Beige Book Report: San Francisco
November 29, 2017
Summary of Economic Activity
Economic activity in the Twelfth District continued to expand at a moderate pace during the reporting period of October through mid-November. Overall price inflation was flat. Conditions in the labor market tightened further, and upward wage pressures intensified. Sales of retail goods grew moderately, and growth in the consumer and business services sectors remained strong. Conditions in the manufacturing sector remained solid, and activity in the agriculture sector was flat. Contacts reported that residential real estate market activity remained robust and conditions in the commercial real estate sector were strong. Lending activity grew at a moderate pace.
Employment and Wages
Conditions in the labor market tightened further, and upward wage pressures intensified. Shortages of skilled IT professionals in the technology, financial services, and manufacturing industries further intensified upward wage pressures. Wages in the construction industry climbed higher as post-hurricane rebuilding efforts in the Southeast worsened existing labor shortages. Contacts in the Mountain West observed very low unemployment levels in nearly every industry. Producers of manufactured pharmaceuticals reported intensified competition for new hires, increasing wage pressures notably. Major film releases during the holiday season and preparation for the upcoming awards season are expected to boost seasonal employment in the entertainment and related industries. Demand for labor in the commercial airline industry declined somewhat as manufacturers reported a slowdown in new orders.
Prices
Overall, price inflation was flat over the reporting period. Prices for some building materials jumped as reconstruction efforts in the Southeast pushed up demand sharply. Airfare inflation picked up modestly due to a jump in fuel prices. Prices for transportation services are expected to increase over the holiday season as a large transportation company is expected to institute a holiday surcharge. Except for all but a small number of niche products, price growth for apparel was flat. Increased competition in the retail pharmaceutical industry slowed overall drug price growth, and contacts continued to report modest deflation in generic drug prices. Continued strong production slowed price growth for many agricultural commodities. Prices of mobile devices continued to decline on a 12-month basis.
Retail Trade and Services
Growth in retail sales remained moderate over the reporting period. Sales of beverage products were strong, and contacts noted a shift in consumer preference towards smaller noncarbonated beverages. While e-commerce sales growth in the apparel industry continued to outpace sales declines at brick-and-mortar retailers, contacts noted that overall sales remain weak, given the favorable overall economic conditions.
On balance, holiday sales are expected to increase modestly relative to last year's holiday season due in part to an extra shopping day between Thanksgiving and Christmas. However, some industry surveys suggested there will be less in-store foot traffic on Black Friday this year as consumers have become accustomed to year-round discounting. Holiday sales of technology products are expected to increase relative to last year. Automobile sales during the holiday season are expected to be solid, but down from last year's strong pace. Elevated inventories and soft demand are expected to fuel strong discounting at apparel retailers during the holiday sales season.
Activity in the consumer and business services sector continued to grow at a strong pace. Demand for air travel reached its highest level in a decade, and revenue growth in the industry remained strong. Sales of technology services picked up as demand for cloud computing and security software remained robust, and infrastructure investment in data centers ramped up further. Wildfires in Northern California temporarily reduced shipping volumes in the region. However, shipping volumes are expected to increase to record levels during the holiday season, and contacts reported increased investment in automated warehouse technology to meet peak demand. After declines in the early fall, same-store sales in the restaurant industry have picked up modestly.
Manufacturing
Conditions in the manufacturing sector remained solid. Demand for semiconductors continued to be strong. Production of steel and manufactured metals picked up further, and rebuilding efforts in the Southeast are expected to buoy normally soft year-end sales. However, capacity utilization rates in the steel sector remained below long-run levels. Deliveries of commercial aircraft reached peak levels, but new orders slowed somewhat. Production of manufactured pharmaceuticals slowed somewhat from its pace over the first half of the year.
Agriculture and Resource-Related Industries
On balance, activity in the agriculture sector was flat. Exports of some processed manufactured milk products were strong. Excess supply of wheat put downward pressure on prices and hampered profitability of growers in Eastern Washington. Harvest yields of potatoes in Idaho were slightly below long-run averages. Contacts emphasized that energy producers focused capital investments on improving existing infrastructure.
Real Estate and Construction
Activity in real estate markets picked up to a robust pace. Construction activity in the residential market remained robust and was slowed only by shortages of land and labor. Low inventory levels and strong demand pushed up house prices and rents. Contacts reported that affordability remained a concern as price increases continued to outpace wage growth in much of the District. Commercial construction activity picked up to a strong pace. Contacts in Seattle noted continued strong demand for commercial office space, driven mainly by demand from large technology companies. Permits for commercial storage space are expected to surge in Eastern Washington and Idaho. Over the next 10 years, contacts expect that a significant number of large retail spaces will be repurposed for storage.
Financial Institutions
Lending activity grew at a moderate pace over the reporting period. Loan demand remained moderate. Demand for deposits outpaced growth, pushing up deposit rates. Loan underwriting standards softened slightly. Delinquencies remained low, but contacts in some rural areas noted an uptick in nonperforming loans. Contacts reported that regulatory compliance continued to push up overall costs, particularly for community banks.