet increased demand—and, more importantly, anticipated future demand.
Employment largely stable
Throughout the first part of 2015, contacts continued to indicate no major problems in filling jobs outside of information technology (IT), accounting, compliance, and truck drivers. Staffing levels across firms generally remained steady, with some adding to headcount. Those hesitant to add staff turned to contingent labor (such as contract staff or temps) to meet demand. In late spring, we began to hear about increased turnover at many levels, and recruiting and retention appeared to be getting tougher. In central Florida, tourism contacts cited concerns of potential worker shortages as a result of a very low regional unemployment rate and increased construction attracting available labor.
Labor, nonlabor costs and price pressure surfacing
By March, mentions of mounting wage pressures at all job levels surfaced. Though not universally reported, numerous contacts said they were beginning to increase starting salaries, which they noted will eventually ripple through higher levels of staff to maintain internal pay equity and retain talent. Wages increased for engineers, truckers and technicians, and IT specialists. Into the summer, stories of referral and signing bonuses, customized perks, and other benefits enhancements for both recruitment and retention became more common.
Feedback on health care costs continued to be mixed. Health care costs for most increased at a pace greater than overall inflation, though companies continued to try to minimize the increases by changing plan designs or by sharing more of the cost with employees.
Overall, concerns about nonlabor costs were muted. Some mentioned lower energy and fuel costs have offset increases in other input costs.
The ability to raise prices varied among industries. However, a number of contacts indicated pricing power had improved, though the magnitude of price increases was limited. Generally, though, margins were edging up.
Credit, investment remain available
Throughout the first half of the year, credit was readily available and banking contacts reported increased activity. Many companies, especially small businesses, continued to deleverage even in the low interest rate environment, and many larger firms reported funding investments internally. Lenders reported increases in mortgage refinances as rates dipped, and they noted improved home equity levels. Auto lending was described as extremely strong.
Almost without exception, retail contacts noted expansion activity and further growth plans, all the result of expectations for stronger consumer spending. Real estate agents indicated that appraisal issues improved, and buyers, even the self-employed, generally faced little trouble financing home purchases. Stories regarding business investment were mixed between outlays for deferred projects and spending for new demand. This year, it's become clear that there is less hesitation about investment.
Business outlook mostly bright
Though we heard a couple of references to a cloudier outlook during the next two to three years as we approach another presidential election, collectively—and as recently as July—most REIN contacts and board members were as positive about current activity and future expectations as we have seen since the recession.
What's is in store for Florida in the second half of the year? Stay tuned.
By Chris Oakley, regional executive, and Sarah Arteaga, REIN director, both of the Atlanta Fed's Jacksonville Branch
Middle Tennessee Consumer Confidence on the Rise
Last week, the Federal Reserve Bank of Atlanta's research director Dave Altig wrote a macroblog post that emphasized the importance of consumer spending as the economy tries to rebound from a disappointing first quarter. Incoming data indicate that consumers haven't been willing to open up their wallets as much as expected considering recent economic conditions. The underlying fundamentals that influence consumer spending would suggest a higher level of consumption than the economy is currently experiencing. In a recent speech, Atlanta Fed President Dennis Lockhart pointed out these fundamentals, which included real personal income growth, household wealth, access to credit, and consumer confidence. According to the Middle Tennessee Consumer Outlook Index, released on May 1, Middle Tennessee has the confidence fundamental covered.
The Middle Tennessee Consumer Confidence survey is conducted by the Office of Consumer Research at Middle Tennessee State University, headed by Professor Timothy Graeff. Students in Graeff's marketing research course conduct the survey by phone. The 11-question survey asks questions related to economic conditions in the United States as well as Middle Tennessee.
The overall index rose to its highest level since June of 2004 (see the chart).
Participants felt particularly more optimistic about the local economy than the national economy. A solid 65 percent of survey participants indicated that business conditions in Middle Tennessee were good, but only 27 percent felt that conditions were good for the nation.
Looking forward, the future expectations index also rose since the last survey, suggesting that people are more optimistic about the economy over the near term. When asked what conditions for Middle Tennessee would be like in six months, 44 percent indicated things would be better, and 50 percent felt things would be about the same. The national numbers were less optimistic than the local but still represented an improvement over the last survey, with 26 percent indicating conditions would improve and 57 percent stating conditions would stay about the same.
The national consumer confidence indexes have trended up overall since the depths of the recession but still have not reached levels seen in the mid-2000s (see the chart).
