According to most reports the District's economic growth continues to moderate, and the general outlook is for some further slowing in the rate of growth over the coming months. Although recent merchants' sales have generally met expectations, retailers are planning inventories conservatively for the coming holiday season. Residential building activity and sales weakened and are expected to continue to slow through year-end. Commercial real estate markets remain healthy, and there is little apparent risk of widespread overbuilding at this time. A few large projects are stimulating an otherwise sluggish manufacturing sector. The outlook for the tourism and hospitality industry is less positive than before, but still healthy. Bankers report solid overall lending growth. Tight labor markets and labor quality remain significant problems for many District employers. Few manufacturing and retail firms say they have been able to pass on higher labor and fuel costs to their customers, resulting in increased pressure on profitability. The District's agricultural sector has been severely affected by the drought.
District retailers reported that sales continued to slow across the region during the third quarter; however, the impact is relatively less at discount department stores. Most merchants said that sales results during September and early October had generally met their expectations, and this contrasts with our last report that sales in August had fallen below expectations. Retailers reported mostly balanced inventories but are planning conservatively for the coming holiday season. Most do not anticipate the strong sales growth that they experienced in the fourth quarter of last year and do not want to be left with excessive inventories after the holidays. Notably, many retailers are reducing their apparel inventories relative to a year ago.
Evidence of a slowdown in the District's single-family residential market continues to emerge. Buyer traffic has been down recently in many parts of the District, while inventories have risen somewhat and the use of price concessions has increased. Both builders and realtors noted that home sales had weakened in early October. Contacts anticipate continued moderate slowing in the housing sector through the remainder of the year.
Commercial real estate activity remained strong, with vacancy rates declining slightly in most markets. However, several contractors around the District have reported that construction activity is slowing, backlogs are shrinking, and there have been net declines in occupied space in many areas. Industry experts indicate that the market remains well positioned in general, and there continues to be little risk of oversaturation in the near term.
Contacts paint a mixed picture of recent factory activity. Military contracts and high-tech industries are continuing to stimulate manufacturing activity in the District. Recent congressional approval for the purchase of F-22 Raptor fighter aircraft and C-1390J Airlifters is a positive development for Lockheed Martin's Marietta, Georgia, plant. The Motorola Corporation recently announced a new corporate campus near Atlanta that could eventually employ thousands. Shipyards in the District report increasing activity generated by large contracts for guided missile cruisers, destroyers, ferries, and barges. In Alabama, Daimler-Chrysler is spending $600 million to double the size and production capacity of its plant and plans to eventually add over 2,000 workers to its current payroll there. On a less positive note, slowing construction activity is adversely affecting wood product and building material suppliers. The ongoing downsizing of the region's apparel industry also continues, with further announcements of plant closings.
Tourism and Business Travel
Reports from the tourism and hospitality sector are not quite as upbeat as in our last report. Florida contacts are increasingly concerned that rising fuel prices may discourage winter season tourism. "Snow goose" tourism, in particular, is expected to be down from a year ago because of weakness of the Canadian dollar and high fuel prices. One report notes that overcapacity in Florida's cruise industry, which is resulting in fare discounting, does not bode well for the industry's outlook. In contrast, current booking figures suggest that 2001 will be a record year for large conventions in Atlanta.
Strong consumer and commercial loan demand continues to fuel overall growth in bank lending activity. Automobile loan demand slowed slightly, while residential mortgage demand remains flat. District bankers note that net interest rate compression and slower overall deposit growth have been offset somewhat by rising loan volumes and fees. Overall credit quality remains healthy. Bankers expect loan growth to slow slightly through the remainder of the year.
Wages and Prices
Tight labor markets and labor quality remain problems for many District employers, and increasing labor costs are widely perceived as major threats to profits. While the labor market appears to have eased slightly in certain areas, particularly for manufacturing and construction workers, there is continued intense demand pressures in the high-tech and medical sectors. In some cases, unplanned year-end bonuses are going to be offered to key employees in an attempt to maintain staffing levels.
Increases in oil-related input costs and transportation fuel surcharges are widespread. The rising cost of healthcare and other insurance programs continues to be a concern for many employers.
Recent rains came too late to help many of the District's crop farmers, and the overall cost of the drought in terms of lost production and income has been substantial. The regional agricultural disaster declarations now cover all of Georgia and Mississippi, 59 of Florida's 67 counties, and 64 of Alabama's 67 counties, making these areas eligible for federal assistance. The director of Louisiana's crop emergency board has requested that the Governor declare an agricultural disaster in 40 of the state's 64 parishes.