Beige Book Report: San Francisco
April 13, 2016
Economic activity in the District grew at a moderate pace during the reporting period of mid-February through the end of March. Overall price inflation firmed somewhat, while upward wage pressures grew at a moderate pace. Sales of retail goods and consumer and business services expanded moderately. Demand for manufacturing products grew modestly. Activity in the agriculture sector picked up, and residential and commercial real estate market activity continued to expand at a robust pace. Lending activity continued to grow at a modest pace.
Prices and Wages
Overall price inflation firmed somewhat over the reporting period. Prices for pharmaceuticals increased in line with higher production costs, with one contact expecting further cost and price increases. Prices in the construction industry grew at a moderate pace as the effects of labor shortages outweighed lower material costs. Contacts in the food and beverage industry expect commodity prices to rise somewhat over the coming months; however, they anticipate having to absorb those increases through lower profit margins rather than passing them on to consumers. Low commodity prices continued to hold down material costs in most sectors, and the prices of some agricultural goods also remained low.
Wage inflation remained moderate overall. Contacts in the hospitality and restaurant industries reported significant wage increases and more upward pressure in general as minimum wage laws began to take effect. Wages for information technology workers strengthened in most industries, particularly in the financial services sector, as firms increased IT spending to help meet regulatory requirements and boost online security systems. In the construction industry, continued labor shortages increased upward wage pressures. Contacts in the food and beverage sector reported that levels of wages and compensation were largely unchanged.
Retail Trade and Services
Retail sales expanded at a moderate pace over the reporting period. Contacts generally reported a slight uptick in consumer spending as improved household balance sheets helped bolster consumer confidence. Motor vehicle sales remained strong, and auto dealers replenished depleted inventories that previously had held back sales. Sales of food and beverage products rose, and activity in the grocery industry expanded modestly in general, spurred in part by new product offerings. Investment spending was mixed but somewhat muted on balance, with many contacts noting that expenditures were focused largely on productivity enhancements rather than capacity expansion.
Activity in the consumer and business services sector grew at a moderate pace. Cargo volumes increased in the transportation sector, and airline revenue rose due to higher demand and lower fuel prices. In the health-care sector, demand remained robust and contacts reported capacity shortages at some facilities. Activity in the restaurant industry was largely flat, with little change in same-store sales noted for recent months; one contact reported that a number of chain restaurants had scaled back plans to remodel. More generally, investment spending in the services sector grew modestly over the reporting period.
Manufacturing
Activity in the manufacturing sector grew modestly. For makers of pharmaceuticals, shifting demographic trends continued to support strong demand growth, prompting increased investment spending for business expansion and development of new and more effective drug treatments. Sales of electronic components grew modestly but at a pace slightly below long-term trends. Orders of new commercial aircraft slowed, and deliveries were flat compared with the same period last year. Conditions in the steel sector remained weak as low foreign demand and an elevated dollar slowed exports. Energy consumption by manufacturers slowed, and capacity utilization rates remained slightly depressed relative to historical averages. Investment plans for much of the sector remained modest and in line with expectations that sales growth will be held down by exports.
Agriculture and Resource-Related Industries
Activity in the agriculture sector picked up over the reporting period. Growing conditions in California and other parts of the District have been bolstered by ample winter rainfall that has partially alleviated the challenges created by sustained drought. A seasonal improvement in domestic demand for timber products somewhat offset weaker foreign demand. However, contacts reported that the elevated dollar continued to weigh down exports for most products. Domestic sales of produce strengthened. Despite weak exports, herd costs fell, reducing losses in that sector. Contacts reported that capital spending plans were focused on productivity enhancements and replacing equipment rather than capacity expansion.
Real Estate and Construction
Real estate market activity grew at a robust pace across most of the District. Demand for residential units remained strong, with one contact reporting construction backlogs of more than six months for new single-family units in his region. Contacts outside of major cities reported that demand for luxury units was relatively lower than for affordable units. Construction of residential units picked up, particularly in technology hubs. Construction materials remained in ample supply, but some areas reported that permits for new residential construction have not kept pace with increased demand, in part reflecting constraints from labor shortages. Demand for commercial space has been growing rapidly in some urban areas, and new construction completions have not kept pace, putting upward pressure on lease rates.
Financial Institutions
Lending activity grew modestly over the reporting period. Contacts noted especially strong growth for revolving credit and mortgage loans. Credit quality improved further, but, despite strong demand, lenders remained cautious with respect to borrowers with lower credit scores. One contact reported that credit unions in his region had purchased high volumes of subprime mortgages. Low interest rates, vigorous lender competition for qualified borrowers, and costs of regulatory compliance reportedly held down profit margins for some institutions. Investment spending by financial institutions grew modestly and was primarily focused on productivity enhancements and strengthening cyber security.