Still, as Dave Altig pointed out in his macroblog post and President Lockhart in his speech, the fundamentals suggest that consumer spending will pick up in the not-too-distant future. Our confidence may be slightly guarded, but we are optimistic. Just like Middle Tennessee.
By Troy Balthrop, a senior Regional Economic Information Network analyst in the Atlanta Fed's Nashville Branch
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Tiny Bubbles in Alabama
Do you like to blow bubbles when you're chewing gum? I do. I recently discovered that bubbles are not just fun to blow when you're chewing gum—they can also be a fun and interesting way to visualize data. Yes, I said data. At the Atlanta Fed, we often use bubble charts to track and analyze certain data series. It is particularly helpful when we compare two bubble charts with the same information from different points in time.
In the charts below, which focus on Alabama, each bubble provides a static representation of a given value while also providing comparative information to other industries. The bubble size in these charts illustrates the most recent three-month average of jobs in that industry. The y (vertical) axis shows the three-month average annualized (or short term) job growth, and the x (horizontal) axis shows year-over-year (or long-term) job growth.
The chart is divided into four quadrants. A bubble in the upper-right quadrant (expanding) indicates positive movement in employment (both short- and long-term measures are positive), whereas the lower-left quadrant (contracting) indicates both measures are negative. The upper-left quadrant (improving) indicates the three-month measure is positive, but we're not seeing positive movement year over year. Lastly, the lower-right quadrant (slipping) is positive year over year, but the three-month measure is negative.
As you can see in the first chart, Alabama's leisure and hospitality employment in December 2013 was in the expanding quadrant. We interpret that as this sector has been making gains over the short and long run. This gain stands in contrast to the information sector, which contracted during both the short and long term, putting it firmly in the bottom-left quadrant.
Now, let's take a look at how some of Alabama's industries are doing. In December 2014, the leisure and hospitality sector was still expanding (gaining 8,800 jobs). According to the University of Alabama's Center for Business and Economic Research (CBER), the increase in leisure and hospitality is the result of staffing in food services and drinking places (restaurants, for example). CBER's Ahmad Ijaz said, "Restaurants are adding jobs all across the country."
The construction sector is in an even better position, moving from a contraction in December 2013 to expansion a year later. The Birmingham Business Journal, in an article from January 2015, said "Alabama is ranked eighth among the 50 states and the District of Columbia in construction jobs added." Likewise, the Alabama Department of Labor reported that Alabama "employment in the construction sector is at its highest point since November 2010."
Finally, a look at the manufacturing industry in Alabama also showed notable improvements. In 2013, it seemed like manufacturing employment was easing into the "slipping" quadrant, indicating a short-run slowdown. But 2014 saw it move firmly into the expanding quadrant. CBER's Ijaz tells us that this is the result of the automotive industry adding jobs from October 2013 to October 2014. He said that Alabama is one of the few states adding jobs in this sector. In September 2014, AL.com reported that Alabama's auto industry was projected to grow 2 percent in 2014 while the rest of the U.S. auto industry would contract about 4 percent.
So now that we've scrutinized past data, what are Alabama's employment projections for 2015? According to CBER's latest forecast, Alabama is expected to see stronger growth in employment in 2015 overall. I look forward to comparing bubble charts later in the year. In the meantime, I think I'll grab a piece (or two) of gum.
By Susan Remy, a Regional Economic Information Network analyst at the Birmingham Branch of the Atlanta Fed
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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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A New Year, a Better Economy?
The optimism expressed by the Jacksonville Branch's contacts in north and central Florida in the latter half of 2014 continued through the holidays and into early 2015. Conditions were described as quite good, and the majority of contacts reported strengthening demand across multiple sectors. Further, reported headwinds for current and future activity decreased noticeably.
Universities noted some challenges with enrollment, which—although negative for the schools—reflects a strengthening economy and an improving job market as prospective students lean toward employment rather than continuing education. Growth in new customer demand for utilities indicates people moving. Several financial institutions cited robust consumer lending, led by an increase in demand for auto loans. Some banks reported double-digit increases in credit card use by consumers. However, they described residential mortgage lending as soft, with inventories of both existing and new homes remaining low. Small business lending was characterized as very strong compared with the same period a year ago. Tourism in central Florida remained robust amid reports of record-setting attendance and revenue at some attractions, along with elevated occupancy rates at area hotels for the last half of 2014. Regarding holiday sales, contacts reported increases over year-earlier levels.
