July 26, 2006 Federal Reserve Districts Sixth District--Atlanta

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Reports from Sixth District business contacts were mixed in June and early July. Retail sales varied by type and location, with strongest reports coming from high-end retailers and in the areas affected by last year's hurricanes. Automobile sales continued to lag, especially in the domestic truck and SUV segments. Housing contacts reported further declines in home sales in most Florida markets, and some moderation was noted in other areas as well. Nonresidential construction displayed modest growth, spurred by Gulf Coast infrastructure repairs. In coastal areas, the availability and sharply higher cost of insurance coverage has emerged as a major concern for homeowners and businesses. Reports on factory activity were generally positive, and transportation contacts continued to report they were operating near capacity. Tourism contacts remained cautiously optimistic. Lower real estate loan demand was noted in most areas outside the Gulf Coast. Reports of shortages of skilled labor continued to be widespread. Price pressures persisted, although the ability to pass on higher costs remained limited. Agricultural production was adversely impacted by drought conditions in many areas. Oil production in the Gulf Coast improved. Consumer Spending Retail sales performance was varied in June and early July. The strongest reports came from merchants in Katrina-damaged areas and from high-end retailers, whereas several low-end retailers noted sluggish sales. Most merchants anticipated modest sales growth over the next few months. District vehicle sales remained mixed. Domestic dealers struggled with declining demand for full-sized trucks and SUVs despite increased promotional rebates and incentives. In contrast, most foreign auto distributors reported another good month. Real Estate Reports from single-family homebuilders and Realtors indicated that housing activity outside of the hurricane-affected areas weakened in June and early July, and inventories of unsold homes rose. Most of the weakness remained concentrated in Florida, where contacts noted that home sales declined further and some homebuilders started offering various sales incentives. Florida Realtors reported that more sellers were lowering the asking price on existing homes than earlier in the year. The higher cost and lower availability of homeowner insurance in coastal areas was said to be one factor that was limiting the pace of home sales. Sales of condominiums declined further in several Florida markets, and in some cases condominiums were being reconverted back into rental units. District nonresidential commercial contractors reported that new development during June and early July was slightly ahead of last year's pace. Infrastructure repairs continued to dominate the recovery effort along the Gulf Coast, although some commercial projects have been put on hold until after the hurricane season. Manufacturing and Transportation Reports on manufacturing activity were generally positive. A building products manufacturer reported an increased volume of new orders and employment, and a manufacturer of electrical equipment was operating at near capacity and experiencing increased order backlogs. Defense contractors reported new orders while a manufacturer of automobile and industrial belting and hoses is in the process of expanding because of increased demand from local automobile assemblers. However, a furniture manufacturer reported a decline in sales, and a supplier of pre-stressed concrete in south Florida observed a decline in new orders. Reports from transportation sector contacts continued to be upbeat. Inter-modal centers in Huntsville and Atlanta were reportedly benefiting from a steady growth of regional domestic and global trade. Georgia Ports recently announced an $82 million capital improvement plan to upgrade port facilities in Savannah and Brunswick. Tourism and Business Travel Reports from the tourism sector were cautiously optimistic. According to the Mississippi Gaming Commission, employment at the ten Gulf Coast casinos is expected to approach Pre-Katrina levels by fall. However, the availability of affordable housing was viewed as a critical limiting factor. Despite hurricane season fears and higher gas prices, reports on Florida's tourism sector were mostly upbeat. Traffic was reportedly higher than a year ago in Orlando and at some coastal resorts. In Nashville, occupancies and room rates at several hotels were higher than a year earlier. Banking and Finance Real estate loan activity softened further in June and early July, although a New Orleans contact noted that real estate loans were up significantly in the Gulf Coast area. Commercial lending remained slow overall. Credit quality continued to be strong across the District. Overall deposit growth was flat and characterized by intense competition, although strong deposit growth was reported by contacts in hurricane-impacted areas. Employment and Prices Contacts continued to report labor shortages in certain sectors. Florida builders continued to report shortages of qualified workers in all trades, and a Tennessee temporary help agency reported that business was strong for high-skilled positions. However, in New Orleans, hotels were said to have difficulty finding workers at any skill level. AirTran Airways recently announced that it expects to add about 2,500 jobs in Georgia over the next few years. Contacts noted continuing price pressures. A building-supply company reported that prices for all petroleum-based products such as roofing, vinyl flooring and insulation were still increasing. A large producer of asphalt reported that rising prices will have a tremendous effect on the cost of state and federal highway programs. Insurance costs have also jumped sharply higher for businesses in coastal areas. Businesses reported that they were coping with rising input costs in various ways, including lower levels of staffing and service, and increased productivity. Many companies continued to state that they were unable to pass on all their energy cost increases because of competition, and were thus faced with eroding profit margins. However, some medical service providers, attorneys, restaurants, and roofers have reportedly been able to successfully implement price increases. Agriculture and Natural Resources Drought-like weather has impacted farmers across the District, with low-moisture conditions most dramatic in areas of Alabama, Georgia, and Mississippi. Most areas without irrigation systems were experiencing crop losses. Contacts reported that Florida's citrus crop this year would be lower because of last year's storms and disease problems, and could be impacted further by the shortage of migrant labor. Crude oil availability from the Gulf of Mexico continued to improve in June with one major platform returning to production. Reports also indicated strong demand for labor and equipment. Return to top Richmond Chicago