Beige Book Report: San Francisco
September 6, 2017
Summary of Economic Activity
Economic activity in the Twelfth District continued to expand at a moderate pace during the reporting period of July through mid-August. Overall price inflation was flat, while upward wage pressures intensified and labor market conditions tightened further. Sales of retail goods were unchanged, and growth in the consumer and business services sectors remained strong. Manufacturing activity picked up at a moderate pace, and activity in the agriculture sector expanded modestly. Contacts reported robust activity in residential real estate markets, and conditions in the commercial sector strengthened. Lending activity grew at a modest pace.
Employment and Wages
Labor market conditions tightened further, and upward wage pressure intensified in most parts of the District. Shortages of software engineers, particularly those with experience in cloud computing, boosted wages in the technology industry. Robust labor demand in the online retail sector boosted hiring in the Seattle area. Shortages of skilled labor somewhat restricted production in the manufacturing sector. While employee levels were unchanged in the pharmaceutical industry, contacts noted that some large companies began to move some production facilities to lower cost locales outside of the District. Wages in the construction sector continued to climb due to shortages of qualified contractors. Investments in automation in the agriculture sector picked up further, as labor shortages persisted and businesses sought to increase production efficiency. Legalization of cannabis increased demand for low-skilled workers in parts of the District.
Prices
Overall, price inflation was flat over the reporting period. Strong demand from the construction sector boosted prices of raw materials and steel products. Strong demand in the hospitality sector pushed up food and beverage prices at restaurants and hotels. Inflation remained low for branded pharmaceuticals, while prices of generic drugs continued to decline modestly. Continued elevated production reduced prices for some agricultural commodities. Mounting competitive pricing pressures in the retail grocery sector pushed prices lower.
Retail Trade and Services
On balance, the pace of retail sales was largely unchanged from the previous period, but many contacts reported increasing competitive pressures from online retailers. Demand for automobiles grew at a similar pace to that of late summer last year. However, contacts reported that inventories of used vehicles remained elevated, particularly for sedans, as low fuel prices boosted demand for trucks and sport utility vehicles. Overall sales at grocery retail outlets were largely unchanged from the prior reporting period, but contacts reported that traditional retailers faced growing competitive pressure from multinational chains. Sales of apparel products declined modestly, and contacts reported continued competitive pressure from online retail outlets. Additionally, foot traffic at large shopping centers declined further.
Activity in the consumer and business services sectors grew at a strong pace. Domestic and international flight arrivals continued to increase at a robust pace, and contacts reported that airports were running at or above capacity. Activity in the hotel industry remained robust in Southern California, although contacts expect the strong pace of growth to slow somewhat at the start of next year. While the health-care industry faced some uncertainty around federal policy, demand for services strengthened, and investments in medical information technology picked up after a soft first half of the year. Demand for restaurant services continued to be strong. Sales of information technology services increased modestly, as declining sales of legacy product lines were more than offset by increased investment in cloud computing and big data solutions.
Manufacturing
Manufacturing activity expanded at a moderate pace over the reporting period. Conditions in the steel sector improved, as global growth continued to strengthen and competitive pressures from abroad eased. Production of semiconductors rose modestly, while new orders rose strongly; contacts expect overall sales for 2017 to grow by nearly a double-digit pace. Production of pharmaceuticals picked up over the first half of the year. Deliveries of commercial aircraft over the first seven months of the year grew at around the same pace as the prior year, while new orders increased substantially.
Agriculture and Resource-Related Industries
Activity in the agriculture sector picked up at a modest pace. Harvest yields of grain were strong. Dealers reported that demand for used agricultural equipment picked up, while sales of new equipment were soft. Overcapacity in the energy generation industry hindered profitability somewhat, and contacts expect capital investments over the next few years to slow from historically high levels.
Real Estate and Construction
Real estate market activity continued to grow at a robust pace. Residential construction activity remained strong throughout the District, particularly in urban centers. New construction activity was slowed only by shortages of available land. Supply constraints pushed inventories to very low levels and slowed home sales somewhat. Prices continued to rise at a brisk pace, and contacts reported that affordable housing shortages in Southern California remained a serious concern. Overall, commercial real estate activity picked up to a moderate pace. Declining foot traffic at large shopping centers continued to push up vacancy rates. Rents for commercial property edged up slightly.
Financial Institutions
Lending activity grew at a modest pace over the reporting period. Loan demand expanded modestly. Deposit growth weakened slightly due to increased competition from nonbank institutions. Credit quality remained unchanged, and delinquency rates continued to be low. Contacts noted that regulatory costs continued to constrain profitability at community banks in some regions.