Beige Book Report: San Francisco
January 15, 2014
Economic activity in the Twelfth District expanded at a moderate pace during the reporting period of late November through late December. Price inflation was subdued for most final goods and services, and upward wage pressures were modest overall. On balance, holiday retail sales increased relative to the year earlier. Demand for business and consumer services edged up. District manufacturing activity advanced. Output in agricultural and resource-related industries expanded. Demand for residential real estate climbed further, and commercial real estate activity improved. Reports from financial institutions indicated that loan demand increased.
Prices and Wages
Price inflation for most final goods and services remained subdued on net. Contacts noted that some firms expect benefit-related cost increases, which may be passed through to final prices this year. Food industry contacts noted ongoing price gains for shrimp but sustained price decreases for other items, such as beef and coffee. Prices for branded drugs trended up as producers attempted to maximize revenues before facing a potential increase in competition from generic brands. Prices firmed for some construction-related inputs, including lumber, insulation, and asphalt. A few contacts mentioned slight concerns about deflation prospects.
Upward wage pressures were modest overall. Many contacts observed wage gains of 2 to 3 percent in 2013 and projected a similar increase in 2014. However, contacts pointed to above-average wage growth in certain metropolitan areas, particularly those that have experienced robust employment growth in recent months. High-skilled workers in the technology industry experienced relatively strong wage gains. Most contacts indicated that end-of-year bonuses were flat compared with 2012.
Retail Trade and Services
Despite a short holiday shopping season in 2013, many retailers reported that holiday retail sales were up over 2012. However, contacts also noted that the level of promotional activity in 2013 exceeded that in 2012. Traditional brick-and-mortar retailers faced fierce competition from online vendors, and in-store sales were soft relative to online sales. Sales of home furnishings were robust, but sales of electronics, including televisions, personal computers, and cameras, were weaker than in recent years. Some contacts expect the market for personal computers to stabilize in 2014. While some retail grocers were hesitant to build up inventories prior to the holiday season in anticipation of weak demand, year-over-year sales in most areas exceeded expectations. New auto sales were robust while used auto sales were more moderate. Auto dealers expressed a positive outlook for sales in the year ahead.
Demand for business and consumer services edged up. Strong demand for cloud services supported solid overall business conditions for providers of information technology services. Contacts in the quick-service and casual dining segment of the food service industry noted that sales expanded over the prior year, albeit at a slower pace than last year. Providers of health-care services were uncertain in their outlook for consumer demand. Travel and tourism activity stepped down in Hawaii and remained somewhat weak in Las Vegas.
Manufacturing
District manufacturing activity advanced during the reporting period of late November through late December. Semiconductor producers noted that business conditions improved gradually. Contacts from the commercial aerospace industry maintained a positive outlook based on strong financial performance of firms and further expansion in the backlog of orders for commercial aircraft. Defense-related manufacturers remained cautious, with many firms expecting to lay off workers as a consequence of delays or cutbacks in production contracts related to sequestration. Producers of pharmaceutical products were upbeat about growth prospects in the industry this year. A wood products manufacturer noted that orders and production activity expanded, spurring increased hiring. Relative to the previous reporting period, conditions held steady for steel producers; contacts reported stronger conditions for manufacturing of automobile and aircraft-related inputs than for nonresidential construction inputs. In addition, capacity utilization for steel producers was unchanged.
Agriculture and Resource-related Industries
Output in agricultural and resource-related industries expanded on balance. Demand remained strong for most crop and livestock products. A healthy corn harvest in the District contributed to a decline in feed costs. Water resources were adequate in most areas. Demand for petroleum and gasoline was strong, with contacts reporting the highest deliveries by refineries in three years. Builders noted that timber supplies were sufficient to meet rising demand. However, in some areas, availability was limited due to seasonal weather factors. Sales of electricity and gas to industrial customers ticked up, and power companies reported ample energy inputs.
Real Estate and Construction
Demand for residential real estate climbed further, and commercial real estate activity improved. Home prices increased further across most of the District. Prices stagnated in selected spots, with some contacts citing seasonal factors. The pace of home sales picked up in a few areas that had seen a drop-off earlier in the year. However, some builders were concerned that further increases in mortgage interest rates would dampen home sales. Some contacts reported strong growth in stand-alone and condominium residential construction, and increases in permit issuance suggest that growth will be sustained in 2014. Public infrastructure projects, as well as a large number of high-rise commercial construction projects, have been announced or are under way in Honolulu, Los Angeles, and the San Francisco Bay Area.
Financial Institutions
Reports from financial institutions suggest that overall loan demand increased. Lending grew robustly in selected areas, and some regions that had experienced declining loan volumes for several years saw a modest uptick. Several contacts also reported an increase in projects in planning stages and expect healthy loan growth this year. However, contacts from other areas reported that businesses remain cautious about the future and desire little credit, perpetuating substantial competition for high-quality commercial borrowers. Contacts continued to observe instances of other financial institutions relaxing their underwriting standards to retain or capture loan business. In the District's Internet and digital media sectors, mergers and acquisitions activity was moderate. The pace of initial public offerings slowed, following a surge of activity earlier last year. Private equity activity was on par with recent months, and venture capital financing in the third quarter of 2013 reached its highest volume since mid-2007.