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San Francisco: October 2018

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Beige Book Report: San Francisco

October 24, 2018

Summary of Economic Activity
Economic activity in the Twelfth District continued to expand at a moderate pace during the reporting period of September through early October. Conditions in the labor market tightened noticeably, and wage pressures picked up. Price inflation increased moderately. Sales of retail goods picked up slightly, while activity in consumer and business services was solid. Activity in the manufacturing sector expanded moderately, and conditions in agriculture improved somewhat. Contacts reported that residential and commercial real estate market activity expanded at a strong pace. Lending activity picked up moderately.

Employment and Wages
Conditions in the labor market tightened noticeably, with contacts across the District experiencing continued hiring challenges due to labor shortages. Manufacturers in Oregon noted difficulty hiring entry-level production workers, and employment growth fell short of firms' expectations. Shortages of skilled loan officers limited hiring at several rural community banks. A contact in the California banking industry observed that an uptick in mergers resulted in a modest decline in employment as the banks involved resolved job redundancies. A major shipping and logistics business in Northern California reported strong employment growth due to recent and anticipated increases in demand for its services.

Wage growth picked up broadly. Contacts across the District noted continued upward compensation pressures for a variety of skilled occupations, including finance professionals, health-care providers, and business consultants. A contact in the retail industry raised starting wages in anticipation of intensifying labor shortages during the holiday season. A few contacts noted that some businesses increased benefits like vacation allowances and onetime bonuses rather than wages.

Price inflation increased moderately over the reporting period. Several contacts noted a moderate pickup in price growth for metal inputs due mostly to the continued impact of tariffs. Rising energy costs resulted in pricing pressures for transportation services and petroleum-based inputs to construction and manufacturing. Final prices at quick service restaurants increased somewhat. A contact in the hospitality industry in Southern California reported that many hotels were passing along higher labor and input costs to guests in the form of one-off surcharges. Pricing pressures in the agriculture markets across the District were mixed, but flat on balance. Lumber prices continued to decline due to a softening in construction starts in some regions.

Retail Trade and Services
Sales of retail goods picked up slightly over the reporting period. Demand at home improvement stores increased moderately, although the building materials segment exhibited modest weakness. E-commerce retail sales grew somewhat, reflecting gains in consumer confidence. A major quick service restaurant chain based in Washington reported that in-store traffic was down slightly.

Activity in the consumer and business services sectors was solid. In Washington, demand for health-care services grew noticeably in urban areas, due in part to an increase in hiring at businesses with health benefits. A contact in the shipping and logistics industry noted an increase in demand for freight services, especially from small businesses. A contact in Southern California reported an uptick in demand for technology consulting services. Contacts in the hospitality industry noted that hotel bookings for leisure guests were solid, and discretionary on-site spending grew. However, business reservations declined somewhat on a year-over-year basis.

Activity in the manufacturing sector expanded moderately. Industry contacts reported that demand for construction equipment was solid, though producers were attentive to indications of a moderation in some real estate markets. Contacts in Northern California reported that sales of semiconductors were brisk, driven in part by strong global demand. Deliveries of commercial aircraft were essentially flat from the same period last year, while new orders grew noticeably.

Agriculture and Resource-Related Industries
Conditions in the agriculture sector improved somewhat, with crop yields generally beating expectations. However, most contacts reported that trade policy changes started to have a tangible impact on activity. Yields and profits for growers in Central California continued to be satisfactory, but inventories of certain exported crops increased after delivery schedules were delayed due to trade policy uncertainty. Forward contracts for heavily exported crops declined. Wheat and fruit growers in Washington observed a slight tick down in demand, which some attributed to growing trade tensions. A contact in Oregon noted that sales of raw lumber to large building companies continued to decline at a gradual pace, while demand for processed wood products was solid.

Real Estate and Construction
Activity in real estate markets expanded at a strong pace. Overall, contacts reported that robust demand for housing outpaced the supply of homes, which continued to be constrained by shortages of labor and high material costs. In particular, inventory levels of more affordable homes remained low, while demand in this market segment picked up further, putting upward pressure on prices. Contacts noted that a further increase in mortgage rates had only a slight moderating impact on demand.

Commercial real estate activity was robust. Construction activity was solid, especially for industrial and warehouse spaces. A contact in Southern California noted that rents and occupancy rates increased. In Oregon, commercial activity expanded in rural areas with lower land costs and rents. Demand for retail spaces at malls declined somewhat, resulting in lower occupancy rates.

Financial Institutions
Lending activity picked up moderately over the reporting period. Loan demand increased overall. Profitability and net interest margins improved noticeably as increases to lending rates outpaced those for deposit rates. Credit quality continued to be strong. Contacts at credit unions reported an increase in membership.