Beige Book Report: San Francisco
March 01, 2017
Summary of Economic Activity
Economic activity in the Twelfth District continued to expand at a moderate pace during the reporting period of mid-January through February. Overall price inflation was mild, while upward wage pressures strengthened. Sales of retail goods picked up, and activity in the consumer and business services sector slowed slightly to a moderate pace. Conditions in the manufacturing sector remained mixed, and activity in the agriculture sector was largely unchanged. Contacts reported continued vigorous activity in residential real estate markets, while activity in the commercial sector expanded at a moderate pace. Lending activity grew at a moderate pace.
Employment and Wages
Wage pressures intensified in general as labor market conditions remained tight throughout much of the District. Seasonal job loss in the retail sector was less pronounced at the end of the holiday season than in previous years. Talent shortages in the technology industry have increased the time required to fill positions and the cost per hire. Contacts in the agriculture sector noted that proposed changes in immigration policy could limit labor supply, particularly during harvest season, and drive up wage costs. In the financial services industry, shortages of skilled bankers and credit analysts have boosted wages for those occupations. One contact in the hospitality industry reported a continued shortage of workers across all job categories despite wage increases, signing bonuses, and increased recruiting efforts. Shortages of construction workers and contractors persisted.
Prices
Overall price increases were mild during the reporting period. Prices of building materials increased from an already elevated level. While global prices remained low for many agricultural commodities, contacts reported that prices for some grains recently picked up. Pressure from online sellers slowed price inflation somewhat in parts of the retail sector. Contacts in the apparel industry noted that implementing a border tax could have a significant impact on the prices of imported apparel products.
Retail Trade and Services
Retail sales picked up from the previous period. On balance, contacts continued to report that e-commerce sales were strong, and retailers continued to shift investment away from traditional brick-and-mortar establishments towards online channels. Retail supermarkets experienced solid sales volumes, and major chains continued to improve online retail and store pickup options. Demand for apparel products was moderate and flat relative to the previous reporting period. Sales of automobiles softened somewhat but remained comparable to last year's average pace.
Activity in the consumer and business services sector slowed slightly to a moderate pace. Robust demand for cloud computing services and investments in data centers continued to support strong growth in the technology service sector. While demand for health-care services expanded at a strong pace, and providers continued to innovate delivery systems, uncertainty surrounding federal health-care policy slowed capital investment. Tourism picked up to a strong level, but contacts voiced concerns that changes in immigration policy would reduce international visits. Activity in the hospitality industry weakened slightly, but advance bookings for the summer months at Southern California hotels were above levels experienced in the prior year. Contacts in the nonprofit sector noted that uncertainty around environmental and alternative energy policy remained a major concern for growth prospects over the near term.
Manufacturing
Conditions in the manufacturing sector remained mixed. New orders and production of manufactured pharmaceuticals remained strong. Conditions in the semiconductor industry stabilized, but exporters remain concerned about the value of the dollar and potential trade conflicts. Contacts reported that steel mill capacity utilization remained below its long-run average, as a strong dollar and weak global demand slowed exports and boosted imports. Orders of commercial aircraft dipped, and deliveries were flat compared with the same period last year. Contacts in the metals fabrication industry noted that heavy equipment sales were weak, reducing demand for manufactured parts and accessories.
Agriculture and Resource-Related Industries
Activity in the agriculture sector was little changed from the previous reporting period. Demand for timber remained strong, and contacts reported that domestic wood products manufacturers expanded production as input costs were low and margins remained favorable. A major buyer of barley notified producers in Idaho that their purchases would decrease by 30 percent in 2017. Weak global prices and increased production costs in California further reduced rice plantings. Overall, the elevated dollar continued to suppress agriculture exports. Wet winter conditions increased snowpack in the Sierra Nevada, and contacts expected increased water supplies to boost harvests later this year.
Real Estate and Construction
Real estate market activity grew at a vigorous pace as in the previous reporting period. On balance, activity in the housing market remained strong, but conditions varied by region. Shortages of land, labor, and materials in many major cities in the West somewhat tempered the rapid pace of construction activity, while a few rural regions noted that tight financial conditions remained a barrier to new construction. House prices edged up further in much of the District, with contacts in Los Angeles reporting that many communities expect significant gentrification in the coming years. Rents continued to climb in parts of the District, making homeownership relatively more attractive. Commercial construction activity expanded at a moderate pace, except in downtown Sacramento, where construction activity continued to be robust.
Financial Institutions
Lending activity continued to expand at a moderate pace over the reporting period. Loan demand grew at moderate pace, similar to the prior period. One contact noted that consolidation in the financial services industry had reduced financing options for small businesses. On balance, deposits ticked up. Credit quality remained strong, and liquidity was ample.