U.S. 2020 Economic Conditions and Commentary Considering COVID-19 and Continuing Economic Developments: Part Six
- Sep 30, 2020
Where We Are – September 2020 Observations
This is part five of a series of posts focusing on year-to-date economic conditions in light of the impact of the COVID-19 pandemic. Read part one, part two, part three, part four, part five and part seven.
1. Federal Reserve Bank of Atlanta
Summary of Economic Activity
Reports on economic activity in the Sixth District were mixed. Labor markets continued to modestly improve as firms slowly recalled workers. Non-labor costs remained muted. Retail contacts reported continued strength in the home improvement and renovation segment, but softness in apparel sales. Auto dealers noted sales increased since the previous report. Tourism and hospitality activity remained soft. Residential real estate continued to strengthen; however, commercial real estate markets remained challenged. Overall manufacturing activity accelerated somewhat, though new orders and production levels varied across firms. District financial institutions reported that loan growth slowed, underwriting standards tightened, and loan loss reserves increased.
Employment and Wages
Although labor conditions improved modestly since the previous report, payrolls remain below pre-COVID levels and the outlook for further improvements was less certain. Firms continued to slowly recall workers as demand returned. However, many contacts noted that some prior staff cutbacks were permanent, and others had used attrition to reduce headcount. Among those hiring, most indicated that the pool of available workers was ample, although there were reports that unemployment insurance benefits continued to present challenges attracting low-wage workers. Several contacts reported that employees quarantined while waiting for COVID-19 test results was disrupting operations. Many employers also expressed growing concern about workers' abilities to balance workloads with the demands of child care and a return to school or virtual learning environments.
Reports on wages and compensation varied among contacts. Some businesses rescinded salary cuts, while others maintained pay cuts, froze salaries, or eliminated bonuses and/or contributions to 401(k) plans. Wage increases remained concentrated at the low-end of the pay scale.
Over the reporting period, contacts continued to note muted input costs and little-to-no pricing power. Increasing costs associated with personal protective equipment, testing, and sanitation practices to protect employees and customers from COVID-19 were notable, and rising shipping costs affected some industries, though neither of these costs were reportedly passed through. On balance, food prices stabilized, but shortages of some products caused prices to increase. The Atlanta Fed's Business Inflation Expectations survey showed year-over-year unit costs increased, on average, to 1.5% in August, up from 1.1% in July. Year-ahead expectations remained steady at 1.7%.
Consumer Spending and Tourism
District retail contacts reported continued strong demand in the home improvement and renovation segment. Clothing retailers noted lower year-over-year sales. Auto dealers reported continued increases in sales since the last report, as consumers focused on personal mobility versus shared transportation because of COVID-19.
Similar to the previous report, tourism and hospitality contacts across the District noted that while most hotels and attractions reopened with limited capacity in order to uphold social distancing measures, both revenues and employment continued to be negatively impacted.
Construction and Real Estate
Housing demand across the District remained resilient over the reporting period. Pending home sales soared as low interest rates and pent-up demand increased housing activity. Many markets experienced supply shortages, which accelerated upward pressure on home prices. Construction was unable to keep pace with the surge in demand experienced by homebuilders. Higher home prices, coupled with declining household incomes, continued to suppress home ownership affordability. Delinquencies remained elevated, especially in markets with high concentrations of workers in the leisure and hospitality sector, such as in South Florida and Orlando.
Commercial real estate (CRE) contacts reported that the sector continued to encounter challenges associated with the coronavirus pandemic. Contacts in hard hit sectors like retail and hospitality reported that conditions continued to stabilize as local economies improved. Owners of lower-price multifamily properties reported an increase in late rent payments and a softening in occupancies. However, some contacts reported a decline in the number of tenants and borrowers seeking relief. While improving, low levels of tourism and travel are having a notable negative impact on activity across the hospitality and retail sectors. Investment property sales remained a fraction of pre-COVID levels. Contacts reported that capital was readily available at banks; however, underwriting criteria tightened for the financing of stabilized CRE projects. Contacts reported that high-quality asset values declined marginally, and hospitality and retail sector assets declined at a more accelerated rate.
While most manufacturing firms reported a modest acceleration in overall business activity compared with the previous report, the level of activity remains slightly below pre-COVID levels. While many contacts indicated that new orders and production levels increased, reports of subdued demand at some firms persisted. Purchasing managers reported a slight increase in supply delivery times and a decline in finished inventory levels. Expectations for future production levels increased, with nearly half of contacts expecting higher levels of production over the next six months.
Transportation contacts indicated that demand was generally consistent with the previous reporting period. Activity at ports was mixed: some contacts noted continued softness in container traffic, while others reported increased container volumes tied to e-commerce and consumer goods. Exports of agricultural products such as wood pulp, cotton, and peanuts rose, but coal exports were down. Year-over-year total rail traffic declined, but intermodal traffic increased slightly. Trucking firms saw higher freight volumes, which contacts attributed to inventory restocking and surging online sales.
Banking and Finance
Conditions at financial institutions rebounded slightly but continued to be impacted by issues related to COVID-19. Although requests for forbearance on loan payments declined, financial institutions increased loan loss reserves in preparation for increased charge-offs as the initial forbearance periods ended. Loan growth stalled, and underwriting conditions tightened for a majority of loan products. Compressed net interest rate margins, along with higher provisions for loan loss expenses and noninterest costs, continued to put negative pressure on earnings. Liquidity remained strong due to high deposit levels maintained by customers.
Energy markets continued to face a great deal of uncertainty. Crude oil production remained restrained by oversupply and weak demand. Demand for natural gas declined further over the reporting period, as COVID-19 shutdowns reduced power usage across the commercial and industrial segments. Reﬁneries cut back throughput and maintained historically low utilization rates amidst muted demand. Reports indicated that delayed maintenance at refineries is expected to occur in the coming months, which contacts expect to add strain to already limited resources. District energy firms operating in areas such as oil and gas production, petrochemical refining, pulp and paper, and power continued to delay or halt projects indefinitely and reduce headcount. In contrast, renewables projects, including solar and wind farms and renewable diesel production, remained active.
Agricultural conditions remained weak. Drought-free conditions prevailed in most parts of the District except in Georgia, where much of the state experienced abnormally dry conditions. On a month-over-month basis, July's production forecast for Florida's orange crop was unchanged from the previous month and remained below last year's production, while Florida's grapefruit production forecast was down from the previous month but remained ahead of last year. The USDA reported that in June, year-over-year prices paid to farmers were up for rice and soybeans but down for corn, cotton, cattle, broilers, eggs, and milk. On a month-over-month basis, prices increased for cotton, rice, soybeans, broilers, and milk but decreased for corn and eggs while cattle prices were unchanged.
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Timothy Speiss is a Tax Partner in the Private Client Services Group and Vice President of EisnerAmper Wealth Planning LLC. He chairs our Asia Practice and is a member of the firm’s community service group, EisnerAmper Cares.
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