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.
Sunnier Times in the Sunshine State
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 Jacksonville Branch talked with more than 30 Florida business leaders, including branch directors, about economic conditions. As one who has been involved with the REIN program since its inception in 2008, I can attest that, while “slow and steady” remains a theme in this economic recovery, the sentiment of our contacts over the past two months has been the most upbeat since before the recession.
General business conditions
Almost all firms reported increases in business activity. Two design/build firms indicated robust demand and reasonably strong pipelines, including a strengthening in industrial and office development. For the first time, we heard of some speculative building in the commercial sector from three different contacts. Housing continued its slow improvement, though several contacts used the word “bumpy” to describe activity. The appetite for auto purchases continued, as a recent SouthPoint post discussed, with lenders citing robust auto-lending activity. Some banks also reported that consumers are now slowly adding to outstanding credit card balances.
Employment and hiring
Labor markets tightened as the number and types of difficult-to-fill positions increased. In addition to highly skilled positions that are normally a challenge to fill (including information technology and engineering), contacts shared frustrations with filling midlevel positions such as analysts. In construction, finding subcontractors and skilled laborers was harder than normal. However, one contact saw a 20 percent annual increase in revenue as clients resumed a normal hiring pace.
Labor and input costs
Contacts reported seeing wage pressures in their organizations. For example, demand for truck drivers that one firm described as “significant” led to a 33 percent pay increase since the beginning of 2014. One retail contact reported wage increases for maintenance positions as the “construction boom in the area lures these workers away.” Most contacts previously noted merit programs of between 2–3 percent. However, for the first time, several contacts discussed plans for more aggressive increases of 4–5 percent. Regarding health care, most anticipate premiums to continue growing significantly, and many have self-insured to mitigate rising costs.
Most contacts described nonlabor input cost increases as benign. Although the cost of some construction-related materials was a cause for concern earlier this year, most of this volatility has dissipated. While most contacts do not claim much pricing power, some companies are seeing improved margins as they are able to push through increases in the form of higher sales prices.
Credit and investment
Contacts at medium and large companies noted that while credit is readily available, many are still risk-averse and avoiding taking on debt, relying instead on cash flow or internal reserves to fund projects. Companies that do borrow are undergoing “rigorous but rational underwriting.” One construction contact said that many of his larger clients are no longer just catching up from the recession but are now willing to take risk and invest in adding capacity. A bank also reported more risk-taking among customers, especially in commercial real estate and equipment leasing. At the consumer level, real estate agents and lenders referred to qualified mortgages as something of an impediment to mortgage loan activity, but they generally viewed the more rigorous process as worth the effort to reduce risk.
Since June, the consensus from REIN contacts at the Jacksonville Branch was largely positive. Overall demand conditions have improved, though some expressed concerns about regulatory impact. Some contacts specifically mentioned dissipating headwinds as a reason for increased investment, including one contact who sees enough improvement in the economic environment that the company has changed its strategy from diversification to more rapidly expanding its footprint with aggressive new revenue goals.
Does this jibe with what you, our readers, are seeing? As always, your thoughts are welcome.
By Sarah Arteaga, a Regional Economic Information Network director in the Atlanta Fed's Jacksonville Branch
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Is Florida Finally Beginning to Flourish Again?
In March, we shared the view of our contacts in the Regional Economic Information Network (REIN) in north and central Florida. Those contacts described modest but sustained growth in activity in the first quarter of the year. That sentiment continued as winter turned into spring, with reports of increasing activity and greater optimism for continued growth during the remainder of the year.
Since mid-March, the REIN team in the Atlanta Fed’s Jacksonville Branch held 13 one-on-one interviews, one roundtable with a mix of business leaders, a Trade and Transportation Advisory Council meeting (recently summarized), as well as our branch board meeting. Although meeting participants noted acquisitions as a primary growth engine for most firms, some firms are expanding capacity to meet improving demand. Community banks are reporting increased commercial activity as bigger banks trim lines on small businesses. Though loan demand is still relatively soft, our contacts characterized clients as somewhat more confident, which bodes well for future lending activity. One banker cited noteworthy increases in credit card usage and home equity loans.
