Beige Book Report: San Francisco
June 3, 2015
Economic activity in the District expanded at a moderate pace during the reporting period of early April to late May. Overall price inflation firmed somewhat, while wage gains picked up a bit but remained moderate on balance. Retail sales and demand for consumer services grew moderately. Manufacturing activity was mixed but appeared to have been flat overall. Agricultural output expanded. Real estate activity strengthened, predominantly in the multifamily sector. Lending activity expanded, largely spurred by growth in real estate financing.
Prices and Wages
Overall price inflation firmed somewhat in the District during the reporting period. Prices for both health-care services and prescription drugs rose significantly. Leisure and hospitality contacts reported that prices in that sector have fully bounced back from their recession lows, and they expect continued growth throughout the remainder of this year. Low oil prices and the strong dollar reduced input and transportation costs for agricultural producers, putting downward pressure on prices in that sector, in general. However, prices increased noticeably for pork and poultry as a result of supply disruptions.
Wage pressures varied widely but increased somewhat on balance. Some contacts in the information technology sector reported rapid wage gains for workers with specialized skills, although other technology contacts reported more limited wage growth. In the construction sector, growing competition for skilled labor has created appreciable upward pressure on wages. Wage gains for lower skilled workers were mixed, with some contacts in the restaurant and hospitality industries reporting significant increases and others reporting limited upward pressure.
Retail Trade and Services
Retail sales grew at a moderate pace. Several contacts mentioned that low fuel prices provided a tailwind for consumer spending on other products. Automobile sales grew robustly relative to the same period last year, particularly for light trucks and SUVs. Consumers exhibited strong demand for entertainment and gaming products, and some contacts reported difficulties meeting this demand growth due to inadequate availability of skilled labor. Sales of food and beverages rose, but contacts noted a shift towards lower-priced products. Business investment spending in the retail sector held largely steady, with most investment activity aimed at enhancing productivity.
Demand for business and consumer services grew further on balance. Sales expanded smartly for restaurants and hotels, particularly in Southern California, although one contact noted that fast food sales slowed slightly throughout the District. Demand for technology services continued to grow moderately, with expansion primarily evident for cloud computing, security, and data analytics products. Activity in the health-care services industry was strong with a few contacts citing the Affordable Care Act as a source of ongoing growth. Demand for legal services generally remained weak, and contacts reported that many new graduates in that field are either underemployed or working in other sectors. Capital investment among service providers was flat on balance during the reporting period.
Manufacturing
Activity in the manufacturing sector was mixed but flat overall. Contacts in the biotech and pharmaceutical manufacturing industries reported strong growth and a record level of activity in mergers and acquisitions. Sales of semiconductors picked up a bit over the reporting period. Deliveries of commercial aircraft increased, but new orders fell significantly compared with the same period last year, suggesting slower demand growth ahead. Sources in the steel industry reported that global excess supply and a strong dollar continue to restrain demand for domestically produced steel. Sales of wood products in the District remained weak, reportedly due to weak demand from other parts of the country. Capacity utilization rates among various manufacturers were down from 2014 levels and remained well below long-term averages in some cases. However, capital spending for productivity enhancements grew further, with assorted contacts noting continued spending for new technology and equipment upgrades.
Agriculture and Resource-Related Industries
Agricultural output grew but conditions remained challenging in the resource extraction sector. Contacts reported excess supply and low prices for some agricultural products, notably potatoes and dairy, reflecting global competition and an appreciated dollar that has reduced exports. In contrast, demand for livestock, notably cattle, has been strong, keeping prices and profitability high. Growers of nuts and raisins also saw strong demand, propelled in part by an increase in exports that occurred despite the elevated value of the dollar. However, drought conditions continue to strain water resources, and contacts expressed concern that this could lead to a decline in fruit and nut production during the harvest season. Capital investment in the agricultural sector expanded at a modest pace, with most spending aimed at enhancing productivity. Resource extraction activity fell as low oil prices continued to depress drilling.
Real Estate and Construction
Real estate activity expanded on balance, led by strong growth concentrated in a handful of metropolitan areas. Construction of multifamily residential structures grew at a brisk pace, with some contacts reporting vacancy rates below those observed at the peak preceding the recession that began in 2007. Single-family home sales grew at moderate rate; one contact noted that high prices in the multifamily market have led young buyers to consider single-family units. Commercial real estate construction and leasing activity grew overall, with growth concentrated in a few areas with vibrant technology sectors. Shortages of skilled labor remained a constraint on construction activity in some fast-growth areas. Expanded construction activity spurred additional equipment purchases by construction companies, including some aimed at enhancing productivity.
Financial Institutions
Lending activity in the District rose moderately over the reporting period. Demand for commercial and industrial loans grew further, accompanied by significant increases in real estate lending in some areas. One contact reported increased hiring of loan originators, processors, and underwriters to meet growing demand for mortgages. Several sources reported that nonperforming loans declined and liquidity remained strong throughout the financial sector. However, regulatory constraints and low interest rates continued to exert downward pressure on net interest margins, and several contacts reported that some financial institutions relaxed their lending standards or began looking for new revenue streams. Capital spending was largely flat, with investments focused on equipment and software to enhance productivity or meet regulatory requirements.