Reports from District contacts indicated, on balance, that business activity continued to expand modestly in January and February. Merchants reported that retail sales were similar to year-ago levels, while auto sales continued to be sluggish in most of the District. Tourism reports were generally positive. Most Realtors and homebuilders noted that residential sales and construction remained below year-ago levels, although declines have moderated relative to late in 2006. Meanwhile, robust activity in the nonresidential sector was sustained. Manufacturing and transportation reports continued to vary by industry segment. Labor markets remained tight in several industries, and there were more reports of rising labor costs. Agriculture contacts noted that higher corn and soybean prices have led some crop farmers to shift away from cotton.
Consumer Spending and Tourism
Most District contacts reported that sales in January and February were similar to year-ago levels and in line with expectations. The majority indicated that they were pleased with inventory levels. Several retailers noted that the advent of cooler temperatures boosted apparel sales. Overall, District contacts anticipate modest sales growth over the next several months. Import distributors and domestic dealers reported that auto sales remained sluggish in most parts of the District, with only South Florida contacts noting stronger sales.
Tourism reports were mostly positive in January and February. Mississippi contacts reported that Gulf Coast casinos, although fewer in number, were doing more business than before Hurricane Katrina. Tourism indicators for New Orleans continue to show some improvement. However, airlines have not brought back all of their pre-Katrina flights, and business, tourist, and convention travel remains below pre-Katrina levels. For instance, flights into New Orleans for the year are reportedly at 60 percent of the 2004 level. Florida contacts gave mixed reports, with strength in the fourth quarter of 2006, helping to offset some of the weakness earlier in the year. Florida officials expect business travel, including conventions and conferences, to increase moderately this year, but domestic leisure travel to the state is forecast to be flat in 2007. Contacts also noted that international travel is experiencing strong competition from other destinations as well as the negative consequences of tightened U.S. entry requirements.
Most District housing contacts reported that both new and existing home sales remained below year-ago levels in January. However, they added that the declines were moderating. Persistence weakness was most heavily noted in parts of Florida. Throughout the District, homebuilders and real estate agents noted that inventories exceeded year-ago levels. The outlook among real estate agents for the next several months was mixed, with Florida contacts again voicing the most pessimism. Home construction is expected to remain weak in most Florida markets, while elsewhere in the District activity is anticipated to be similar to year-ago levels.
Nonresidential construction in the District remained at healthy levels. Contacts reported that demand for commercial development continued to be strong in January and February. Vacancy rates remained low in several markets and rental rates were trending upward.
Manufacturing and Transportation
Reports from the manufacturing sector in January and February continued to vary by industry. Weaker reports came from producers of construction-related materials, reflecting the downturn in residential construction. Weak auto sales also fed through to production as Nissan recently announced plans to reduce payrolls at two manufacturing plants in Tennessee. Meanwhile, a regional power company reported energy sales for industry were slightly below year-ago levels, which was attributed partly to textile mill closures. More positively, contacts said that the steel business was still good with firms reporting profits above those of a year ago. A producer of electrical machinery reported increasing new orders and a lengthening factory workweek. A Japanese parts supplier for the Honda plant in Lincoln, Alabama, announced the opening of a new facility in the state.
Trucking contacts reported lackluster business conditions in January. Two large regional transportation companies recently reported lower than expected revenues, partly because of weaker demand from homebuilders. Rail contacts said that fewer freight shipments of lumber and other construction-related cargoes were somewhat offset by strong international inter-modal traffic.
Banking and Finance
Banking conditions in the District were largely unchanged in early 2007. Overall credit quality remained strong, but there were reports of increases in mortgage delinquencies in some parts of the District. Most of the mortgage-related credit problems were said to be in the sub-prime component. Commercial loan demand was described as stable and competition for deposits was reportedly intensifying.
Employment and Prices
Business contacts reported that hiring remained positive in January and February. Tightness in labor markets have resulted in rising wage pressures in some areas. Upward pressures were noted most in highly-skilled and professional occupations. For instance, a firm that provides temporary personnel to both manufacturing and defense/aerospace companies had to increase wages to attract technical workers – a trend that is expected to continue. Meeting the growing demand for healthcare workers, particularly nurses and laboratory technicians, remains a challenge for employers in the medical industry. Some reports also noted difficulties finding and retaining low-skilled workers, especially in the leisure and tourism industry.
Rising benefit costs were noted by several employers. Some indicated that they have had to increase benefit packages in order to attract quality applicants and to retain existing staff. Several manufacturers commented on the high cost of health insurance.
Prices for some construction components continued to decline, and several subcontractors reported that they were cutting prices on projects to maintain workflow. Some metals costs have softened, but were still high compared with two years ago. At the retail level, service firms continued to be more successful than merchandisers in passing on price increases to their customers.
Agriculture and Natural Resources
Winter rains slowed plantings in some areas, but eased drought conditions in Florida. Rising prices for corn and soybeans relative to cotton has prompted growers to substitute acreage; the District's cotton acreage is expected to be more than 20 percent lower in 2007 compared with 2006. High oil prices continued to spur interest in new deepwater drilling in the Gulf of Mexico.