Employment and labor markets
Employment stories were mixed during the past couple of months. Some larger companies reported increases in staff, but others indicated that employment levels have shrunk as a result of efficiency and automation. Struggles to find talent continued to be widespread across higher-skilled jobs, including those in compliance, engineering, underwriting, and actuarial science. Some contacts suggested that some lower-skill jobs are also becoming more difficult to fill. In the Orlando area, service workers were in high demand to meet strong tourism activity, which has resulted in employee churn among employers in the hospitality, retail, and theme park/entertainment industries.
Labor and nonlabor costs and prices
Although few contacts reported wage pressures building, certain jobs continue to command higher salaries as competition for talent increased. For example, we heard that some firms are increasing wages to attract and retain accountants. Also, talented lawyers fresh out of law school seeking positions with large law firms are asking for, and getting, higher wages that not only cover the cost of living but help pay down college debt. However, contacts noted a change in the types of jobs where wage increases were evident, such as entry-level distribution center labor, and they expect that wage pressures will increase. Contacts reported offering a variety of other types of compensation, including performance-based incentive payouts, stock options, and equity increases to retain key employees. Increased offerings of "soft benefits," such as more time off and flex time, were also reported. Most contacts reported merit increases between 2 percent and 3.5 percent. Health care premium increases continued to be mixed across all contacts.
We continued to hear from a majority of contacts that nonlabor input cost increases appeared to be stable or slowing. Companies with contractual agreements of multiple years with customers were reporting some pricing power during renegotiations, although government and defense contractors reported very limited pricing power and have been forced to reduce costs to maintain margins.
Falling gas prices have had a positive effect, giving consumers in particular a psychological boost regarding spending. Travel and tourism contacts in central Florida reported increased passenger traffic and hotel occupancy. Others reported higher activity in auto sales, where product sales have shifted to trucks and SUVs in response to lower fuel prices.
Availability of credit/investment
Credit continued to be readily available for most large companies. Bank and credit union contacts indicated strong demand across most lines of business, with an increased interest in warehousing as the retail sector continued to increasingly use online fulfillment in addition to traditional brick-and-mortar stores. Other financial institutions reported significant improvements in the credit quality of consumers. Contacts cited examples of capital investments in IT (for efficiency and process automation), acquisitions, and infrastructure.
Contacts have expressed increased confidence in their outlook, and most are experiencing and expect further improvement. They cited few domestic headwinds outside of the unknowns related to oil's rapid price decline and the regulatory environment in banking and other industries. We continue to hear more about a possible resurgence of domestic manufacturing, with rising wages in Asia and the lower cost of energy in the Western Hemisphere, which could drive manufacturing to Mexico and to the United States during in the medium term. Contacts with a strong international presence didn't view the strengthening dollar as their biggest worry. Rather, they described demand challenges in certain markets and U.S. tax policy as more worrisome. Overall, contacts during the past three months were upbeat about economic conditions, with the majority forecasting higher growth during the short and medium term.
By Sarah Arteaga, a Regional Economic Information Network director in the Atlanta Fed's Jacksonville Branch, and Chris Oakley, regional executive at the Jacksonville Branch
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A Timely Talk with Energy Professionals
If you read or watch the news, you've undoubtedly noticed what's happening with the price of oil. But for those of you who may have missed these reports, here it is in a nutshell: the price of Brent crude oil, the international benchmark, has declined more than 40 percent since its peak of over $115 in mid-June (see the chart).
Many reports have discussed what the decline means to the energy industry and economy as a whole. In fact, the Atlanta Fed's very own macroblog published a post that examined the impact on energy investment and overall economic growth. We were also fortunate to be able to discuss this important and timely situation, along with other industry trends, with energy sector representatives last month during our Energy Advisory Council meeting held at the New Orleans Branch. So what did council members think about the declining price of oil? I gleaned a few key takeaways.
Council members reported that the recent drop in the price of oil had led exploration and production firms to reevaluate operational flexibility, cost-management strategies, and extraction technologies. These firms also initiated renegotiations with oilfield service companies for reductions to pricing structures, which a recent report suggested may drop as much as 20 percent.
In addition, council members conveyed their expectation that marginal oil producers may be negatively affected by falling oil prices, as their breakeven point is typically much higher than the larger producers. They shared that foreign oil-producing countries that acquire a majority of their revenues from the world's most traded commodity may also be adversely affected, which is a known concern among many key people inside the industry. The council also pointed out that if oil prices continued to decline or even hold at current levels, capital spending may be affected since firms would have fewer profits to reinvest into production and growth. Some reports indicate that this effect on spending is already beginning to occur. However, some members told us that they anticipate continued steady production in both deepwater and onshore drilling since many of these projects are large scale and long term and have high front-end costs (which in many cases have already been funded). Decisions about future projects may need to be reconsidered, however.
