Beige Book Report: San Francisco
July 12, 2017
Summary of Economic Activity
Economic activity in the Twelfth District continued to expand at a moderate pace during the reporting period of mid-May through June. Overall price inflation was flat, while upward wage pressures strengthened. Sales of retail goods were modest, and growth in the consumer and business services sectors remained strong. Conditions in the manufacturing sector improved, and activity in the agriculture sector picked up to a modest pace. Contacts reported robust activity in residential real estate markets, and activity in the commercial sector picked up. Conditions in the financial services sector remained solid.
Employment and Wages
On balance, wage pressures ticked up, and conditions in the labor market tightened further during the reporting period. Wage pressures for skilled software engineers intensified further as competition for programmers with experience in cybersecurity and cloud computing remained fierce. Demand for unskilled warehouse employees in the transportation and logistics services sector increased. Contacts reported that they increasingly filled job openings with older workers who were reportedly seeking health-care benefits or supplemental income. Shortages of labor and increasing wage costs fueled investments in automation in the agriculture industry. Sluggish sales growth and rising compensation costs slowed the pace of hiring in the restaurant industry.
Prices
Overall, price inflation was flat over the reporting period. Prices of construction materials picked up. Hotel rates firmed as tourism demand remained strong. Overall prices for consumer electronics edged down slightly. However, increased demand for computational memory buttressed prices of some manufactured components. Prices for cloud computing services declined as data centers achieved greater economies of scale. Increased capacity in renewable energy generation held down energy price inflation. Overall, prices of agricultural commodities slipped as the pace of supply growth outpaced that of demand.
Retail Trade and Services
On balance, retail sales were modest over the reporting period. Contacts reported that, while retail sales picked up overall, the shift in consumer preferences toward online purchases slowed sales at traditional brick-and-mortar retailers. Declines in gasoline prices reportedly boosted sales of light trucks. Inventories of automobiles grew as demand softened further, and contacts expected sales to remain weak for some time.
Activity in the consumer and business services sector generally grew at a strong pace. Business demand for security, cloud, and analytic services continued to boost sales in the technology industry. E-commerce sales supported strong volume growth in the transportation industry. Tourism demand remained strong, although contacts noted that continued uncertainty surrounding immigration policy slowed international bookings at hotels in Southern California. Restaurant sales remained sluggish, and contacts expect the sluggishness to continue through the end of the year.
Manufacturing
Conditions in the manufacturing sector improved somewhat, but uncertainty around fiscal, trade, and immigration policies tempered views on future growth. Increases in demand for memory on consumer devices boosted production of semiconductors, and contacts expect double-digit growth through the end of the year. Demand for primary and fabricated metals increased, buoyed by a pickup of business investment and solid residential and commercial construction. Production of manufactured pharmaceuticals expanded moderately. Deliveries of commercial aircraft slowed to a modest pace, but orders rose from the same period last year. One contact reported that improved sales at some manufacturers boosted their expected capital investments.
Agriculture and Resource-Related Industries
Activity in the agriculture sector picked up to a modest pace over the reporting period. In the Central Valley of California, yields of nuts and row crops were up over the previous growing season. Ample water supplies boosted cherry harvests. On balance, improved global economic conditions nudged up demand for some agriculture products, particularly pork. Increased global production pushed raisin inventories higher, reducing profitability for some growers. Demand for electricity was flat, and persistent surpluses hampered profitability. Contacts reported that financial distress at many independent power generators continued to propel industry consolidation. Use of fossil fuels, particularly coal, in energy generation continued to decline, while demand for renewables continued to be robust.
Real Estate and Construction
Real estate market activity picked up to a robust pace. Residential construction activity continued to be strong in much of the District, slowed only by a lack of available land and labor. Inventories of new homes dropped further. One contact in California reported extremely high presales in the residential market. Supply shortages continued to fuel strong price increases, and affordability remained a concern in most metropolitan areas. Commercial construction activity was solid. Contacts reported an uptick in commercial investment aimed at remodeling and repurposing large retail spaces for health-care and entertainment services. Financing conditions for commercial projects tightened slightly.
Financial Institutions
On balance, conditions in the financial services sector remained solid. Loan demand softened slightly, although contacts in the Pacific Northwest noted that, after a soft first quarter, lending activity picked up briskly in that region. Credit quality, while strong by historical standards, deteriorated slightly for commercial and industrial and auto loans. Deposits continued to increase but at a slower pace than in previous months. Asset quality remained solid, and capital levels were at all-time highs. Net margins remained compressed, hindering bank profitability, and contacts reported that community banks continued to consolidate.