Beige Book Report: San Francisco
September 7, 2016
Economic activity in the District continued to grow at a moderate pace during the reporting period of July through late August. Overall price inflation remained limited, while upward wage pressures intensified. Sales of retail goods expanded somewhat, and activity in the consumer and business services sectors grew at a moderate pace. Manufacturing activity changed little on balance. Improved growing conditions provided a slight boost to activity in the agricultural sector. Contacts reported vigorous activity in residential real estate markets, while conditions in the commercial sector firmed a bit. Lending activity grew at a solid pace.
Prices and Wages
Overall price inflation remained limited over the reporting period. Prices for new automobiles ticked down, while prices for used vehicles moved up slightly. Lower demand for hotel rooms held down price growth in the sector. Prices of agricultural products declined somewhat. Ticket prices in the airline industry grew modestly as demand for domestic and international travel both increased. Strong demand for pharmaceuticals pushed up prices for branded and generic products.
Wage increases picked up further and were strong on balance during the reporting period. Growing demand for highly skilled workers and technology specialists fueled strong wage growth in the technology, banking, and health-care IT sectors. Shortages of physicians and nurses continued to push up wages in the health-care industry. Increased demand and the implementation of minimum wage laws in some parts of the district increased wages for less-skilled workers. Contacts in the financial services industry reported that quit rates rose, and wage growth remained solid. Shortages of engineers fueled strong wage growth in the aerospace and defense sector.
Retail Trade and Services
Sales growth was modest overall in the retail sector. Reports on overall retail spending were mixed, with sales gains reported in some regions and flat demand in others. Sales of apparel products were largely unchanged after falling over the first half of the year, and contacts reported that inventory levels stabilized. Downward price pressures from discount outlets kept retail grocery revenues largely flat. Contacts reported that automobile sales declined somewhat despite price discounting and favorable financing terms.
Activity in the consumer and business services sector grew at a moderate pace over the reporting period. Demand for air travel remained strong and combined with low fuel prices to boost industry profits. In the broader transportation sector, delivery volumes continued to grow at a brisk pace, particularly for e-commerce. Demand for restaurant meals changed little, except in the quick service sector, which has maintained solid sales growth since the start of the year. Demand for hospitality services was mixed, with contacts in some regions reporting strong demand growth but others reporting an increase in hotel vacancies and restrained spending by travelers. Additionally, contacts reported that stays from European travelers softened somewhat due to the elevated dollar.
Manufacturing
On balance, manufacturing activity was largely unchanged over the reporting period. Contacts reported that sales of pharmaceuticals grew at a strong pace despite some increased production costs from government regulation and negative media coverage around industry pricing decisions. Orders for new commercial aircraft were modest, and deliveries remained flat compared with the same period last year. Activity in the semiconductor industry was largely stable, with new orders coming in at the same pace as final sales and capacity remaining somewhat underutilized. On balance, manufacturers' demand for energy declined modestly, although the decline was less rapid than earlier this year. Activity in the aerospace and defense sector was constrained by continued uncertainty surrounding the federal defense budget. Demand for steel and recycled metals contracted further due to a loss in export competitiveness from the elevated dollar, further increases in foreign production, and weaker domestic demand from the energy sector. Overall, contacts reported that capacity utilization rates remained slightly low on a historical basis.
Agriculture and Resource-Related Industries
Activity in the agricultural sector expanded modestly. Above-average water availability boosted harvests, with record yields recorded for almonds and walnuts, but contacts expressed concern that a return to earlier weather trends would hurt yields over the near term. On balance, increased foreign production, the elevated dollar, and flat overall demand increased inventories of many agricultural goods. Contacts reported that dairies continued to operate at a loss despite lower input prices, while ranchers benefited from somewhat firmer cattle prices.
Real Estate and Construction
Real estate market activity expanded further over the reporting period. Residential construction remained robust, and contacts reported that many contractors are at capacity for new projects. Sales of residential units were strong, and the inventory of available units declined further. In Idaho, contacts reported that shortages of rentals and multifamily units have held down in-migration and labor availability. Contacts in Arizona reported an undersupply of affordable housing. On the commercial side of the market, construction activity grew at moderate pace, and lease rates picked up in some metropolitan areas, particularly those with a vibrant technology sector. Shortages of raw materials and labor somewhat constrained growth in construction activity in some parts of the District.
Financial Institutions
Lending activity grew at a solid pace over the reporting period. Loan growth was strong, but contacts reported that competition for borrowers was fierce as supply of funds remained above demand. Deposit growth rose at a strong pace, and banks reported having ample liquidity. Credit quality was stable, and a few contacts reported that underwriting standards loosened slightly. Contacts in the community banking sector reported moderate revenue growth relative to the same period last year. Financial institutions in a few states with a legal marijuana industry reported increased operational costs related to regulatory constraints on activities linked with that industry.