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San Francisco: March 2019

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Beige Book Report: San Francisco

March 6, 2019

Summary of Economic Activity
Economic activity in the Twelfth District continued to expand at a moderate pace during the reporting period of January through mid-February. Conditions in the labor market remained tight, and wage growth was moderate. Price inflation was unchanged. Sales of retail goods expanded modestly, while activity in consumer and business services was strong. Conditions in the manufacturing sector strengthened moderately, and conditions in agriculture deteriorated modestly. On balance, contacts reported that residential and commercial real estate market activity expanded moderately. Overall lending activity was flat.

Employment and Wages
Conditions in the labor market remained tight, with persistent worker shortages reported across many industries and skill levels. Hiring picked up moderately on balance. Employment at a large San Francisco software and consulting company grew notably as demand for its services increased. A cattle ranching company in Arizona also increased employment to meet growing demand. In the Mountain West, a regional bank noted that its hiring was limited only by a shortage of qualified labor. The bank hoped to be able to increase employment further when it expands its lending business later this year. A steel manufacturer in Oregon reported that hiring activity was flat. A fruit grower in the Pacific Northwest noted that weaker profit potential stemming from lower market prices resulted in excess labor capacity in the industry and could lead to layoffs.

Wage growth continued to increase moderately across most sectors due to continued brisk labor demand amidst persistent shortages of qualified workers. Contacts emphasized that wage growth was especially noticeable for higher-skilled workers. Demand for high-skilled warehouse workers and truck drivers picked up in the Mountain West, resulting in wage pressures. Employers continued to raise starting salaries for most information technology and cybersecurity positions. A community bank in Central California enhanced its bonus structure and increased its retirement benefits to better retain and attract experienced loan officers.

Overall, price inflation was unchanged over the reporting period. A contact in Seattle noted somewhat higher prices at grocery stores and restaurants due to the robust local economy. A contact in the California utility sector observed modest upward pricing pressures for electricity rates due mainly to higher financing costs following recent wildfires. A contact in Central California saw slightly higher crop prices, due in part to lower inventories, while elsewhere in the District, pricing pressures for fruit and dairy remained subdued. A contact in the Mountain West observed that fuel prices fell further. Lumber prices were stable, but at a noticeably lower level than last year, and contacts in California and Oregon reported that price inflation of other building materials was weak.

Retail Trade and Services
Sales of retail goods expanded modestly. Contacts in the Mountain West reported that retail sales activity beat expectations for a moderation following the holiday season and against the backdrop of the government shutdown. A contact in the home goods retail sector in Arizona noted solid sales activity. One contact in the Mountain West reported that retailers are attentive to ongoing trade negotiations, as certain product supply chains depend on inputs from China and could be negatively impacted if no resolution is reached in the coming months.

Activity in the consumer and business services sectors was strong. Demand for software products and consulting services expanded solidly in Northern California, and one contact noted that, with IPO activity expected to pick up in the coming year, the outlook for most technology consulting and financial services businesses was optimistic. A major shipping and logistics business reported plans to increase investment in automation to meet growing consumer and business demand more efficiently.

Conditions in the manufacturing sector strengthened moderately overall. A steel manufacturer in Oregon noted strong activity in the industry due to lower competition from abroad arising from trade policy actions. A contact in Northern California reported that activity in the semiconductor industry continued on solid footing. Deliveries of commercial aircraft were flat from the same period last year, while new orders increased significantly. A contact in the Pacific Northwest observed that activity at sawmills ticked down, due in part to poor weather affecting raw material deliveries and slower growth in the national housing market. The outlook in the manufactured lumber sector was for solid building activity as weather conditions improve.

Agriculture and Resource-Related Industries
Conditions in the agriculture sector deteriorated modestly. Many contacts continued to cite trade policy changes as a source of weaker sales abroad and general uncertainty, though factors such as a stronger dollar and the moderation in the housing market also played a role. A contact in Eastern Washington observed that demand from China for fruit crops declined, and a contact in California noted that walnut exports declined. A raw lumber producer in Oregon reported that sales were significantly lower on a year-over-year basis, due to moderating construction activity and lower demand from China. Oversupply in dairy markets persisted, hurting profitability and forcing some producers in the Mountain West to exit the market. In Idaho, profitability at beef producers picked up, though it was still below levels seen a year ago. A California contact noted that the outlooks for crop yields and inventories improved further after rainfall beat expectations over the reporting period.

Real Estate and Construction
Real estate markets expanded moderately on balance. While most contacts continued to acknowledge slower activity over the past several months, they did not notice any significant deterioration over the reporting period. Contacts in the Pacific Northwest and Mountain West generally noted stable to slightly improved residential construction activity. A contact in Oregon reported a modest increase in building and selling activity due in part to lower mortgage rates, though a few other contacts observed a slight decline in building activity in some areas due to softer demand. A contact in Central California observed tepid selling activity, while contacts in Southern California and Idaho saw solid demand supporting still-elevated home prices. Contacts generally noted that residential inventories and time-on-market had risen slightly but were still low by historical standards.

In the commercial real estate market, contacts reported stable construction activity. Contacts in the Pacific Northwest generally noted that construction activity has not deviated noticeably from its solid trend. However, in Oregon, a contact observed that building activity was down slightly on a year-over-year basis. A contact in Central California saw commercial leasing and sales activity slow modestly.

Financial Institutions
Lending activity was generally flat over the reporting period. A contact at a national small business lending service based in California reported that loan demand significantly beat expectations. However, contacts in the Mountain West noted that while most business borrowers renewed loans at existing levels, a few reduced credit lines due to lower demand for their products. Contacts at community banks in Oregon and Central California noted that loan growth slowed slightly, while competition between lenders was brisk. Most contacts reported that credit quality remained healthy. However, a contact in the Mountain West reported that the balance sheets of dairy producers weakened as profitability declined in that market.