Beige Book Report: San Francisco
April 16, 2014
Economic activity in the Twelfth District continued to improve moderately during the reporting period of mid-February through early April. Upward pressures on prices and wages were quite modest overall. Demand for consumer goods improved slightly relative to the prior reporting period, while demand for business and consumer services was mixed. The manufacturing industry appeared to gain some momentum. Demand for agricultural and resource-related products was largely stable, but weather-related factors held back production in some areas. Activity in residential and commercial real estate markets advanced further. Banking contacts reported that loan demand increased overall, notably from small business borrowers.
Prices and Wages
Price inflation remained subdued for most final goods and services. Contacts observed modest increases in dairy and protein prices. Reduced availability of water as a consequence of the drought in California is expected to put upward pressure on the prices of some fruits and vegetables in coming months. Prices edged up for some construction-related inputs, including wood and insulation. Reports indicated that wheat and coffee prices dropped. Final prices for steel products also fell.
Wage gains remained quite modest overall, but some contacts noted increases for certain occupations and in certain areas. Contacts observed rapid gains in compensation for software developers and engineers. As the cost of living climbed in major metropolitan areas, especially the San Francisco Bay Area, contacts reported stronger wage pressures for entry-level positions. The prospect of rising minimum wages triggered concerns about possible future labor cost increases for contacts in agricultural and construction businesses.
Retail Trade and Services
Retail sales improved a bit relative to the previous reporting period. Retailers continued to observe increasing online sales and declining traffic at malls. Retail grocers noted that the growth of e-commerce and the entry of new firms into the industry have made the environment extremely competitive, and, as a result, some firms have shifted their product offerings in an effort to preserve gross margins. For example, one contact noted that traditional brick-and-mortar stores reduced inventories of baby products, which consumers tend to buy online. Reports from auto dealerships in the 12th District highlighted strong sales in the early part of the year, and contacts expect auto sales to remain strong over the next couple of years. Most contacts project consumer spending overall will improve or stay the same over the next 12 months.
Demand for business and consumer services was mixed. Reports indicated healthy overall conditions in the technology industry, with particularly strong demand for services related to network security, data analytics, and cloud-based infrastructure. Food service industry contacts noted that monthly same-store sales and transaction counts declined, especially at family and casual dining establishments. Providers of health-care services highlighted historically weak demand for semi-elective dermatological and allergy-related procedures. Contacts noted that the level of Hawaiian travel and tourism activity remained high in early 2014, although it was lower compared with the same period a year earlier.
Manufacturing
District manufacturing activity appeared to gain some momentum during the reporting period of mid-February through early April. The electronic components industry expanded at a pace consistent with its historical average. The sustained backlog of orders for commercial aircraft supported growth in the commercial aerospace industry. Launches of innovative products buoyed growth in the pharmaceutical industry. Defense-related manufacturers pointed to a recent pickup in new orders as a source of optimism. A utilities provider noted that year-over-year gas and electricity use expanded for various manufacturing customers, including food processers, metal producers, and wood product fabricators. Contacts noted that demand for steel production inputs improved from both domestic and foreign sources, particularly from Southeast Asia. Capacity utilization rates at U.S. steel mills held steady at low levels.
Agriculture and Resource-related Industries
Demand for most agricultural and resource-related goods was largely stable, but the supply was somewhat constrained as several weather-related factors held back production. Demand was stable or up for assorted crop and livestock products and particularly robust for dairy items. However, storms in parts of the District disrupted transportation of winter vegetables. Contacts' concerns about water costs and availability mounted, and limited water for irrigation contributed to decreased yields of annual crops, including tomatoes, greens, and onions, in California's Central Valley. Water shortages led some farmers to reduce cattle herd sizes as well. Pork production fell as some hogs in the District contracted a fatal virus. Year-over-year growth of crude oil production increased robustly, outpacing year-over-year growth in demand for petroleum and gasoline.
Real Estate and Construction
Activity in residential and commercial real estate markets advanced further. Most contacts expect demand for residential real estate during the first half of 2014 to strengthen relative to the second half of 2013. Home prices across the District continued to move up. The pace of home sales varied across geographic areas; some contacts in California noted an uptick, while contacts from Washington observed a more sluggish pace. Construction of both single and multifamily units improved across the District, and almost all contacts expect housing starts to improve over the next 12 months. However, contacts in Utah, Washington, California, and Hawaii anticipated potential shortages of construction labor. Robust leasing activity in large urban areas drove up rental rates for both residential and commercial properties. Vacancy rates for commercial and industrial space were either stable or down in many areas. Contacts from Oregon noted that public-sector construction activity was somewhat slow, but in other areas such as the San Francisco Bay Area, Southern California, Honolulu, and Seattle, public infrastructure projects and a number of high-rise commercial construction projects have been announced or are under way.
Financial Institutions
Loan demand increased overall. Consumers exhibited solid demand for home and auto loans. Some contacts observed an uptick in loan demand from small businesses and increased loan growth at community banks. However, contacts noted that the availability of credit for small businesses largely remained limited to higher-quality borrowers. Lenders, flush with liquidity, continued to compete vigorously on rates and terms for such borrowers. Contacts noted that some financial institutions also relaxed underwriting standards in an effort to win new business or maintain existing business relationships. The pace of initial public offerings in the District's Internet and digital media sectors continued to pick up. Reports indicated that private equity and venture capital financing activity was strong in late 2013 and has appeared to hold steady in early 2014.