Beige Book Report: San Francisco
June 4, 2014
Economic activity in the Twelfth District continued to improve moderately during the reporting period of early April through mid-May. Price inflation and upward wage gains remained modest overall. Retail sales picked up a bit relative to the prior reporting period, while demand for business and consumer services was mixed across industries. Manufacturing activity edged up. Demand for agricultural and resource-related products increased, but various factors suppressed output. Housing market activity slowed in some areas, but commercial real estate conditions generally improved. Reports from financial institutions indicated that loan demand increased and credit quality remained strong.
Prices and Wages
Price inflation remained quite modest for most final goods and services. Prices of raw materials used in construction rose slightly on balance. Restaurant industry contacts indicated that meat and seafood prices increased significantly. With cattle prices at record highs, the price of beef is projected to rise further through the second quarter. Food price inflation more broadly has picked up because of the drought in California.
Upward wage pressures were limited overall, but contacts continued to observe relatively large increases in compensation for certain occupations. Contacts reported increased wage pressures in the construction industry as a consequence of shortages of qualified construction management personnel, particularly in fast-growing urban areas. Software developers and engineers continued to experience rapid compensation growth. Most firms expect wage gains of 2 to 3% in 2014.
Retail Trade and Services
Consumer spending was up slightly relative to the previous reporting period. Reports indicated that the pace of sales at some department stores was slow, prompting caution for inventory accumulation. Some retailers have announced strategic store closures in favor of online distribution. Contacts noted that demand for autos and home-related goods was relatively strong. Auto dealerships reported robust sales growth for new cars and more modest growth for used vehicles. On balance, contacts remained optimistic about growth prospects for consumer spending over the next 12 months.
Demand for business and consumer services was mixed. Contacts pointed to healthy overall conditions in the technology services sector, as businesses throughout the economy expand their investments in software, security, cloud, big data, and mobile products. In the food services industry, monthly same-store sales and transaction counts declined further, although the declines in April were less severe than in the preceding three months. Providers of health-care services expect demand to increase as more individuals gain health insurance coverage through provisions of the federal Affordable Care Act. The level of Hawaiian travel and tourism activity dipped down in recent months relative to the same period last year.
Manufacturing
District manufacturing activity edged up during the reporting period of early April through mid-May. Demand for semiconductors improved modestly. Contacts expect utilization rates at semiconductor factories to rise during the second half of the year. Reports from the commercial aircraft and metals fabrication industries noted that production remained high due to sustained backlogs, although new orders have been coming in slowly. Many drug manufacturers experienced modest sales growth, driven largely by the introduction of innovative products rather than existing drugs. Defense-related manufacturers ratcheted down their sales outlook relative to the previous Beige Book, as the pace of new orders slowed. A manufacturer of renewable energy equipment noted that capacity utilization ticked up. A utilities provider reported increasing sales of electricity and natural gas to industrial customers, including manufacturers of wood products, aerospace parts, and refined metals.
Agriculture and Resource-related Industries
Demand for assorted fruits and vegetables and livestock products increased, but production in agricultural and resource-related industries was uneven across the District. Concerns about water costs and availability mounted in some areas. Contacts noted that drought conditions in California and Arizona led to reduced herd sizes and decreased plantings of annual crops, including tomatoes and rice. On the other hand, farmers in Idaho anticipated adequate water supplies and planted grains, hay, and potatoes ahead of schedule, expecting the level of plantings in 2014 to be similar to 2013. In general, dairy operations benefited from low feed costs. Pork production remained weak as a fatal virus swept through pig farms in some areas. Contacts noted that demand from China for fertilizer and logs was strong. Year-over-year crude oil production expanded robustly and outpaced demand growth.
Real Estate and Construction
Demand for homes stepped down, while activity in commercial real estate markets expanded. Home prices across the District continued to move up, although at a slower pace in parts of Arizona, Idaho, and Washington relative to the previous Beige Book. The pace of home sales slowed or declined in some areas as well, but most contacts expect sales to pick up later this year. Contacts indicated that severe weather conditions and low expected future growth of house prices were the most important factors holding back home sales on a national level. Reports on current construction of residential properties varied substantially across geographic areas, although the vast majority of contacts expect housing starts in their region to rise over the next 12 months. Commercial real estate activity improved, with lower vacancy rates reported in many areas. Contacts reported robust demand for large blocks of high-quality commercial space in the San Francisco Bay Area. In several regions, 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, and most contacts noted that credit quality remained strong. Consumers exhibited solid demand for auto loans. New home mortgage and refinance activity was largely stable, but contacts noted that first-time homebuyers faced challenges qualifying for mortgages. Relative to a year ago, contacts noted that less creditworthy individuals have been applying for refinancing. A few contacts observed an uptick in loan demand from small businesses and increased loan growth at community banks. Lenders competed vigorously on rates and terms for high-quality borrowers, and contacts noted that some financial institutions relaxed underwriting standards in an effort to win new business or maintain existing relationships. The pace of initial public offerings remained high in the Internet and digital media sectors but slowed a bit in the broader technology sector. Reports indicated that the value and volume of private equity financing picked up.