Beige Book Report: San Francisco
July 16, 2014
Economic activity in the Twelfth District continued to improve moderately during the reporting period of mid-May through June. Overall price inflation remained quite modest, and wage pressures were well contained on net. Most contacts indicated that retail sales growth was unchanged from the previous Beige Book. Demand for business and consumer services ticked up. Manufacturing activity improved. Drought conditions contributed to reduced production of some fruits, vegetables, and livestock products. Activity in real estate markets advanced, although growth in the residential sector slowed somewhat. Loan demand increased overall.
Prices and Wages
Price inflation overall remained quite modest, although the pace of food and energy price increases appeared to pick up. Food price inflation has risen, driven by higher price inflation for beef, pork, and dairy items, as drought conditions in California constrain supplies. A utilities provider expects an acceleration in natural gas and electricity prices to occur in the near-term. Contacts indicated that the prices of some raw materials used in construction rose further. A lumber manufacturer was able to pass higher costs through to higher prices for customers.
Most contacts observed continued wage increases of 2-3 percent per year. However, in fast-growing regions, certain specialized positions for which the supply of qualified workers is scarce experienced much stronger wage gains. In addition, some contacts' firms have felt pressure to offer slightly higher starting salaries in an effort to attract talent from competitors. Several contacts pointed to rising minimum wages as a source of upward wage pressure.
Retail Trade and Services
Most contacts indicated that retail sales growth was unchanged since the previous reporting period. Sales of low-end and mid-range technology goods were strong, offsetting relatively weak sales of premium devices. Contacts noted that sales in the Internet and digital media sector increased as well, particularly for health and fitness e-books. An apparel retailer noted that inventories increased. In general, online retailers experienced strong sales and continued to put pressure on traditional brick-and-mortar retailers. Contacts observed robust demand for autos and home-related goods. Reports from auto dealerships pointed to strong sales growth for new cars, supported by aggressive financing for creditworthy borrowers. However, sales of used vehicles softened.
Demand for business and consumer services ticked up. Technology service providers reported healthy overall conditions, as both small and large businesses continued to make investments in cloud services, big data analytics, and security. Several contacts noted ongoing weak demand for dining out, as reflected in declining same-store sales in the casual dining segment of the food service industry. The level of travel and tourism activity largely held steady or improved in most major District travel destinations.
Manufacturing
District manufacturing activity improved during the reporting period of mid-May through June. Demand for semiconductors strengthened and inventories declined. Utilization rates at electronic components factories ticked up, approaching rates associated with higher capital expenditures during past business cycles. Contacts observed strong production in the commercial aircraft industry due to a sustained backlog of orders. Contacts noted that many biotechnology manufacturers experienced positive revenue trends of late and that new orders were up compared with last year. A manufacturer of renewable energy equipment noted that capacity utilization edged up, but significant capacity remains available. Defense-related manufacturers indicated that capacity utilization rates declined and the pace of new orders slowed further. A metals fabricator reported that business conditions were largely stable. Steel manufacturers noted that capacity utilization rates at mills producing inputs for the auto industry have been over 90 percent. However, at mills producing inputs for the construction industry, including nonresidential, commercial, and infrastructure projects, capacity utilization rates have been lower, in the 60-65 percent range.
Agriculture and Resource-Related Industries
Contacts indicated that drought conditions contributed to reduced production of some agricultural and resource-related goods. Contacts expressed ongoing concerns about water costs and availability. They also mentioned that it would be challenging for regulatory agencies to address issues related to pricing and prioritizing limited water supplies if low levels of rainfall and snowpack persist next year. Contacts observed reductions in herd sizes and plantings of annual crops, including tomatoes and rice. Most permanent crops, including nut and fruit trees, have not been affected yet, but some farmers may choose to reduce new plantings or remove less productive orchards. Farmers in Idaho anticipate high yields of grains, wheat, and potatoes this year. Dairy operations continued to benefit from low feed costs. Contacts noted that demand for logs slowed overall, as demand from Asian markets cooled.
Real Estate and Construction
Activity in real estate markets advanced, but growth in the residential sector has slowed since the start of the year. The rate of increase of home prices has slowed in many areas. Several contacts reported that, except at the very high end, the level of home sales also is down from a year ago. Residential construction activity picked up, especially for multifamily units and higher-priced projects. However, various contacts reported that activity has been constrained due to shortages of available lots, construction materials, and workers. Vacancy rates for commercial space were mixed. Some contacts reported low vacancy rates overall, while others pointed to high vacancy rates--particularly for retail space--in part due to transitions to online distribution. Private-sector commercial construction activity increased modestly in most areas but more robustly in the San Francisco Bay Area and Southern California. Contacts from Southern California and Hawaii also reported vigorous public-sector construction activity.
Financial Institutions
Loan demand increased overall. Commercial real estate, home mortgage, and construction loan demand expanded modestly, although contacts noted that refinance volumes declined. Demand for auto loans held steady, but some contacts noted a decline in the credit quality of consumers. In most areas, business loan demand increased only slightly and remains relatively weak. Some contacts observed a stronger uptick in loan demand from smaller businesses. Contacts continued to note that the availability of commercial credit largely remained limited to the highest quality borrowers and that lenders are competing vigorously on rates and terms for such borrowers. Contacts reported robust venture capital and private equity financing in the District. Companies backed by venture capital are receiving ample funding.