All in all, the Energy Advisory Council meeting was very timely, considering our attempts to understand what was happening globally with the price of oil and its impact on the economy. It will be interesting to learn how the energy industry will have adapted to current events when the council convenes again in March 2015.
By Rebekah Durham, economic policy analysis specialist in the Atlanta Fed's New Orleans Branch
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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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Taking Tennessee's Temperature
During the most recent cycle of the Federal Open Market Committee (which ran from June 19 to July 30), the Atlanta Fed's Regional Economic Information Network (REIN) team at the Nashville Branch met with business leaders, including branch directors, to discuss economic conditions.
General business conditions
Our REIN contacts in Middle and East Tennessee remain optimistic about the prospects for their businesses and the general economy. Most have a positive outlook and report solid growth in customer demand.
Our contacts also indicate that manufacturing is expanding robustly, with the sector running at nearly full capacity, especially the auto industry. A large building-materials manufacturer expects faster growth in the second half of 2014 as the construction industry recovers from the weather-related disruptions earlier in the year. In the Nashville area, both the commercial and residential real estate markets are doing well, benefiting from the low interest rate environment, strong net in-migration, and rising household incomes as the employment picture improves.
Employment and labor markets
Employment growth has accelerated in Tennessee during the past year, and growth momentum is strong across most major metropolitan areas in the state (see the chart).
Middle Tennessee State University's Business and Economic Research Center produces a heat map of Tennessee's employment growth by industry (based on U.S. Bureau of Labor Statistics data) that nicely illustrates what we've been hearing from our business contacts: namely, employment in construction, professional and business services, and leisure and hospitality has been outpacing growth in other industries.
As the labor market improves, businesses are increasingly sharing stories about the difficulties companies face in finding qualified workers across a broad skill spectrum. In addition, several companies have expressed concern that replacing skilled employees who are nearing retirement age will be challenging. Consequently, companies appear to be expanding internal training programs to deal with existing and potential skill shortages.
In addition to our meetings with business executives, we polled a number of mostly larger firms to find whether they experienced difficulty filling open positions. Out of 21 respondents, two-thirds said yes. Seventy percent of those respondents said that they have raised offer wages to attract new hires.
We also conducted a brief poll of 32 of our construction industry contacts. On the residential side, 75 percent indicated that it is now more or much more difficult to find skilled labor compared to the mid-2000s. Skilled labor availability is even tighter in commercial real estate—nearly 85 percent of respondents said finding skilled workers now is more difficult.
We have not heard of any pick-up in materials and other nonlabor input costs but, as mentioned above, the shortage of skilled applicants is putting upward pressure on offer wages. Several manufacturing contacts said that they increased their starting wages along with peer companies in their geographic area.
In the construction industry in particular, labor cost pressures on the residential side have increased compared to the mid-2000s for almost two-thirds of respondents to our poll. Moreover, labor cost pressures have intensified for more than three-fourths of the commercial builders we've polled.
Availability of credit and investments
In the same poll, two-thirds of the homebuilders and residential brokers said it is more or much more difficult to obtain financing for construction projects compared with the mid-2000s. And everyone on that panel said that it is more or much more difficult to obtain financing for land/lot development. Financing conditions are a bit easier for commercial builders (see the chart).
One national commercial construction firm said that financing conditions are actually easier for them now than 10 years ago. Notably, equity financing is becoming more prominent in a number of sectors as investors are looking for higher returns than they can get at financial institutions, and banks' lending standards remain rigorous.
All this said, the positive sentiment among our business contacts in Middle and East Tennessee could possibly also signal continued improvement in the health of the national economy, given that the structure of Tennessee's economy for the most part resembles that of the United States' as a whole. Be sure to check back here as we'll periodically update the Middle and East Tennessee economy.
By Galina Alexeenko, a Regional Economic Information Network director in the Atlanta Fed's Nashville Branch
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Reaching the Public with Confidence
Last week's Beige Book noted that "economic activity increased in most regions of the country since the previous report." Here in the Sixth Federal Reserve District, we wrote that:
On balance, the Sixth District economy expanded at a modest pace from mid-February through March. Reports across sectors were optimistic and most business contacts expect near-term activity to grow at a moderate pace.
How did the Atlanta Fed come to this conclusion? It is a combination of several inputs, including a careful analysis of what our business contacts reported to us in a series of one-on-one meetings held throughout the region. But we also factor in what we hear from broader audiences, such as public speeches, presentations to professional or community groups, and industry- or geographic-specific meetings throughout the region.
