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San Francisco: July 2019

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Beige Book Report: San Francisco

July 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-May through June. Conditions in the labor market remained tight, employment growth was modest, and wage growth was moderate. Price inflation remained unchanged on balance. Sales of retail goods increased moderately, while activity in consumer and business services increased somewhat. Conditions in the manufacturing sector were mixed. Conditions in agriculture deteriorated modestly. Contacts reported that residential real estate market activity expanded moderately, and commercial activity grew modestly. Lending activity picked up moderately.

Employment and Wages
The labor market remained tight and employment growth was modest. Some contacts reported that employment growth would have been higher if not for persistent shortages of qualified labor. In Eastern Washington, a large employer in the utility sector shifted some of its existing workforce into information technology-related functions, given the difficulty of hiring for those roles. To fill vacancies in construction positions, some employers in Idaho discussed whether to relax certain hiring standards related to drug testing. In Southern California, some employers increased investments in workforce development programs to hire and train workers from labor pools that may have been overlooked in the past.

Wages continued to rise moderately over the reporting period due to brisk competition for qualified workers across sectors. Wages for construction jobs rose solidly in parts of the District where building activity picked up. Hourly rates for delivery drivers at a major shipping and logistics business in California rose moderately. A few businesses continued to adjust to increased minimum wages in their states, which have put upward pressures on starting pay. Some businesses relied increasingly on signing bonuses and expanded benefits packages to fill vacancies.

Price inflation remained unchanged on balance. For many businesses, brisk competition in final goods markets limited the ability to raise selling prices to offset higher costs, which rose because of compensation pressures and higher input costs. A few businesses that import heavily from China reported higher input costs due to tariffs. Lumber prices remained substantially lower than they were last year. Prices for most other building materials increased somewhat over the reporting period. In Seattle, a restaurant industry contact reported weak upward price pressures for food and beverages, while a payments services provider noted that higher hardware costs were being passed on to clients. Inflation in the agriculture sector overall remained modest, but market prices for beef and pork rose noticeably due to decreases in global supply.

Retail Trade and Services
Sales of retail goods increased moderately. In the Pacific Northwest and the Mountain West, tight labor markets with solidly rising wages supported brisk consumer spending. In Oregon, sales at home improvement stores rose moderately on a year-over-year basis, and a major apparel company based there reported that demand was healthy and should remain so, thanks to elevated consumer confidence. Spending at e-commerce outlets continued to displace some foot traffic at brick-and-mortar retailers, but the impact has been uneven across the District.

Activity in the consumer and business services sectors increased somewhat. Demand for shipping and logistics services remained solid. A major service provider in the District noted that they expect continued brisk shipping activity thanks to strong consumer spending and innovations in their service offerings, such as expanded mobile checkout options. Restaurants in the Pacific Northwest reported moderate sales growth because of the healthy regional economy. Growth in airline passenger volumes in the Los Angeles area slowed slightly, though retail revenue growth at airports picked up as per-passenger spending increased. In the wider Southern California region, contacts reported weakening conditions in the hospitality industry, visible in fewer bookings for both leisure and business guests and a shift in preferences to more affordable rooms.

Activity in the manufacturing sector was mixed. Production of heavy building machinery and construction materials like asphalt declined somewhat due to lower domestic demand. Some of the weaker demand was attributed to poor weather in regions outside of the District, which delayed building projects there. A business that supplies natural gas and electricity to various manufacturers noted that demand from their aerospace and metals-producing customers was especially solid, likely reflecting the impact of recent protective tariffs in the case of the metals producers. In Northern California, activity in the semiconductor sector recovered from a dip in recent months, with healthier sales and inventory levels.

Agriculture and Resource-Related Industries 
Conditions in the agriculture sector deteriorated modestly. Poor growing conditions for wheat and corn resulted in yields weaker than normal in the Mountain West, though some contacts said this boosted profitability slightly on net as selling prices ticked up. Demand for lumber from major trading partners like China continued to run soft due to trade tensions, and domestic demand was also weak due to slower national building activity in recent months. A lumber producer in Oregon observed that some landowners initiated plans to reduce log supply in response to continued weak demand. Fruit growers in the Pacific Northwest also noted subdued demand from foreign trading partners owing to trade developments. A contact in Central California observed stable domestic demand for a variety of crops, though uncertainty surrounding global demand ticked up. Domestic producers of beef, pork, and poultry continued to benefit from the impacts of a swine fever outbreak in China, which limited Chinese meat imports. In the utilities sector of Southern California, electricity sales growth was flat and generation capacity remained well above demand.

Real Estate and Construction
Residential real estate markets expanded moderately. In most areas, demand remained elevated while supply continued to be somewhat constrained by worker and materials shortages, putting further upward pressures on selling prices. In the Mountain West, construction activity did not keep pace with growing demand for both single-family and multifamily housing in urban areas, raising affordability concerns further. In Oregon, the completion of several apartment complexes and single-family developments resulted in brisk selling activity, especially for more affordable units. A couple of contacts reported a tick down in housing demand in Washington and Central California, as evidenced by growing time-on-the-market, but still expected generally stable market activity over the rest of the year.

In the commercial real estate market, contacts reported modest expansion. In Washington, construction activity was strong, and builders had long lists of planned projects, especially in urban areas. Demand for office space in Seattle was high, and the vacancy rate was nearly the lowest in the country. A contact in Central Oregon reported that demand for retail space picked up noticeably, but remained at a slightly lower level relative to previous economic expansions. Commercial permitting for Idaho and Oregon as a whole was down modestly.

Financial Institutions 
Lending activity picked up moderately over the reporting period. Contacts across the District noted healthy demand for loans, supported by historically low interest rates, and observed that credit availability was steady. In the mortgage market, refinancing activity increased modestly as mortgage rates declined. Loan quality remained solid, though a contact in Oregon reported that loan quality in their region's agriculture industry deteriorated slightly due to declines in profitability in the sector.