Beige Book Report: San Francisco
May 31, 2017
Summary of Economic Activity
Economic activity in the Twelfth District continued to expand at a moderate pace during the reporting period of April through late May. Overall, price inflation was steady. The labor market tightened further, while upward wage pressures grew moderately overall. Sales of retail goods grew modestly, and growth in the consumer and business services sectors remained strong. Manufacturing activity picked up to a modest pace, and conditions in the agriculture sector were mixed. Contacts reported continued strong activity in residential real estate markets. Lending activity grew at a moderate pace.
Employment and Wages
On balance, the labor market tightened further, and contacts reported continued moderate wage gains. In the technology, financial services, and health-care sectors, demand for skilled information technology (IT) labor remained strong, pushing up wages for those workers. Contacts in the hotel industry noted widespread strong upward wage pressure for all positions, with one contact reporting plans to raise workers' wages. Recent changes in immigration policy created substantial labor supply shortages for low-skilled workers in the agriculture sector; as a consequence, some growers discarded portions of their harvest. Several contacts observed that applicants for some low-skilled positions did not meet the minimum job requirements or were unable to pass pre-employment screenings such as drug tests. Cost pressures in the steel industry resulted in employment reductions and slowed wage growth.
Prices
Overall, price growth was steady over the reporting period. Electricity prices expanded at a moderate pace. Prices for branded and generic pharmaceuticals continued to increase more slowly than in previous years. Competitive pressures pushed down prices for cloud computing services and data storage. Price growth in the apparel industry declined, as consumers continued a long-run shift from designer products towards lower-priced substitutes. Contacts in the restaurant industry reported that increased labor costs via minimum wage increases were passed along to consumers.
Retail Trade and Services
Overall, retail sales expanded at a modest pace. Sales at clothing and accessories retailers improved modestly, but one contact reported that bankruptcies and store closures were on the rise. Sales of beverage products rebounded from a slow first quarter, although vendors without an online presence continued to lose market share to online sales. Demand for automobiles weakened and inventories rose. Contacts expect vehicle sales to continue to decline. Pharmaceutical sales growth slowed somewhat.
Activity in the consumer and business services sectors remained strong, with growth varying by industry. Demand for IT business services remained robust due to investments in cloud computing and big data solutions in the financial services, health-care and manufacturing sectors. However, demand for legacy IT services continued to soften. E-commerce sales continued to drive strong domestic demand for transportation services. Hotel bookings edged up from the same period last year, but contacts reported that changes in immigration policy slowed international arrivals markedly. The possibility of increases in infrastructure spending boosted demand for engineering services. Demand for business consulting services slowed somewhat, and contacts noted that any optimism regarding potential federal government policies to reduce corporate tax burdens had not translated into increased investment in many industries.
Manufacturing
On balance, manufacturing activity picked up to a modest pace during the reporting period. In the aerospace and defense industry, capacity utilization improved modestly. Deliveries of commercial aircraft slowed somewhat from the same period in the previous year, but new orders doubled. Credit demand from manufacturers picked up, and a few contacts reported that previously delayed investments were moving forward. Increased investment spending in the manufacturing sector and continued strength in residential construction lifted the demand for steel and fabricated metals. Sales of semiconductors stayed strong; however, concerns remained over the elevated dollar and potential changes in trade policy. Contacts reported that manufacturers' demand for energy in eastern Washington was flat.
Agriculture and Resource-Related Industries
Conditions in the agriculture sector were mixed. A wet winter in much of the West boosted water supplies and improved crop yields. However, cool wet weather delayed some plantings in Idaho. One contact in the Mountain West noted that credit demand from the agriculture sector softened as overall growing conditions remained challenging and yields were down somewhat. Demand from canneries for tomatoes softened, and the number of new tomato plantings is expected to decline. While contacts in the agricultural export sector reported optimism that rising global demand would boost overall sales, they continued to express concerns over competition from foreign producers and the still elevated dollar.
Real Estate and Construction
Real estate market activity continued to grow at a strong pace, but activity varied by region. Residential construction activity remained strong in urban centers but slowed to a moderate pace in some rural regions, due in part to especially wet ground conditions in areas of the Mountain West. Permits for single and multi-family units edged up, but contacts noted that construction was somewhat hampered by shortages of available land in some areas. Supply shortages and strong demand continued to fuel rapid home price growth in most parts of the District; contacts in urban centers reported that bids routinely came in significantly above the asking prices. Demand for commercial real estate loans in California remained strong.
Financial Institutions
Lending activity continued to grow at a moderate pace over the reporting period. In parts of the Northwest, loan demand jumped after a slow start to the year. Demand for automobile loans slowed. A few contacts reported increased use of personal credit lines. Deposit growth continued to expand at a moderate pace. Delinquency rates for automobile loans increased, but overall credit quality remained at a high level. A few contacts reported that increased competition among lenders contributed to a softening of loan standards. Liquidity remained ample.