Beige Book Report: San Francisco
March 5, 2014
Economic activity in the Twelfth District expanded at a moderate pace during the reporting period of late December through mid-February. Price increases for most final goods and services were minimal, and wage gains remained quite modest on net. The pace of retail sales stepped down, although demand for business and consumer services rose. District manufacturing activity was mixed. Production activity in agricultural and resource-related industries expanded on balance. Activity in residential and commercial real estate markets continued to expand. Financial institutions reported that loan demand increased overall.
Prices and Wages
Contacts observed minimal price increases for most final goods and services. Fruit and produce prices moved up, and many contacts expect food and water price inflation to pick up in the near term as a consequence of the drought in California. Prices edged up for some construction-related inputs, including wood, insulation, and cement. A higher supply of recycled metals in Asia resulted in lower exports of such metals from the United States, which contributed to downward pressure on U.S. steel input costs and on final prices for steel products.
Wage gains remained quite modest on net, although contacts pointed to signs of building upward wage pressures in areas with particularly strong regional economic activity. Wages for some worker types, notably software developers and engineers, continued to increase rapidly. Reports suggested that the rising cost of living in the San Francisco Bay Area may be pushing up wage pressures.
Retail Trade and Services
The pace of retail sales stepped down. Traditional brick-and-mortar retailers faced fierce competition from online vendors, but recent reports indicated that both in-store and online sales were soft. Retail grocers observed increasing price sensitivity on the part of consumers and noted that even upscale retail grocery establishments experienced pressure on margins. Despite the recognition of some weakness in current conditions, most contacts expect consumer spending to improve or stay the same over the next 12 months. In particular, contacts were optimistic in their outlook for spending on autos and home furnishings.
Demand for business and consumer services rose. Demand for cloud computing services remained strong, although contacts noted that many small and medium-sized businesses have continued to invest in their own data centers. Contacts noted that activity in the food service industry continued to improve. Providers of health-care services expect increased demand for services as a result of expanded coverage under the Affordable Care Act. The level of Hawaiian travel and tourism activity in 2013 surpassed past-year records despite a slowdown in the fourth quarter. Contacts also indicated that tourism picked up in Southern California, with occupancy rates in San Diego hotels reaching historic highs. Overall tourism conditions in Las Vegas improved slightly.
Manufacturing
District manufacturing activity was mixed during the reporting period of late December through mid-February. Contacts noted that year-over-year growth in the electronic components industry resumed after several quarters of decline. Semiconductor sales hit record levels in 2013 and are expected to grow modestly in 2014. The sustained backlog of orders for commercial aircraft supported growth in the commercial aerospace industry, although contacts expect the pace of new orders to slow this year. Defense-related manufacturers reported sluggish overall conditions, and they expect sales, new orders, and capacity utilization to trend downward. Wood and steel product manufacturers noted that extreme weather conditions across the country created problems along their supply chains. Demand for steel used in private nonresidential construction projects continued to improve slowly, although contacts reported low capacity utilization rates at steel mills.
Agriculture and Resource-related Industries
Production in agricultural and resource-related industries expanded on balance. Demand was stable for most crop and livestock products. Concerns about water costs and availability may cause farmers in the California Central Valley to scale back planting. Contacts expect growers to allocate water to more permanent plantings, such as almond and walnut orchards, before allocating water to annual crops, such as corn. In addition, dairy and meat producers may face higher feed costs due to water shortages. Year-over-year crude oil production increased robustly, although consumer demand for petroleum and gasoline rose more modestly. Demand for electricity and gas by industrial customers grew further.
Real Estate and Construction
Activity in residential and commercial real estate markets continued to expand. Home prices across most of the District climbed further, albeit at a bit slower pace, and contacts indicated that the pace of home sales was below historical averages in many areas. Contacts noted that while mortgage application volume in Idaho increased, completed sales transactions dropped. Most contacts expect homebuilding activity to strengthen this year. Occupancy rates for commercial real estate trended up in some areas, and increasing permit activity and sales of empty lots suggest that commercial construction may pick up further. In other areas, contacts noted that existing available square footage, especially in retail-oriented properties, has stifled new construction. Public infrastructure projects, as well as a large number of high-rise commercial construction projects, have been announced or are under way in Honolulu, Seattle, Los Angeles, and the San Francisco Bay Area.
Financial Institutions
Financial institutions reported that loan demand increased overall. Lending grew robustly in selected areas, and contacts noted that asset quality improved at most banks. Contacts noted that credit remains cheap and available for large firms but less accessible by smaller businesses. Ample liquidity in the marketplace continued to perpetuate substantial competition among lenders for business from high-quality commercial borrowers. Contacts indicated that some financial institutions relaxed underwriting standards in an effort to win new business or maintain existing business relationships. In the District's Internet and digital media sectors, there were several notable mergers and acquisitions during the reporting period, and the pace of initial public offerings picked up slightly. Private equity activity was mostly stable, and venture capital financing was strong. The volume of venture capital deals in the second half of 2013 reached mid-2007 levels, and the value of deals surged in the fourth quarter of 2013.