Beige Book Report: San Francisco
January 13, 2016
Economic activity in the District grew at a moderate pace during the reporting period of late November through early January. Overall price inflation was minimal, and upward wage pressures increased further. Retail sales expanded moderately, as did demand for business and consumer services. Manufacturing output declined somewhat. On balance, activity in the agriculture sector was flat. Activity in residential and commercial real estate markets expanded further. Lending activity grew at a modest pace.
Prices and Wages
Overall price inflation remained minimal during the reporting period. Prices for apparel products fell during the holiday season due to weaker-than-expected demand, which raised inventories and prompted more discounting than in previous holiday seasons. Reduced component costs and vigorous supplier competition held down prices for consumer electronics. Prices for health-care services rose somewhat, while prices for pharmaceuticals grew rapidly, particularly for branded products. Shortages of labor, selected materials, and land in desired locations for building continued to push up construction costs in some metropolitan areas.
Upward wage pressures increased across the District. Wage growth for high-skilled workers, notably in the technology and financial sectors, continued to exceed that for lower-skilled workers; however, contacts in a few areas noted growing labor shortages and greater upward wage pressures for entry-level employees. Wage pressures intensified in the health-care sector, particularly for specialized positions, with a few contacts reporting that salaries had been adjusted midyear to help retain staff. Strong demand for skilled labor in the technology sector increased compensation; however, contacts reported that firms generally opted to improve vacation and work-life benefits rather than increase salaries. Wage pressures for low-skilled workers in the hospitality industry grew moderately as the effects of recent minimum wage legislation began to take hold.
Retail Trade and Services
Retail sales grew at a moderate pace overall, with mixed reports for holiday season sales across sectors. Automobile sales were very strong, propelled in part by low sales prices, incentives, and low oil prices. Sales of toys and computer games were up from the same period last year, spurred largely by increased activity in online sales and distribution. Holiday sales of apparel products for traditional brick-and-mortar retailers were lower than anticipated, and high inventories led to large post-holiday discounts, reducing profit margins for major retailers. Sales of consumer electronics trended down somewhat, while profit margins narrowed further as exports softened due to the elevated dollar. Demand for pharmaceutical products remained robust, but profits ticked down slightly relative to earlier in the year as firms focused on new product launches with high initial costs.
Growth in consumer and business services expanded at a moderate pace. Demand for server and cloud computing services rose further. Contacts reported a continued shift towards online retailers and noted that e-commerce firms continued to invest in expanding warehouse and distribution capacity. Hospitals and other health-care providers continued to add capacity to meet rising demand, and their profits remained high. By contrast, profitability for many small and medium-sized health insurance providers dipped somewhat due to federal legislation to limit risk payments to insurers with high payout costs. Profit margins for the hospitality industry ticked up relative to last year as softening demand for affordable hotels and restaurants were more than offset by an increase in demand for luxury services.
Manufacturing
Activity in the manufacturing sector was flat to down on balance during the reporting period. An elevated dollar, lower global demand, and antidumping protections in some markets slowed manufacturing exports, notably for steel. Domestic demand for information and communication technology products was undermined by import substitution spurred by East Asia's growth as a manufacturing center. Deliveries of commercial aircraft were up slightly from the same period a year prior, but new orders were significantly lower. Manufacturers of electronic components reported that sales were stable as capacity utilization rates remain largely unchanged, and new orders are arriving at around the same rate as final sales. Profit margins across the sector were flat to somewhat down compared with prior reporting periods as the positive effects of lower commodity input prices were offset by increased global competition and an elevated dollar.
Agriculture and Resource-Related Industries
Activity in the agriculture and resources sector was flat over the reporting period. Despite an unusually wet early winter, drought conditions remain a challenge for growers and ranchers in much of the District. Shortages in water reserves reduced the size and weight of some nut harvests and raised production costs by forcing producers in parts of California to increase expenditures on water extraction. Inventories for dairy products and beef cattle rose as the elevated dollar held down exports. By contrast, dollar effects on exports of pork products were partially offset by rising demand from East Asia.
Real Estate and Construction
Real estate market activity grew at a robust pace across most of the District. Demand for new residential units remains high, with contacts in many West Coast cities reporting ongoing reductions in vacancy rates. Residential construction activity grew substantially, with a somewhat stronger market for multifamily units than for single-family units. Housing prices rose further across the District, and contacts expressed concerns over affordability for low-income buyers. On the commercial side of the market, lease rates for existing units have increased, pushing sales prices higher across the District. Yet, new commercial construction remains concentrated in a few hot markets, such as the San Francisco Bay Area and Seattle. Contacts noted continued shortages of labor and materials and construction delays in those areas, with one reporting that commercial contractors had stopped accepting new construction projects in the final months of the year.
Financial Institutions
Lending activity grew modestly over the reporting period. Loan demand grew unevenly across the District, as some borrowers switched financial institutions while shopping for better terms. Contacts reported that automobile loans and mortgage originations grew at a robust pace. Deposits expanded further, and financial institutions had ample liquidity to cover risk. However, contacts noted that low interest rates and regulatory burdens have held down bank profitability. Credit quality improved further, with stronger household balance sheets contributing to a decline in loan delinquencies and charge-offs.