Retail contacts continue to express concerns about low-income consumers but note that the slowly improving labor market is resulting in somewhat more spending. In central Florida, contacts noted strong spending by more affluent consumers, including foreign visitors who are seeking high-end retail and dining. Robust home sales and price appreciation, accompanied by declining lender-mediated sales, were widely reported. Commercial construction is on the rise, especially in sectors such as health care, manufacturing, apartments, and higher education.
A focus on cost-cutting along with productivity-enhancing efforts continues. As one chief executive officer put it, “People are the last thing we’ll invest in.” Another company has committed to keeping its general and administrative expenses flat, which will result in support staff cuts to offset the increased cost of technology investments and health care. Two other large contacts noted significant reductions of full-timers to avoid having to provide health care coverage and to “be more in line with the industry.” We increasingly hear more about firms restructuring employee health plans and benefits to reduce costs to the company, including shifting more cost burden to the employee, restricting eligibility for spouses who may have access to insurance elsewhere, and adding risk-based surcharges.
Education contacts noted that the ability to place graduates seeking work has improved. Stories abound regarding difficult-to-fill positions (truck drivers, IT, accounting, etc.), and reports of a willingness to increase starting salaries are mixed. Generally, there were few reports of wage pressures mounting (outside of the trucking industry). The news on input prices remains relatively quiet.
Our contacts noted that qualified mortgage rules—and regulations more generally—have the potential to affect the housing recovery. A mortgage and refinance company has cut the majority of its workforce as refinance volume diminishes but noted that current regulations are making first mortgages, especially to the self-employed, “nearly impossible” to issue. Two other small-banking contacts indicated they have discontinued providing residential mortgages. However, two residential real estate contacts did not indicate any major concern about clients’ abilities to obtain mortgage loans.
At the April meeting of the board of directors of the Jacksonville Branch, we asked board members whether the current and near-term environment reflects an economy that is growing at a 2 percent rate or one that is growing at 3 percent. The majority view activity now and in the coming year to be more closely aligned with a 3 percent growth rate. The board members feel that the biggest potential impediment to growth is related to the consumer, as many people continue to struggle and consumer confidence remains lower than before the recession (see the chart).
The old proverb goes, “No matter how long the winter, spring is sure to follow.” One could apply this adage to the Great Recession and the long recovery and ask: Has an economic “spring” finally sprung? We’ll be keeping tabs as the year plays out.
By Sarah Arteaga, a Regional Economic Information Network director in the Atlanta Fed's Jacksonville Branch
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The ACA and Uncertainty around Business Health Care Insurance Premiums
A number of recent articles and blogs have reported on the impact of the Affordable Care Act (ACA) on the individual health insurance market (for example see here, here, and here, as well as this recent analysis by the Department of Health and Human Services). While there has been considerable coverage of the effect of the ACA on premiums in the individual insurance market, a number of provisions also affect employer-provided health insurance. The coming changes are leading to quite a bit of concern and uncertainty among businesses, at least according to a recent poll of Atlanta Fed business contacts. (Note: This survey was conducted at the end of June, just before the announcement that the mandate for all employers to require health insurance will be delayed until 2015. Also note: The survey is not a perfect representation of U.S. businesses, and all statistics shown here are not intended to represent the views of the broad population of U.S. firms.)
