Beige Book Report: San Francisco
April 18, 2018
Summary of Economic Activity
Economic activity in the Twelfth District continued to expand at a moderate pace during the reporting period of late February through early April. Conditions in the labor market remained tight, and upward wage pressures persisted. Price inflation increased modestly. Sales of retail goods were down slightly, while growth in consumer and business services remained solid. Conditions in the manufacturing sector picked up modestly, and activity in the agriculture sector was flat. Contacts reported that residential real estate market activity continued at a strong pace, and conditions in the commercial real estate sector were solid. Lending activity ticked up.
Employment and Wages
Contacts across the District continued to report tight labor market conditions and persistent upward wage pressures in various sectors. Demand for workers experienced in cybersecurity was up. Metals manufacturers reported a modest uptick in employment growth. A contact in real estate development in Northern California observed that demand for contract labor exceeded supply, causing wages to jump. Labor demand in the utilities sector declined somewhat as sales weakened. Employers faced difficulties in filling vacancies in both high- and low-skill positons. In response to labor shortages, several contacts reported increased use of overtime and heightened efforts to automate routine tasks. In Los Angeles, a contact in the air transportation sector implemented process improvements that substituted information technology for labor in customer interactions. In some areas of California, high costs of living made it difficult to attract job candidates. The recent corporate tax cut resulted in some one-time bonuses and a small increase in entry-level wages, according to a few contacts.
Prices
Price inflation increased modestly over the reporting period. Strong construction activity drove further price inflation for a wide variety of building materials, including lumber and sheetrock. Contacts reported a jump in inflationary pressures for metals prices, partly due to the anticipation of tariffs and unrelated increases in raw material costs. Airfares picked up modestly following further industry consolidation and oil price increases. Pharmaceutical prices inched up, resulting in a slight increase in health insurance costs for a Mountain West health-care provider. Retail sales prices were broadly flat to down slightly, with the impact of increased competition in low-cost product spaces mostly offset by the effect of strong demand for high-end goods. Wheat prices decreased modestly due to excess supply. Declines in natural gas prices put downward pressure on heating prices across the District.
Retail Trade and Services
Sales of retail goods were down slightly over the reporting period. Contacts in the Mountain West noted that bad weather in the past month had a negative impact on sales activity in their region. Demand for motor vehicles slowed modestly because of increasing financing costs. The restaurant industry continued to see foot traffic edge down. While mall-based retail activity had been trending down, recently, stores have maintained sales volumes while managing inventories tightly.
Activity in the consumer and business services sectors remained solid. Demand for airline travel was strong, especially from international passengers following improvements in the global economy. Contacts in Los Angeles noted a pickup in tourism activity. Demand for freight airline services was at its highest level since the recession. A major health insurance provider in Utah reported significant competition in the commercial provider market.
Manufacturing
Conditions in manufacturing picked up modestly. Capacity utilization across a range of manufacturing sectors, including steel, picked up noticeably despite rising input prices. Inventories in some sectors ticked up because of a slight decline in export growth, according to a contact in Northern California. Both deliveries and new orders of commercial aircraft edged down on a year-over-year basis. A contact in the metals industry noted greater uncertainty about production costs because materials suppliers would not enter price guarantee agreements.
Agriculture and Resource-Related Industries
Activity in the agriculture sector was flat on balance. Wheat yields were up modestly across the District. Demand in the feedlot industry inched up on a year-over-year basis. Cattle profits were solid, though margins narrowed. Demand for electricity in Southern California was flat, leading excess capacity in power generation to edge up in the region. Grain inventories remained elevated in the Mountain West, and sales contracts fell over the reporting period. Contacts noted that much of the grain industry continued to face prices below breakeven levels.
Real Estate and Construction
Activity in real estate markets continued at a strong pace. Construction in the residential market picked up noticeably, limited only by the persistent shortage of labor and increasing material costs. Contacts across the District observed a solid increase in housing starts, especially for single-family homes, though lengthy permitting processes acted as an additional headwind. Construction starts on middle- to high-end units grew faster than that of more-affordable units because rising input costs jeopardized returns in lower-end markets. Throughout the District, increases in demand amidst still-low inventory levels caused residential sale prices to rise further. Contacts in the Pacific Northwest reported a jump in apartment rents. Commercial real estate activity moderated to a solid pace. Contacts in Eastern Washington reported a modest decline in permitting for commercial projects on a year-over-year basis. Demand for warehouse space for shipping fulfillment operations was up across the District. Some regions of the District cited rising financing costs as a growing constraint on commercial real estate activity.
Financial Institutions
Lending activity ticked up over the reporting period. Loan demand was mixed but increased slightly overall. Strong loan demand in Oregon resulted in a modest jump in lending rates. Contacts in Northern California reported moderate growth in consumer loan demand, while commercial demand fell modestly. On balance, deposit rates edged up and net interest margins remained narrow. Asset quality remained solid. In Oregon, underwriting standards for residential development loans tightened moderately.