Beige Book Report: San Francisco
April 17, 2019
Summary of Economic Activity
Economic activity in the Twelfth District continued to expand at a moderate pace during the reporting period of mid-February through March. Conditions in the labor market remained tight, hiring activity remained generally stable, and wage growth was moderate. Price inflation was unchanged on balance. Sales of retail goods increased modestly, while activity in consumer and business services increased moderately. Conditions in the manufacturing sector improved modestly, and conditions in agriculture deteriorated somewhat. Contacts reported that residential real estate market activity expanded moderately and commercial activity was robust. Lending activity was mixed.
Employment and Wages
Conditions in the labor market remained tight, and hiring activity remained generally stable over the reporting period. Across the District, contacts reported an increase in competition for workers and a shrinking pool of qualified applicants across industries and skill levels. A large San Francisco software and consulting company reported searching for candidates outside the District and even abroad in order to fill its vacancies. In the Mountain West, contacts in the retail and financial services sectors reported failing to fill positions over extended periods, as well as difficulties in retaining qualified workers. Elsewhere, contacts in the manufacturing, utilities, and financial sectors reported a flat hiring rate. A quick service restaurant chain in the Pacific Northwest also noted that employment levels remained unchanged. In California, a few contacts in the hospitality and banking sectors anticipated slower hiring activity later in the year.
Wage growth continued to pick up broadly. Contacts across the District noted persistent upward compensation pressures due to brisk labor demand and labor shortages. Contacts emphasized that wage growth was stronger for higher-skilled workers, though the higher minimum wages in California and Oregon continued to put upward pressures on wages for lower-skilled workers. Contacts continued to report enhanced bonus structures and benefit offerings to better attract and retain experienced workers. A labor union representative highlighted the potential for downward wage pressures within the entertainment industry following recent large mergers and worker layoffs.
Prices
Price inflation was unchanged on balance over the reporting period. Contacts in the construction sector mentioned price increases for most building materials, except lumber. Contacts in the banking, food, and transportation sectors generally reported being able to pass increased labor costs to final consumers, resulting in modest price inflation in those sectors. A contact in the California utility sector observed that price inflation in that sector remained damped as fuel costs did not rise, and excess capacity persisted. Contacts in the agriculture sector noted subdued market prices overall. Oversupply and weak export demand depressed prices for dairy and nut products. One contact observed that some crop prices in the Central Valley of California increased. A contact in California mentioned that high inventory levels suppressed price increases in the semiconductor sector.
Retail Trade and Services
Sales of retail goods increased modestly. Contacts across the District reported higher-than-anticipated retail sales following the conclusion of the partial government shutdown. A contact in the Mountain West noted that rebounding consumer confidence also contributed to higher-than-expected retail sales. A contact in Southern California reported higher consumer spending at airports.
Activity in the consumer and business services sectors increased moderately on balance. Demand for passenger and cargo air transportation expanded solidly. Activity in the quick service restaurant segment was slightly stronger on a year-over-year basis. A contact in the hospitality sector in Southern California noted that hotel bookings declined noticeably, driven by fewer reservations at more affordable properties.
Manufacturing
Conditions in the manufacturing sector improved modestly. A steel manufacturer in Oregon continued to note elevated capacity utilization relative to historical averages, due to lower competition from abroad. A contact in Arizona who provides transportation services to the oil and asphalt sector noted solid demand from producers in that sector. Deliveries of commercial aircraft were flat from the same period last year, while new orders fell a notch. A contact in Northern California reported that demand in the semiconductor industry fell modestly in the beginning of the year.
Agriculture and Resource-Related Industries
Conditions in the agriculture sector deteriorated somewhat. Many contacts continued to report that trade policy tensions and a stronger dollar constrained sales to export markets. A contact in Idaho noted that crop inventories rose to record levels as farmers waited for a resolution to trade negotiations and a recovery in various market prices. In addition, domestic demand for agricultural goods was mixed, increasing only slightly on balance. Oversupply in dairy markets persisted, hurting profitability and forcing some producers in the Mountain West to sell below break-even prices. Contacts reported that higher-than-expected rainfall since the beginning of the year positively affected agricultural production, but raised concerns that continued heavy rainfall could depress output ahead. In the utilities sector, activity remained mostly flat.
Real Estate and Construction
Real estate markets expanded moderately. Most contacts reported increased activity over the reporting period, following a relatively soft period at the beginning of the year. Contacts noted that declines in mortgage rates spurred demand for both single- and multi-family housing, but that inventory for both remained low, leading to a slight pickup in prices. Contacts in the Pacific Northwest and Mountain West generally noted stable to slightly increased residential construction activity, while a contact in Southern California mentioned that construction spending tapered. A contact in the Mountain West observed that some homebuilders opted to relocate to lower-cost markets outside the Twelfth District. Contacts in Idaho and Arizona reported that rental market activity was robust, partly due to a limited supply of starter homes and elevated home prices. Contacts generally noted that time-on-market had risen slightly but was still low by historical standards.
In the commercial real estate market, contacts reported robust activity. Across the District, contacts generally noted that construction activity continued to follow a strong trend. Contacts noted that rents for industrial spaces increased moderately. In California, a contact observed that building activity slowed somewhat after the completion of several large projects.
Financial Institutions
Lending activity was mixed over the reporting period. A few contacts in Central California and Idaho highlighted strong lending activity. Elsewhere in the District, contacts reported a slowdown in loan demand. Contacts at community banks in Oregon and Central California noted that competition between lenders remained brisk, especially for high quality loans. In general, loan quality remained high, though some contacts observed a modest deterioration in commercial creditworthiness. A contact in the Mountain West noted that the balance sheets of certain agricultural producers weakened notably due to low market prices and weak export demand.