The effect on premiums
Before we get into the survey results, I want to discuss a little background on aspects of the ACA that are relevant to business owners. The ACA attempts to fix the adverse selection problem that exists in the current health care market by bringing everyone into the insurance pool. Beginning in 2014, individuals will be required to have health insurance, and beginning in 2015, businesses of a certain size that do not offer health insurance will be penalized. (See this flowchart for details on which type of businesses will be subject to the law beginning in 2015.) This push towards including everyone in the health insurance market will significantly change the risk pool. In addition, new regulations for small-group plans (employers with fewer than 100 employees) will affect the way in which insurance companies can price plans. Beginning in 2014,there will be one small-group market pool for each state, and insurers will no longer be permitted to adjust premiums based on gender, group size, industry, or health status (other than tobacco use) when writing small-group plans. There will also be limitations on their ability to price based on age. These changes can have positive or negative implications, depending upon your point of view. If you are an employer in a state that currently allows for price adjustments by these factors (and most do) and you employ a workforce that tends to be low risk, your premiums might rise. Conversely, a small-group employer in a risky industry might see their premiums decline. So a retailer employing mostly young people might have higher premiums under the ACA, but a mining company might have lower ones, assuming all else (deductibles, coverage levels, etc.) remains equal.
What are businesses doing to adjust their health plans in anticipation of the ACA? Is concern over the ACA spilling over into other business decisions like hiring plans?
Changes to current health care plan offerings
The results of our survey indicate that the majority of businesses (73 percent) participating in the survey are not planning to make any changes to the health care plans they currently offer because either (1) they are too small (they have fewer than 50 full time employees) or (2) they already offer insurance that satisfies the requirements of the ACA. Relatively few (1 percent) firms said their costs were increasing because they will offer health insurance for the first time.
The graph below shows the percent that checked each option. (Note: Firms are instructed to check all that apply.)
While most firms do not anticipate making changes to their health care plans, a nontrivial portion (23 percent) said they were planning to make changes to their current plan offerings or were still deliberating. One thing that stood out in these results was that 8 percent of companies said they planned to cut back or drop insurance coverage. Uncertain as to why this would be, we pored over the “please explain” and “other comments” boxes to learn more.
When we looked at these open ended questions, we found that 19 percent of businesses in the survey specifically mentioned that their premiums were going up in a way that was forcing them to rethink the benefits they currently offer. Many anticipate passing the cost on to their employees. Still others plan to save money in other ways including changing to a consumer-driven plan such as health savings accounts, or switching to a self-insurance option. (Note: This could be a good option for firms with overall low-risk workforces because they will not have to subsidize the health insurance of more risky workers at other places of employment.) Eliminating so-called “Cadillac plan” options was also mentioned, since there will be excise taxes on these plans under the ACA. The most common response however, was that they would reduce the portion of the insurance the company pays and put more of the burden on the employee if higher premiums materialize.
These concerns over managing cost pressures were prevalent across the distribution of firm size, but those with more than 100 employees were about twice as likely to have mentioned it. While it’s true that the ACA will affect large groups (those with more than 100 employees) differently, it’s not clear why they would be more likely to experience cost increases. Under the new law, large groups are subject to the prohibitions on pre-existing condition exclusions, rescissions, and lifetime and annual benefit limits. However, large groups are not limited to the fair health insurance premium rules, minimum essential benefits package, the new rating rules, or limits on deductibles.
The effect on hiring plans
While many firms are facing cost pressures that might affect their bottom line or lead to less take-home pay for employees, very few are anticipating cutting employees as a result of the mandate. While 12 percent of firms (54 out of 437) said they are watching their count of full-time equivalent employees to be sure it stays under 50, only 4 percent of firms were closing in on this limit (16 firms out of 437 that said they were watching their head count currently have between 25 and 50 employees). Those checking “other” mostly consisted of people saying they were still gathering information to see if their business would be affected, waiting to see what their premiums would be, and/or reducing the hours of their part time employees to be under 30.
In conclusion, while higher price pressures seem to be a concern for many, most of these businesses plan to muddle through the increase in cost by passing it onto their employees or by rethinking the type of insurance offered. Relatively few are watching their headcount, although some did say the uncertainty around the ACA is causing them to delay hiring decisions. In general, it seems employers are working through these issues, but more information is needed before any final decisions can be made.
By Ellyn Terry, a senior economic analyst in the Atlanta Fed's research department
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