Beige Book Report: San Francisco
July 15, 2015
Economic activity in the District grew at a moderate pace during the reporting period of late May through the beginning of July. Overall price inflation firmed a bit further, and upward wage pressures increased somewhat. Retail sales strengthened, while demand for business and consumer services grew further. Manufacturing activity was mixed but appeared flat overall. Agricultural output grew further. Real estate market activity continued to strengthen. Lending activity expanded further, spurred in part by growth in consumer lending.
Prices and Wages
Overall price inflation continued to firm somewhat. Generally strong demand in the hospitality sector prompted further increases in hotel rates. Rising prices for pharmaceuticals and increased health-care utilization associated with the aging population combined to put upward pressure on the overall cost of medical services. Prices for agricultural products were largely flat. However, the recent avian flu outbreak pushed poultry prices up, generating inflationary pressures in the restaurant sector more generally. By contrast, earlier energy price declines and dollar appreciation continued to put downward pressure on prices charged by utilities and prices of assorted raw material imports.
Upward wage pressures intensified somewhat during the reporting period. Contacts in the information technology sector continued to report rapid wage gains for workers with specialized technical skills. In the construction sector, competition for skilled labor continued to grow, fueling substantial upward wage pressures; contacts also reported a rising incidence of contractors refusing assignments because the offered compensation was too low. Contacts in the hospitality and restaurant sectors reported increased competition for available workers and consequent wage increases; some areas expect additional upward wage pressures as higher minimum wages take effect over the next few years.
Retail Trade and Services
Retail sales strengthened. Contacts noted that low energy prices, a stronger job market, and improved household balance sheets boosted consumer demand in general. Automobile sales remained robust across the District. Demand for food and beverages strengthened somewhat, with some contacts reporting that spending shifted slightly away from generic labels toward higher priced brand-name products. Sales of electronic goods, particularly mobile phones, remained strong. Consumer confidence appeared to improve overall, and most contacts are optimistic about prospects for domestic consumer spending over the remainder of the year, although a few noted concerns that the elevated U.S. dollar could hamper export sales.
Demand for business and consumer services grew further. Contacts in the hospitality industry reported strong demand but a slight deceleration in the pace of growth as the unexpected surge in past months due to the unusually warm winter dissipated. Activity in the technology services sector continued to expand at a solid clip, particularly for providers of internet security services. Demand for health insurance continued to grow, and contacts expect a further boost now that some legal uncertainties regarding coverage through the Affordable Care Act were resolved by the recent Supreme Court decision. Demand for legal services generally remained weak, and contacts reported continued excess availability of trained legal talent. Energy demand grew modestly but was restrained somewhat by the broader use of energy conservation measures by consumers.
Manufacturing
Activity in the manufacturing sector was mixed across industries but flat overall. New orders of semiconductors increased over the reporting period, and inventories remained in line with demand. Contacts in the biotech and pharmaceutical manufacturing sector reported continued strong demand growth, and the continued availability of low-cost debt financing fueled consolidation among pharmaceutical firms seeking to enhance scale efficiencies. Deliveries of commercial aircraft increased, but new orders have fallen significantly compared with the first quarter, suggesting slower demand growth ahead. Contacts observed continued excess capacity and weak demand growth for wood products. Activity in the aerospace and defense sector expanded, but contacts expressed concern that a renewed debate over federal spending plans could constrain demand later this year.
Agriculture and Resource-Related Industries
Agricultural output grew further over the reporting period, but growth was uneven across sectors. High mortality rates from avian influenza dragged down the supply of poultry and pushed up prices. The overall supply of cattle remained low, as ranchers withheld them from markets to replenish herds. The supply of walnuts and almonds was held down by drought conditions in much of the District, and contacts observed that water-intensive crops more generally face a challenging outlook. Demand for forestry products remained flat as offshore demand slowed and domestic gains were somewhat limited.
Real Estate and Construction
Real estate activity expanded at a solid pace throughout the District. Contacts reported continued growth for residential and nonresidential construction and sales, with particularly rapid growth in metropolitan areas with large technology sectors. A few contacts noted a rising influx of foreign investment in commercial real estate, which drove up property prices in some metropolitan areas. Construction of residential units continued to show good growth in some areas, primarily for multifamily and rental properties. Sale prices reportedly have been rising for all types of residential properties, with an increasing incidence of bidding wars reported. Shortages of skilled labor remained a constraint on growth in construction activity in many parts of the District. Contacts expect that continued improvement in household wealth will spur further growth in residential real estate activity during the second half of the year.
Financial Institutions
Lending activity expanded further. Financial institutions across the District reported that loan-to-deposit ratios rose, and many contacts reported that lending growth was broad based for consumer, commercial, and real estate purposes. Commercial lending remained robust, due in part to the availability of continued low financing rates. Mortgage lending has grown steadily in recent months. Revolving credit for consumers expanded, but delinquencies remained modest. Bank deposits expanded and asset quality improved further, boosting bank liquidity. Sustained economic growth has reopened dormant revenue channels for some banks, as reflected in rising lending for mergers and acquisitions and gift and estate planning. Net interest margins widened somewhat, although large financial firms benefited more than small firms due to their scale advantages.