Atlanta Fed economists and regional executives connect with their communities on a frequent basis. Such an approach allows us to reach a broad audience, and although we do not have the opportunity to perform deep dives like we do in our one-on-one meetings, we do get a good sense from the audience just how the local economy is performing.
For example, Adrienne Slack, our regional executive in New Orleans, delivered two talks on the Gulf Coast, one to a local group of businesses and one to an audience made up of businesses from throughout the country. What she heard confirmed our analysis that the economy in this region was performing somewhat better than the nation as a whole. She reported that:
The tenor of the Gulf Coast audience was optimistic and inquisitive about our thoughts regarding our forecast and the staying power of the recovery. The national audience was also keenly interested in our outlook; however, their own perspective was less optimistic. They too were seeing encouraging trends but not the growth and investment currently at play along the Coast.
Chris Oakley, our regional executive working from our Jacksonville Branch, delivered a talk in Tampa where he noted some concern regarding the level of confidence in our economic forecast. Chris was asked, "What makes you more confident that projections for growth in 2014 will come to fruition as compared to the last several years?" Chris responded that we were more confident that the economy would improve because of several factors, including:
- Consumers have adjusted to the reinstatement of the 2 percent social security payroll tax;
- There are no looming fiscal deadlines in the short term (debt ceiling, fiscal cliff, etc.); and
- Economic weakness among some of our foreign trading partners appears to have abated.
"This environment is allowing for greater visibility and confidence, which translates to more investment and spending," Oakley said, echoing comments made by Atlanta Fed President Dennis Lockhart in a March 6 speech at Georgetown University:
Let me expand on my claim that the economy's fundamentals are stronger. I think basic conditions in several key sectors of the economy are much improved compared with earlier in the recovery period. I would cite banking, housing, energy, and manufacturing as examples.
Household balance sheets are much healthier now thanks to reduced debt, higher saving, and stronger asset prices, including higher home values.
Business and financial-system leverage has been significantly reduced from levels precrisis that were demonstrated to be unsustainable. Business profitability is good, and firm balance sheets are generally liquid.
Likewise, fiscal imbalances, while not solved for the long term, are somewhat less a near-term concern. Finally, employment markets are unquestionably in a better state compared to even a year ago.
President Lockhart continued:
At the same time, certain headwinds that have persistently buffeted the economy and restrained growth appear to have lessened. The fiscal drag associated with federal government budget austerity measures has eased. The risk of another financial meltdown emanating from Europe seems to have receded. Concerns about European sovereign debt and the exposure of the European banking system were an important source of uncertainty that weighed heavily on business confidence in the years 2011 and 2012, for instance.
By Mike Chriszt, vice president in the public affairs department of the Atlanta Fed
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Key Issues Fuel Discussion of Energy
The Atlanta Fed's Energy Advisory Council met on March 25 for its semiannual meeting to discuss current economic conditions in the energy industry. On the whole, council members were optimistic about the energy sector and expect growth in 2014 to be solid in most of the sector's areas. However, council members shared concerns about infrastructure and transportation constraints and labor trends.
The unusually severe winter weather—and its exposure of limitations in the U.S. natural gas distribution infrastructure—was also a key topic of discussion during the meeting. Demand for natural gas was high and regional supply was sufficient, yet transportation and distribution were severely limited, particularly to the Northeast. To meet the demand for utilities, many power providers resorted to using coal instead of natural gas.
Some council members spoke about the importance of the rail industry in the distribution of energy products; demand for rail fleet was high and expected to grow. Members expressed hope that increased use of rail transport would help resolve transportation issues, yet many energy representatives were concerned that the rail industry would not be able to build fleet fast enough to keep up with demand.
Council members also discussed ongoing shortages of skilled labor. A shortage of engineers has led businesses to consider offshoring engineering and conceptual work. Firms were also concerned that there would not be enough tradesmen to execute projects slated for implementation later this year and into 2015. The shortages have created backlogs and caused firms to offshore an increasing number of projects, particularly modular construction of plants, meaning that a company unable to find the skilled labor needed to construct a plant facility may instead have the plant constructed abroad in modules and shipped to the United States for assembly. The technology required to transport large parts and equipment has become readily available and has become more cost effective than it was a few years ago.
Overall, council members are optimistic about the present and future of the energy sector, even as they continue to encounter challenges that must be surmounted to allow the sector to continue to thrive.
By Rebekah Durham, economic policy analysis specialist in the New Orleans Branch of the Atlanta Fed
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