Beige Book Report: San Francisco
January 17, 2018
Summary of Economic Activity
Economic activity in the Twelfth District continued to expand at a moderate pace during the reporting period of mid-November through early January. Overall price inflation edged down. Conditions in the labor market continued to tighten, and upward wage pressures increased. Sales of retail goods picked up noticeably during the holiday season, and growth in consumer and business services remained strong. Conditions in the manufacturing sector remained solid, and activity in the agriculture sector improved modestly. 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 modest pace.
Employment and Wages
Conditions in the labor market continued to tighten, with wage pressures increasing as contacts noted shortages of qualified labor in various sectors. Widespread reports of continued shortages of skilled trade and construction workers resulted in a notable increase in wage pressures for those occupations. In Eastern Oregon, shortages of workers in both agriculture and manufacturing sectors pushed up wages significantly. Businesses in the banking sector reported an increase in the duration of job vacancies and continued difficulty finding qualified applicants. Rising labor costs in the District prompted some businesses to open new operations in cheaper locales. Contacts across the District noted that planned minimum wage increases to go into effect in 2018 are likely to affect their labor costs at all compensation levels.
Prices
Overall price inflation ticked down slightly over the reporting period. Contacts reported increasing deflationary pressures for generic drug prices partly due to a rise in FDA drug approvals. The elevated dollar continued to put downward pressure on agricultural commodity prices. Overcapacity in electricity production continued to restrain price growth over the reporting period. Contacts in the restaurant industry noted only slight upward price adjustments. Higher input costs and a strengthening global trade environment contributed to a moderate increase in scrap and finished steel prices. In the technology sector, prices for cloud services and tablets continued to trend downward due to increased competition and economies of scale. Prices for potatoes increased following the end of the fall harvest.
Retail Trade and Services
Growth in retail sales picked up noticeably over the reporting period, helped by a solid holiday shopping season. E-commerce sales continued to outpace sales at traditional brick-and-mortar retailers. However, contacts noted that foot traffic at large shopping centers was better than expected during the holiday season. Vehicle dealers reported strong in-store traffic and sales, as activity rebounded from the previous months. A contact noted that online channels continued to disrupt the grocery industry, resulting in overcapacity and soft sales at brick-and-mortar stores.
Activity in the consumer and business services sector continued to grow at a strong pace over the reporting period. The hotel industry reached peak capacity, having experienced steady increases in activity throughout the holiday season. Air travel was robust at the close of the year, driven by foreign demand. Demand for cloud computing and security software remained strong, supported by financial and business services sectors. In Hawaii, tourist spending and hotel revenues saw a notable increase in December. Contacts in Eastern Washington noted continued expansion of healthcare services in the region as the industry consolidates around a few large service providers. Animal boarding and health service activity increased as pet owners traveled over the holiday season.
Manufacturing
Conditions in the manufacturing sector remained solid. Contacts in Eastern Washington reported energy usage by major manufacturers in metals production and aerospace was consistent with a modest growth in output. Production of steel and manufactured metals picked up further due in part to a reduction in overseas competition. However, capacity utilization rates in the steel sector ended the year below long-run levels. Semiconductor production moderated as contacts cited uncertainty over government policy.
Agriculture and Resource-Related Industries
On balance, activity in the agriculture sector improved modestly. Demand for organically grown crops remained strong. Conditions in the swine industry improved over the previous year. Farm equipment dealers reported higher-than-anticipated year-end demand based in part on an improved outlook. Crop yields in Central California slipped slightly at year-end, driven by the weak performance of certain nuts. The strong dollar continued to hold back exports of some agricultural commodities, particularly for wheat exports. Contacts noted minimal load growth in electricity as efficiency initiatives offset an increase in demand by customers.
Real Estate and Construction
Activity in real estate markets continued at a strong pace. Construction activity in the residential market remained robust, held back only by shortages of land and labor. High-end home construction grew faster than that of more-affordable units, due largely to narrowing profit margins in lower-end markets. Contacts in Oregon noted that milder and drier weather helped spur an increase in home sales. Low inventory levels and strong demand pushed up house prices and rents in Eastern Washington and Idaho. One contact expected that recent changes to the federal tax system could slow mortgage lending. Commercial construction continued at a strong pace, driven in part by an increase in construction of warehouse and distribution centers. Contacts in Northern California noted elevated demand for commercial office space.
Financial Institutions
Lending activity firmed somewhat over the reporting period. While loan demand was relatively unchanged in most of the District, contacts in the Mountain West reported continued strong gains. Contacts in California reported typical seasonal increases in automotive loans. Demand for deposits outpaced supply, pushing up deposit rates. Interest margins remained narrow. Contacts noted that liquidity was still very strong and overall delinquencies remained low.