Beige Book Report: San Francisco
July 18, 2018
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. Conditions in the labor market remained tight, and wage pressures picked up. Price inflation increased moderately. Sales of retail goods picked up slightly, while activity in consumer and business services edged down. Activity in the manufacturing sector remained solid, and conditions in the agriculture sector deteriorated modestly. Contacts reported that residential real estate market activity expanded at a solid pace, and activity in the commercial real estate sector was also solid. Lending activity ticked up moderately.
Employment and Wages
Tight labor market conditions persisted across all sectors, leading to a pickup in wage growth. Contacts continued to report challenges retaining workers. In the Mountain West, a few major national employers attracted low-skilled warehouse workers from smaller businesses that could not match their starting wages. Across the District, contacts observed higher starting salaries and increased bonuses to attract skilled financial service and information technology professionals. Demand for skilled lending officers increased moderately due to stronger loan growth over the reporting period. Shortages of plumbers, electricians, and other specialized workers drove wage pressures for these positions and led to construction project delays in some cases. A contact in Oregon's banking sector reported an uptick in lending to manufacturers for automation projects to stem increases in labor costs that have weakened profitability. Crop harvesting and processing businesses noted difficulties hiring for on-site managerial positions in rural areas. A contact in financial services in central California reported that employment levels fell slightly as the number of mergers and acquisitions in the region picked up, creating some job redundancies.
Prices
Price inflation increased moderately over the reporting period. Recent oil price increases spurred price inflation in a variety of sectors. Pricing pressures strengthened for freight costs at lumber businesses in California and Oregon and for petroleum-based products like asphalt. Across the District, contacts noted a pickup in price growth for finished steel and for metal inputs to manufactured products. A few contacts in manufacturing attributed recent inflationary pressures for metal products and declines in the duration of price guarantees to the implementation of tariffs. Solid construction sector activity continued to exert upward pressure on prices for building materials. Contacts in California reported moderate price inflation for cherries, nuts, and raisins after yields fell due to poor growing conditions. A few contacts reported that grocery stores passed on increased food safety costs to consumers, increasing food prices somewhat. Excess capacity in power generation and low input costs continued to limit increases in electricity prices in Southern California. Generic drug prices continued to fall modestly due to a relaxation in regulation and heightened competition among the largest drug sellers.
Retail Trade and Services
Sales of retail goods picked up slightly over the reporting period. Contacts in the Mountain West reported an overall increase in vehicle sales in the region, with truck sales lagging passenger car sales somewhat. Demand at consumer hardware and home improvement stores increased moderately. In the food and beverage industry, contacts reported flat sales at grocery stores.
Activity in the consumer and business services sectors edged down. Sales at quick service restaurants were generally flat. In the Mountain West, the livestock health services sector saw growth slow moderately because of disruptions to the medication supply chain. Activity at transportation businesses was constrained slightly due to continued shortages of truck drivers. Growth in the pharmaceutical industry slowed modestly as continued deflationary pressures for generic drug prices negatively affected profitability at producers of branded drugs.
Manufacturing
Activity in the manufacturing sector remained solid. A contact in the Mountain West noted that demand from the mining industry for equipment jumped, leading businesses to expand operations. Deliveries of commercial aircraft increased noticeably from the same period last year, while new orders grew moderately. A steel producer in Oregon observed that there was sufficient capacity to meet the continued elevated demand for their products.
Agriculture and Resource-Related Industries
Conditions in the agriculture sector deteriorated modestly. In California, yields for various crops fell because of weak precipitation levels in recent months. In the Mountain West, feedlot profits fell noticeably on a year-over-year basis, and profits at dairy and pork producers declined moderately. A pickup in global demand for raisins and nuts resulted in a slight increase in exports of these crops. Potato yields in Idaho were solid, and inventory levels improved from the same period last year.
Real Estate and Construction
Activity in real estate markets expanded at a solid pace. Construction in the residential market was strong, constrained only by the shortage of labor and rising material costs. Contacts across the District reported that home prices and residential rents picked up due to still-low inventory levels and strong demand. In the Mountain West, price growth was most evident at more affordable price points where inventory was especially low. A contact in the Seattle area noted that listing durations for single-family houses continued to trend downward due to brisk selling activity. A few contacts noted that rising borrowing costs might limit demand, although there was no tangible impact over the reporting period. Commercial real estate activity was also solid. In Oregon, construction starts for industrial and warehouse spaces picked up noticeably, as did leasing demand for these spaces. Contacts in Southern California reported that commercial rents and sales prices increased moderately.
Financial Institutions
Lending activity ticked up moderately over the reporting period. Loan demand increased overall, with contacts across the District reporting solid loan growth. Deposit growth picked up in the Mountain West. Contacts in California and Oregon observed strong asset quality and liquidity levels. A few contacts noted tighter lending standards for borrowers in the agriculture sector because of weakening profitability in segments of that industry.