Beige Book Report: San Francisco
October 16, 2013
Economic activity in the Twelfth District expanded at a modest pace during the reporting period of late August through early October. Price pressures were limited for most final goods and services, and upward wage pressures remained modest overall. Retail sales were a bit soft, while demand for business and consumer services was mixed. District manufacturing activity inched up. Agricultural production and sales expanded. Demand for housing advanced, and commercial real estate activity gained. Reports from financial institutions indicated that loan demand rose.
Prices and Wages
Price pressures were tame for most final goods and services. While wheat prices have increased, contacts in the agricultural and restaurant industries mentioned softening prices of some other commodities, particularly beef. Some retail grocers were reluctant to raise shelf prices, citing consumers’ price sensitivity. Technology industry contacts recognized stronger downward pressure on prices resulting from more aggressive competition lately. Reports indicated upward pressure on prices of various construction inputs, including wood and cement.
Upward wage pressures remained modest overall. Slack in the labor market restrained wage gains in most sectors, occupations, and regions. Firms in various industries continued to compete vigorously for a limited pool of qualified workers, including construction supervisors and software developers, spurring significant wage growth. In particular, reports noted that the pace of wage gains for software developers might have even picked up in recent months. Contacts indicated that some small businesses have boosted compensation packages to minimize voluntary staff turnover.
Retail Trade and Services
Aside from spending on big-ticket items and certain technology products, retail sales were a bit soft. Contacts pointed to evidence of pent-up demand and attractive financing opportunities spurring households to purchase big-ticket items, particularly autos and housing-related goods. Contacts in the technology industry expect a near-term pickup in spending on various hardware and software products, including storage, cloud computing-related infrastructure, and enterprise security software. Retail grocers and department store contacts noted flat and sluggish sales, respectively. A beverage retailer also noted that consumer demand was stagnant. On net, luxury items and premium brands sold relatively well, but growth slowed for other categories of full-priced items as consumers continued to search for the lowest prices.
Demand for business and consumer services was mixed. Technology contacts noted that, although demand for various technology services ticked up in the U.S. and near-term expectations remain positive, demand in Europe appeared to slip. Reports indicated that demand for discretionary health-care services was somewhat weak. Restaurant industry contacts noted ongoing softness in same-store sales in the quick-service restaurant and casual dining segments of the industry. Travel and tourism activity in Hawaii maintained its solid pace of growth, although contacts noted weaker visitor arrivals from the western United States recently. Contacts noted year-over-year declines in Las Vegas gaming revenues, as the tourism industry there continued to face challenges.
Manufacturing
District manufacturing activity appeared to inch up during the reporting period of late August through early October. Contacts noted that activity along the supply chain for electronic components improved, and capacity utilization remained near its historical average. Uncertainty about fiscal policy triggered reductions of new orders and revenue in the defense industry. Providers of pharmaceuticals noted increased activity in the biotech drug industry. A wood products manufacturer indicated that demand eased over the summer, and a metal manufacturer noted that production activity slowed a bit. However, demand for steel products used primarily in nonresidential construction edged up further, and steel producers reported that overall capacity utilization was mostly stable. In particular, reports indicated an ongoing trend of stronger capacity utilization for steel manufacturing of automobile and aircraft-related inputs than for nonresidential construction inputs.
Agriculture and Resource-related Industries
Agricultural and resource-related sales and production activity expanded in the District. Demand remained strong for most crop and livestock products. Contacts noted that competition for grapes in the California wine industry contributed to higher prices for grapes, which passed through to raisin prices, reducing sales and increasing inventories of raisins. Water availability was adequate on net but limited in some areas. Overall demand for oil products ticked up. Refinery utilization rates, total refinery inputs, and gasoline production activity increased since the previous reporting period. The stock of stored natural gas was up as well compared with the previous reporting period, but notably down year-over-year. Utility providers reported that consumer energy usage patterns were consistent with ongoing modest growth in consumer spending.
Real Estate and Construction
Housing demand advanced overall, and commercial real estate activity improved. Home prices and sales climbed further in many District cities. Reports indicated that residential permit issuance increased in parts of California but decreased in some areas of the Pacific Northwest. Construction activity ramped up on net, although in some areas, new building activity was held back by factors such as poor lot availability and shortages of skilled construction workers. Contacts indicated that multifamily residential construction projects increased. Rental rates for commercial real estate were stable by some reports and up according to others. Technology and medical services firms in particular drove the growth in demand for commercial real estate in the San Francisco Bay Area and Seattle.
Financial Institutions
Financial institutions indicated that loan demand rose. Most contacts reported increased lending. Some small businesses in areas with strengthening local economic conditions sought increased financing for equipment or real estate purchases. Some banks reported slower mortgage origination and especially refinancing activity in response to higher interest rates, although rising home price appraisals have sparked increased activity in home equity lending. Reports highlighted ample bank liquidity and substantial competition for high-quality commercial borrowers. Regional and community banks aggressively sought out well-qualified small business borrowers. Demand for asset management and investment advisory services was strong. In the District’s Internet and digital media sectors, mergers and acquisitions and venture capital activity grew in terms of both deal value and volume, and the pace of initial public offerings picked up substantially. Private equity financing activity, on the other hand, was mostly flat.