Beige Book Report: San Francisco
July 17, 2013
Economic activity in the Twelfth District expanded at a modest pace during the reporting period of late May through early July. Price inflation was minimal for most final goods and services, and upward wage pressures were mostly muted. Retail sales of goods grew modestly overall, although demand for business and consumer services was mixed. District manufacturing activity improved. Production and sales of agricultural items expanded. Demand for housing strengthened, and commercial real estate activity trended up further. Contacts from financial institutions reported increased overall loan demand.
Prices and Wages
Price inflation was minimal for most final goods and services. Food industry contacts noted price increases for some protein items, including fish, poultry, and beef. Reports from health-care organizations mentioned that the pace of increases in insurance premiums has slowed. Competitive industry pressures constrained fees for legal and accounting services. Driven by demand, prices of some construction inputs, such as logs, edged up further.
Contacts reported that upward wage pressures were muted overall. Slack in the labor market held back wage gains in most sectors, occupations, and regions. However, firms in various industries continued to compete vigorously for a limited pool of qualified workers to fill certain technical positions, spurring significant wage growth for occupations such as software developers.
Retail Trade and Services
Retail sales grew modestly. Grocery and apparel retailers noted modest sales growth at retail store locations and relatively strong sales growth online. The retail grocery industry in particular appears to be shifting away from traditional large stores and towards e-commerce. Most contacts' outlook for consumer spending improved slightly since the prior reporting period. Contacts noted that an increase in demand for new devices has spurred some technology firms to expand their medium-term hiring plans. Suppliers of food and beverage products noted improved conditions, although sales of selected discretionary items, such as pet supplies, were a bit soft. As home purchases have increased, so has spending on housing-related products, such as furniture. New and used automobile sales were robust, and some dealers expanded their inventories in anticipation of a further pickup in summer sales.
Demand for business and consumer services remained mixed. Robust activity in Hawaii supported the District's travel and tourism sector, although there is some concern that the flow of international visitors could subside in coming months due to weakness in the global economy. After slipping early in the year, travel and tourist activity in Southern California appeared to pick up somewhat toward the end of the second quarter. However, tourist activity in Las Vegas remained soft through the first half of 2013. Demand for elective health-care services stayed relatively weak, while demand for other discretionary services, such as restaurant dining, appeared to strengthen.
Manufacturing
District manufacturing activity grew overall in the reporting period of late May through early July. Although demand was weak for some electronic components, contacts indicated substantial increases in new orders for semiconductors. Led by launches of innovative products, demand for pharmaceuticals gained further. Wood product manufacturers appeared to ramp up output to levels that exceeded demand in recent weeks. As such, firms are expected to pare back production plans for the second half of the year. Demand for steel products used primarily in nonresidential construction continued to increase. Steel producers reported that capacity utilization ticked up a bit further, and reports of intensified energy usage across multiple goods-producing sectors in the Pacific Northwest implied improved capacity utilization in the region.
Agriculture and Resource-related Industries
Agricultural sales and production activity expanded. Demand was strong for most crop and livestock products. However, some contacts expressed concern about the lack of availability of manual laborers. Insufficient water also was a concern in parts of the District, with this year's rain and snow pack levels running well below seasonal norms. Contacts from the oil and gas industry faced challenges finding qualified geologists, geophysicists, and drillers to fill open positions. Inventories of natural gas rose further, and demand for gasoline edged up. Reports from the utilities industry indicated that business demand for electricity from wood products and aerospace firms has risen robustly, although overall demand growth was more modest.
Real Estate and Construction
Demand for housing strengthened substantially, and commercial real estate activity continued to trend up in most areas. Both sales transactions and house prices climbed further in many District cities. The pace of housing starts exceeded the expectations of some contacts. In some areas, the supply of homes for sale remained low, and some properties have received multiple offers from prospective buyers. Construction of multifamily residential projects increased on balance. Commercial real estate activity expanded rapidly in some major metropolitan areas, even though construction of publicly funded commercial projects has slowed in some regions due to funding constraints from state and local governments.
Financial Institutions
Reports from financial institutions indicated that loan demand continued to increase. Contacts noted an uptick in applicants seeking residential construction loans and commercial office building mortgages. In line with reports of an improved outlook for business investment, banking contacts indicated that some firms have recently expanded their borrowing in order to invest in long-deferred expansion and capital improvement plans. Although banking contacts highlighted generally stiff competition for well-qualified business borrowers, they also noted more lending opportunities. However, hiring plans were mixed, with some financial institutions expecting to expand their payrolls significantly and others mentioning possible layoffs. In the District's Internet and digital media sectors, mergers and acquisitions activity stepped up in recent months. However, the pace of initial public offerings remained slow, and both venture capital and private equity activity were relatively weak.