Beige Book Report: San Francisco
March 02, 2016
Economic activity in the District grew at a moderate pace during the reporting period of early January through mid-February. Overall price inflation was minimal, although upward wage pressures increased further. Retail sales expanded moderately, and demand for business services grew modestly. Manufacturing output was flat. 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. Extensive competition and slightly elevated inventories following the holiday season contributed to continued price discounting for apparel producers. Further declines in component costs and vigorous supplier competition held down prices for consumer electronics. Commodity prices contracted further, reducing energy prices for transportation services and holding food prices at retail grocery and restaurants flat. Pharmaceutical prices continued to rise at a brisk clip, and employers reported that the costs of health plans jumped noticeably in recent months. Construction costs continued to rise as the available supply of labor and material inputs was insufficient to meet rising demand.
Wage pressures continued to creep up across the District. Strong demand continued to push up wages significantly for skilled labor in the technology sector, although one contact reported that a cooling market for tech startups could ease wage pressures in the near term. Wage inflation for workers in the financial services sector picked up. In the aerospace and defense industry, contacts noted rising retention challenges and upward wage pressures, and they expect further increases over the coming year. Low prices for energy and agricultural commodities have led to layoffs and held wages flat in the energy and agriculture sectors.
Retail Trade and Services
Retail sales grew at a moderate pace over the reporting period. While demand for automobiles remained strong, sales were constrained somewhat by inventory shortages. Sales of pharmaceutical products remained robust as firms capitalized on shifting demographic trends and development of new and more effective drug treatments. Sales of apparel products were flat, and suppliers struggled somewhat to clear inventories from a slower-than-expected holiday season. In the retail grocery sector, competition from online entrants and expanded product offerings at large chain pharmacies held down sales and profits somewhat for traditional retailers.
Demand for consumer and business services continued to expand at a modest pace. The tourism industry saw further gains, with hotel profitability picking up further and new restaurants continuing to open in parts of the District. Demand for health-care services softened somewhat as contacts reported that consumers have postponed elective medical procedures for affordability reasons. Health-care providers remain concerned about additional legislation focused on further reducing reimbursements for federal programs.
Manufacturing
On balance, activity in the manufacturing sector was flat. Manufacturers of aluminum products increased capacity through productivity enhancements to meet continued robust demand. Sales of pharmaceuticals rose and industry consolidation continued, but contacts reported that negative attention from recent pricing decisions have raised industry expenses for public relations and lobbying. Although deliveries of commercial aircraft reached near-record levels, weaker global demand has held down new orders and caused some manufacturers to reduce their workforces in anticipation of production cuts. Slower sales of electronic components contributed to a rise in inventories. Demand for steel products remained weak as foreign competition and the elevated dollar held down exports. Additionally, while the fall in energy prices has reduced production costs for steel products, contacts reported that lower demand for energy-related manufacturing goods has more than offset those savings. Contacts noted that unfavorable export conditions and global uncertainty have held back capital expenditure plans for the coming year.
Agriculture and Resource-Related Industries
Activity in the agriculture sector was flat over the reporting period. Continued dollar appreciation slowed agricultural exports in general, although exports of pork products rose as demand from Asia strengthened. Contacts reported that domestic demand from restaurants slowed for some vegetable products. Despite an unusually wet winter, overcoming prior drought conditions remains a costly challenge for growers and ranchers in much of the District. Contacts expect conditions in the agriculture sector to remain roughly the same over the coming year as commodity prices remain soft and exports continue to be subdued.
Real Estate and Construction
Real estate market activity grew at a robust pace across most of the District. Demand for residential housing ticked up, particularly in technology hubs, with one contact reporting that residential lots sold as quickly as they were developed. Construction of multifamily units continued to outpace new single-family dwellings. The costs of residential construction continue to increase: According to one report, a developer walked away from two large projects that had become uneconomical. On the commercial side of the market, occupancy rates continued to rise, spurring higher lease rates and additional construction projects. In some parts of the District, foreign investment continues to flow into commercial real estate projects despite falling capitalization rates.
Financial Institutions
Lending activity grew modestly over the reporting period. Loan demand ticked up across the District, yet lender competition for qualified borrowers was vigorous, with contacts noting that some new originations stemmed from borrowers shifting liabilities across lending institutions. On balance credit quality improved, although contacts expressed concern that continued low commodity prices could undermine asset quality in the agriculture sector. Contacts reported that newly emerging financial institutions have increased market share by leveraging technological advances and big data to reduce search, acquisition, underwriting, and transaction costs.