Beige Book Report: San Francisco
October 15, 2014
Economic activity in the Twelfth District continued to improve moderately during the reporting period of mid-August through late September. Overall price and wage inflation remained modest. Retail sales grew slightly, and demand for business and consumer services increased moderately. Overall manufacturing activity picked up, while agricultural conditions were mixed. Real estate activity advanced, but growth in the residential sector varied across the District. Loan demand increased moderately.
Prices and Wages
Overall price inflation remained modest during the reporting period. Contacts reported that consumers are very price conscious. A shortage of cattle drove up beef prices, and the California drought boosted nut prices. Although operating costs, commodity costs, and packaging costs in the wholesale food industry increased slightly, contacts reported that competition prevented these cost increases from being passed on to retail prices for most food items. Electric utility input prices increased modestly during the reporting period. Prices in the technology sector decreased for both businesses and consumers, driven by competitive pressures and technological advances. Prices of certain building supplies, including wallboard, wood, cement, and insulation increased a bit. Contacts reported that restaurant prices increased slightly in July and August in some states in response to minimum-wage increases. Las Vegas hotel room rates for August were higher than in any August since 2007.
In general, wages continued to increase at a modest pace. Most contacts reported that wages and salaries were up about 2-1/2 percent to 3 percent compared with last year. Wages for software developers, for workers in skilled trades, and, in some areas, for experienced construction workers increased faster. Declines in defense spending led some aerospace manufacturers to institute greater employee cost-sharing on benefits.
Retail Trade and Services
Overall retail sales grew slightly during the reporting period. Sales of higher-end clothing picked up, but somewhat less than respondents expected. Food sales increased a bit, and contacts reported that grocery inventories were stable. However, the droughts in California and other parts of the West resulted in lower-quality produce. Revenue at hobby game stores showed strong growth. Contacts characterized consumers as still cautious in their spending habits but expect retail demand to strengthen further soon.
Demand for business and consumer services increased moderately. Demand for legal services picked up in some areas, in connection with rising real estate activity. Demand for advertising services declined, but businesses increased spending on cloud computing services. Contacts reported that industry leaders expect information technology spending to accelerate in 2015, driven by spending on big data and security services, as well as on cloud computing. Casual dining picked up in August, the first monthly increase in sales in that segment this year. Contacts expect continued slow growth of casual dining in the coming months. Las Vegas year-to-date visitor volume increased moderately over 2013. Total occupied room nights and occupancy percentage at Las Vegas hotels climbed.
Manufacturing
Overall District manufacturing activity picked up during the reporting period. Worldwide semiconductor sales were up markedly over the previous year. Recent sales of manufactured steel and recycled metals also were up over the same period a year earlier. Revenue for biotech and pharmaceutical manufacturers grew notably since the previous reporting period. Industry contacts detected stronger demand for pharmaceuticals stemming from the increase in the number of insured people, and they expect healthy earnings growth to continue. Demand for medical equipment was also very strong. Aerospace and defense capacity utilization declined since the prior reporting period. In contrast, contacts reported that capacity utilization among commercial aircraft producers increased to record levels.
Agriculture and Resource-related Industries
Agricultural conditions in the District were mixed during the reporting period. Continuing droughts in California and parts of Washington and Idaho elevated water costs and depressed harvests of cotton and various grains, vegetables, nuts, and legumes. Farmers increased the number of acres lying fallow and reduced herd sizes. However, low corn prices and stable fertilizer and machinery prices benefited dairy and feedlot operations. Milk prices increased, and export demand for hay from the West Coast reached an historical peak. Sales of electricity and natural gas to the manufacturing sector have increased markedly since the beginning of the year. Agricultural land prices remained relatively high.
Real Estate and Construction
Real estate activity in the District advanced, but growth trends in the residential sector were uneven across the District. Contacts reported that in a few areas, prices of single-family homes accelerated, while in other areas the pace of price increases declined. In a few areas, year-to-date single-family housing starts were down compared with the same period in 2013. Sales of single-family homes were stable during the reporting period. Overall, multifamily construction and development activity remained strong. Commercial office demand was robust in San Francisco and Silicon Valley, and rents increased compared with the previous reporting period. In Los Angeles, commercial real estate construction picked up.
Financial Institutions
Overall loan demand increased moderately since the previous reporting period. In some areas where lending activity had been stagnant for a long time, demand for commercial and industrial and commercial real estate loans picked up. Other areas that had already been experiencing growth in loans showed continued expansion. Asset quality improved since the previous reporting period, and contacts reported that current overall loan performance was comparable to that seen before the recession. Competition among lenders for customers with high-quality credit remained intense. Contacts reported that this competition had depressed interest rates on loans, reducing net interest margins and profitability.