Beige Book Report: San Francisco
January 14, 2015
Economic activity in the Twelfth District continued to improve moderately during the reporting period of mid-November through late December 2014. Overall price and wage inflation remained modest. Retail sales and demand for business and consumer services increased moderately. Overall manufacturing activity picked up, while agricultural conditions were mixed. Real estate activity advanced, mainly in the commercial construction sector. Lending activity was mixed.
Prices and Wages
Overall price inflation remained modest during the reporting period. In general, input costs were fairly stable. However, increases in the cost of various construction materials were widespread. Shortages of truck drivers contributed to increases in shipping costs in some areas, even amid fuel price declines. Supply constraints boosted wholesale prices of produce and meat. Effects on retail prices tended to be minimal, but selected areas saw significant jumps. Wholesale prices of agricultural commodities, such as grains, were stable or declined. Oil price declines contributed to a drop in prices in the energy-intensive aluminum production sector. Vigorous online competition exerted downward price pressures in selected retail clothing segments.
In general, wages continued to increase at a modest pace during the reporting period. Several contacts reported that wages were flat or had increased at about the rate of price inflation in their area. Labor shortages boosted wages of truck drivers, aerospace engineers, and construction machinists and framers. Regarding total compensation, some contacts noted that increases in employee medical insurance premiums tended to offset any increases in wages and salaries.
Retail Trade and Services
Overall retail sales activity grew moderately during the reporting period. Holiday spending tended to be higher than in recent years and notably so in some areas. Sales met most expectations, with few reports of excess inventories. Higher-priced items, electronics, men's and women's clothing, cosmetics, and accessories sold well. Online sales growth exceeded in-store growth. Auto sales were robust in some areas, but came in somewhat below expectations in other regions. Contacts attributed stronger overall holiday sales to continued improvement in employment conditions and decreases in gas prices. Many contacts are optimistic that these developments will continue to spur retail spending in 2015.
Demand for business and consumer services grew moderately during the reporting period. Demand for cloud computing services continued to increase. Sales in the limited service segment of the restaurant sector slowed a bit in November but ticked back up as the holiday season progressed. Holiday spending in this segment was higher than in 2013, and contacts expect that lower gas prices will continue to boost customer traffic in the new year. Travel and tourism to Southern California grew substantially in 2014, and contacts expect this trend to continue into 2015. In particular, travel from China grew rapidly in 2014, and new extended visa rules for Chinese visitors should encourage even more tourism. Improved snow conditions and declines in gas prices contributed to a year-over-year increase in skier visits to the eastern Sierra Nevadas during the reporting period. Spending per visitor at ski destinations also increased.
Manufacturing
Overall District manufacturing activity grew moderately during the reporting period. Contacts reported that energy demand from manufacturers was solid. Biotechnology and pharmaceutical manufacturing earnings were healthy. Semiconductor producers reported year-to-date worldwide sales increased 10 percent from the same period a year earlier, while U.S. sales were up 12 percent. Commercial aircraft production was strong. Order backlogs remained sizable, but contacts were somewhat concerned that the decline in oil prices may cause airlines to start deferring purchases of more fuel-efficient planes. Sequestration continued to erode revenues and capacity utilization in the defense aerospace sector, as the rate of new program starts declined. Increases in the pace of commercial construction boosted domestic demand for recycled steel and metals. However, the stronger dollar and weaker foreign demand reduced exports of these materials.
Agriculture and Resource-Related Industries
Agricultural conditions in the District were mixed during the reporting period. Declines in petroleum prices contributed to reductions in the cost of gas and fertilizer. However, some farmers also faced lower prices for their commodities. In some areas, restaurants purchased fewer vegetables. Dairy farm profits increased significantly over the past year, but milk futures prices declined recently. Uncertainty regarding future water availability in California slowed new plantings of permanent crops. Declines in demand from Japan and China contributed to a reduction in exports of logs. However, modest increases in the pace of new home construction in some areas slightly elevated domestic demand for logs.
Real Estate and Construction
Real estate activity advanced during the reporting period. The pace of new single-family home construction increased modestly in some areas of the District, with relatively more activity in urban areas than in rural areas. However, some contacts cited increasing costs of materials and labor and a shortage of available lots in some areas in their projections that the pace of new construction will fall back in 2015. Indeed, these contacts reported that the pace of construction permit issuance has declined. A few contacts indicated that home sales picked up a bit in December, but some contacts reported that insufficient inventory is damping the pace of sales. Multifamily residential real estate construction activity was strong in many areas of the District during the reporting period. Retail, office, industrial, or infrastructure projects also were widespread. Most contacts viewed the pace of construction as healthy. However, one contact reported that some investors are concerned that, given planned construction, there soon will be an excess supply of multifamily units in their area.
Financial Institutions
Lending activity in the District was mixed during the reporting period. Some contacts reported a significant increase in loan demand, mostly in the construction segment. Other contacts reported that overall loan demand remained somewhat weak. In some areas, businesses with sufficient cash turned towards internal financing. Deposit growth was strong in many areas, and banks have ample liquidity. Stiff competition for high-quality borrowers exerted downward pressure on loan interest rates, and declines in net interest margins were widespread. Some contacts reported that compressed margins contributed to increased acquisitions as smaller banks combined in order to reduce operating costs.