Beige Book Report: San Francisco
March 4, 2015
Economic activity in the Twelfth District continued to improve moderately during the reporting period of early January through mid-February. Overall price inflation remained modest, while wage inflation was moderate. 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 multifamily construction sector. Lending activity increased modestly.
Prices and Wages
Overall price inflation remained modest during the reporting period. Reports of stable prices were widespread across the District. Several contacts observed that businesses in general appear to be using any decreases in input prices stemming from oil price declines to increase profit margins rather than decrease final prices of their products. However, contacts did note that the fuel surcharge for courier services and for delivery of wood products had declined. The price of sheetrock increased dramatically in some areas during the reporting period. Prices of branded and specialty pharmaceuticals increased markedly. Competition from imports contributed to a dramatic decline in scrap steel prices.
In general, wages increased at a moderate pace during the reporting period. While several contacts reported that wages had increased at about the rate of price inflation in their area, several others noted slightly faster overall wage growth. Wage pressures continued to be relatively strong for various information technology occupations. Contacts submitted scattered reports of increasing labor costs in construction. In some areas, upward wage pressures appeared for certain health-care positions, including registered nurses and pharmacists. Some tourist areas saw intensified bidding for restaurant workers.
Retail Trade and Services
Overall retail sales activity grew moderately during the reporting period. Automobile sales were strong, and demand for SUVs was robust. Some contacts reported new data on holiday sales since the last reporting period. Merchants in some areas showed very strong holiday sales and would have seen even larger volumes if not for delays receiving merchandise caused by labor disputes at West Coast ports. In other regions, holiday sales were not quite as strong as expected, and, as a result, retailers in those areas still have a little excess inventory. Contacts reported that most retailers are optimistic about growth over the coming year, citing decreases in gas prices and improvements in employment conditions. However, the outlook is weaker in areas where unemployment remains relatively high.
Demand for business and consumer services grew moderately during the reporting period. Travel and tourism to Southern California increased compared with the same period a year ago. The number of international casual tourists climbed, and spending was strong in airport duty-free shops, despite the increase in the value of the dollar. Advance hotel bookings from the business segment declined somewhat. Overall travel and tourism activity in Hawaii declined a bit from the same period last year. Contacts from various areas reported that spending at restaurants increased and that new establishments opened. Some contacts observed an increase in physician and hospital visits and surmised that the growth in the number of insured patients under the Affordable Care Act has spurred demand. However, others, citing the growth of high deductible health insurance plans, observed a decline in demand for health care services.
Manufacturing
Overall District manufacturing activity grew moderately. Contacts reported strong energy demand from aerospace, metals, and wood products manufacturers. Biotechnology and pharmaceutical manufacturing earnings were healthy. Orders for and deliveries of commercial aircraft increased in 2014, and 2015 is expected to be a record year for sales. U.S. Department of Defense budget challenges have reduced new orders and diminished capacity utilization in the defense aerospace sector. Reduced demand for equipment used in mining and the energy sector contributed to softening orders for recycled steel and metals. However, demand for these products from the auto industry and the commercial construction sector remained robust.
Agriculture and Resource-Related Industries
Agricultural conditions in the District were mixed during the reporting period. Drought conditions and unseasonably warm weather in parts of the District contributed to lower yields, but the associated increases in many of the prices received by farmers resulted in slightly higher revenues. Farmers remain concerned that the drought will continue, requiring them to leave more acreage fallow. Numerous contacts reported that the labor disputes at West Coast ports reduced agricultural exports, as perishable products such as fruits wasted away in storage containers waiting for shipment. Contacts also stated that the stronger dollar limited exports. Offshore demand for logs, especially from China, slowed, while domestic demand increased slightly.
Real Estate and Construction
Real estate activity advanced during the reporting period. Multifamily residential real estate construction activity remained strong in many areas of the District. Some areas anticipate that single-family home construction will soon pick up, as the pace of building permit issuance has climbed notably. In other areas, the pace of new construction remained slow, and single-family housing inventories continued to drift down. One contact commented that single-family home construction in their area has been limited to only pre-sold homes. In some relatively fast-growing areas, shortages of skilled labor are contributing to the tepid pace of construction. Several contacts reported a pick-up in the pace of single-family home sales but little change in prices. Commercial rents in the San Francisco Bay Area continued to rise even in the face of significant new construction, and rents for restaurant space in the Los Angeles area crept up. In other areas, commercial rents remained stable.
Financial Institutions
Lending activity in the District increased modestly during the reporting period. Demand for commercial real estate loans continued to climb, and demand for agricultural loans picked up. Some contacts reported that demand for small business loans strengthened, with owners beginning to expand and purchase new equipment. Demand for consumer loans other than for autos remained somewhat weak. Some contacts observed that, even with low interest rates, consumers are more cautious about taking on additional debt than at this time last year. Several contacts stated that recent declines in mortgage interest rates contributed to a small wave of refinancing activity. 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. Overall credit quality remained good, but some contacts reported that lenders in their area appear willing to relax credit standards to imprudent levels in order to capture customers.