Beige Book Report: San Francisco
December 2, 2015
Economic activity in the District grew at a moderate pace during the reporting period of early October to mid-November. Overall price inflation ticked up, and upward wage pressures increased further. Retail sales grew moderately, while demand for business and consumer services expanded. Manufacturing output was largely unchanged. Agricultural activity edged up modestly. Conditions in residential and commercial real estate markets continued to strengthen. Activity in the financial services sector expanded at a modest pace.
Prices and Wages
Overall price inflation appeared to tick up slightly on balance. Prices for branded pharmaceuticals increased rapidly, while price growth for generic drugs was down relative to the same period last year. Shortages of labor, selected materials, and land in desired locations for building continued to push up construction costs in some metropolitan areas. Lower natural gas prices reduced electricity costs. In the technology sector, competitive pressures and technological advances reduced prices for consumer electronics, while price growth for technology services slowed as data centers continued to realize economies of scale.
Upward wage pressures increased across the District. On balance, wage growth for high-skilled workers exceeded that of low-skilled workers; however, contacts in a few areas reported that labor shortages for entry-level employees increased relative to the previous survey period. Wage pressures grew in the health-care sector, particularly for specialized positions such as nurses and software developers. Labor shortages in the financial sector have increased pressure on firms to raise compensation levels, but some contacts reported reliance on favorable benefit packages rather than salary increases to retain and attract talent. In the technology sector, higher demand for labor bumped up wages for both experienced and entry-level workers. Wage increases in the grocery industry were modest; one contact noted that available labor supply is largely in line with demand, and stiff competition among retailers limits their ability to pass wage increases on to prices.
Retail Trade and Services
Retail sales grew at a moderate pace; however, a few contacts noted that sales had slowed somewhat from the summer. Automobile sales were very strong, propelled in part by low sales prices and incentives. Sales of apparel items were mixed, with high-end retailers experiencing slower sales and higher inventory accumulation, which could cause significant price discounting during the holiday season. By contrast, lower-priced boutique retailers saw moderate growth in demand for their products. Food and beverage sales slowed a bit from the summer months but remained solid. Sales of online games remained brisk, and contacts expect strong movie releases over the holiday season to propel additional growth. Demand for pharmaceutical products remained robust, due in part to an aging population and the development of new and more effective drug treatments.
Growth in consumer and business services remained strong. Demand for cloud computing services and big-data analytics drove sales of technology services higher. Heightened household travel and leisure activity spurred demand growth in the hospitality sector. Contacts reported that demand for health-care services grew moderately as market expansion from the Affordable Care Act boosted demand for insurance. Activity in the utilities sector grew modestly, and a few contacts expect El Niño weather patterns to impact winter demand for energy and heating services.
Manufacturing
Activity in the manufacturing sector was largely flat. An elevated dollar, lower global demand, and anti-dumping protections in some markets slowed manufacturing exports. Industrial production remained somewhat soft on balance, with contacts reporting that oversupply in some markets had pushed up inventories and curtailed production. Deliveries of commercial aircraft were up slightly from the same period a year prior, but new orders were significantly lower. The recent passage of the federal continuing budget resolution eliminated the near-term risk of major demand disruptions in the defense industry; however, capacity utilization was flat and manufacturer competition for large contracts was intense. Activity in the biotech and pharmaceutical manufacturing sector expanded, on balance, supported in part by extensive merger activity spurred by ready financing.
Agriculture and Resource-Related Industries
Output in the agriculture and resource sector expanded modestly over the reporting period. Yields in areas less affected by drought were strong, while elevated price levels for some products helped maintain revenue in drought-stricken areas with lower yields. Similarly, drought conditions have reduced cattle herd sizes; however, supply shortages have boosted meat prices and helped keep profit margins steady. Restaurant demand for agricultural staples grew modestly, and contacts expect this to continue along with stable growth in consumer demand. Low oil prices continue to hold down activity in the petroleum extraction industry, with one contact noting that several large companies have slowed exploration plans significantly.
Real Estate and Construction
Real estate market activity continued to strengthen across the District. Demand for new residential units remains high, with one contact highlighting growing backlogs for planned projects. Residential construction picked up further, spurred primarily by multifamily rather than single-family units. However, a few contacts mentioned that sales of affordable new single-family units grew strongly in parts of Southern California, driven predominantly by first-time buyers. Shortages of qualified labor and selected construction materials reportedly have held down the pace of construction in some areas. Housing prices continued to rise significantly across much of the District. Activity in the commercial real estate sector continued to expand. Contacts in the Seattle and Salt Lake City areas reported strong growth in commercial market activity, with a contact from the latter area noting that growth has been spurred in part by the relocation of California firms.
Financial Institutions
Lending activity grew modestly over the reporting period. Loan volumes expanded, particularly for auto and mortgage loans, and a few contacts mentioned the increased role of nontraditional lenders in mortgage markets. Deposits expanded further, and contacts viewed the financial sector as having ample liquidity. However, low interest rates and regulatory burdens have reduced net margins and held down bank profitability. Credit conditions strengthened as household balance sheets continued to improve. Contacts from a few financial institutions noted plans to expand capacity and employee counts in the coming months.