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San Francisco: June 2019

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Beige Book Report: San Francisco

June 5, 2019

Summary of Economic Activity
Economic activity in the Twelfth District continued to expand at a moderate pace during the reporting period of April through mid-May. Conditions in the labor market remained tight, hiring activity remained generally stable, and wage growth was moderate. Price inflation remained 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. Conditions in agriculture also improved modestly. Contacts reported that residential real estate market activity expanded moderately, and commercial activity was steady. Lending activity increased slightly.

Employment and Wages
Conditions in the labor market remained tight, with persistent worker shortages reported across various skill levels and industries. Hiring activity remained generally stable over the reporting period. Contacts continued to report elevated competition for workers, difficulty in filling vacancies including entry-level positions, and a shrinking pool of qualified applicants. Many contacts across the District noted that hiring and retaining information technology professionals has been particularly challenging. Contacts in the food services and banking sectors reported an increase in hiring connected to the opening of new locations. Contacts in other sectors, including electronics, manufacturing, utilities, public agencies, and nonprofit organizations, noted that hiring remained generally flat. A quick service restaurant chain in the Pacific Northwest noted that employment levels remained unchanged. A contact in Hawaii reported that following recent increased numbers of lawyers and technological alternatives, hiring in the legal practices sector has softened.

Wage growth continued to rise moderately over the reporting period. Across the District, upward compensation pressures persisted due to brisk competition for workers and higher minimum wages in California and soon in Oregon. Contacts particularly noted increasing entry-level wages for both low- and high-skilled workers. A few contacts also reported offering more comprehensive benefit packages in order to attract and retain workers.

Price inflation remained unchanged on balance. Most contacts across the District, particularly in the finance and technology sectors, reported steady price increases. Some contacts in the transportation and food services sectors reported price increases beyond those implemented earlier in the year. The ability to pass increased labor costs and tariffs to final consumers varied across different sectors, and in some instances even within the same sector. A contact in the California utility sector observed that some price inflation resulted from wildfire-related costs. Contacts in the agriculture sector noted that export prices continued to be subdued. A few contacts in the construction sector mentioned that prices for lumber and other wood products were considerably lower relative to the previous year.

Retail Trade and Services
Sales of retail goods increased modestly. Contacts across the District reported higher retail sales over the reporting period relative to earlier in the year. Contacts reported that most growth has taken place within the online retail market, leading some larger retailers to close certain brick-and-mortar locations across the District. Contacts in the electronics and automotive sectors described sales growth as steady. A large animal product retailer in Arizona mentioned that consumer spending is becoming more polarized, with items at the high and low ends of the price spectrum seeing the largest sales growth.

Activity in the consumer and business services sectors increased moderately. Demand for shipping and logistics services saw strong growth across several product lines, including warehousing services. Food service providers in the Northwest reported strong demand because of the strong regional economy. Contacts in Hawaii noted that the tourism sector remains robust. Contacts in the health care and insurance sectors reported steady demand, while a contact in the passenger air transportation sector noted that demand softened somewhat.

Conditions in the manufacturing sector improved modestly. Contacts in the metal manufacturing sector reported that raw materials were readily available and that capacity utilization remains elevated relative to historical averages. One steelmaker in the Pacific Northwest reported strong domestic demand backed by order backlogs and reduced competition from abroad, though another noted a tick down in all new orders. On the export side, demand for finished metals was somewhat softer. A contact in Northern California reported that demand for semiconductors and smart phones fell modestly due to increased competition from abroad, which in turn led to excess inventory accumulation.

Agriculture and Resource-Related Industries
Conditions in the agriculture sector improved modestly. Many contacts reported stable demand and adequate supply throughout the District, with inventories and planted acreage remaining at healthy levels. Domestic demand for agricultural products remained steady, although a contact in the peach and apricot markets reported increased competition from producers in states outside the District. Concerning export demand, contacts noted that continued trade policy tensions affected some products more intensely than others. Contacts in California and the Mountain West mentioned that demand from abroad has declined for grain, potatoes, walnuts, and cattle markets. Contacts in the swine market reported that the outbreak of a particular strand of swine fever in foreign markets has constrained global supply and increased demand for domestically produced pork products, putting upward pressure on prices. One contact in Central California continued to express concern over higher-than-expected rainfall and its potential effects on the output of crops that are nearing harvest season, such as cherries. In the utilities sector, activity remained mostly unchanged, with one contact in Southern California reporting flat sales growth.

Real Estate and Construction
Residential real estate markets expanded moderately. Contacts noted that declines in mortgage rates spurred demand for both single-family and multifamily housing. Contacts in Idaho and California noted that demand for entry-level homes rose briskly, inventories remained low, and prices appreciated notably. Most contacts reported robust construction activity over the reporting period. A few contacts in Southern California mentioned that homebuilding activity in the area was steady at a low rate, with builders initiating projects only after completed sales.

In the commercial real estate market, contacts reported steady activity. Across the District, contacts generally noted that demand for commercial space remained at healthy levels but softened somewhat relative to earlier in the year. Contacts noted that nonresidential construction activity was buoyed by the industrial real estate sector; demand for physical retail and office space has cooled.

Financial Institutions
Lending activity picked up slightly over the reporting period. Contacts in Central California, the Pacific Northwest, and Idaho continued to report strong loan demand and credit availability. Elsewhere in the District, contacts reported a slowdown in lending activity. Contacts at community banks highlighted that competition between lenders remained elevated. Most contacts reported that loan quality remained generally high, though a contact in Southern California and another in Oregon observed a modest deterioration in underwriting standards.