Beige Book Report: San Francisco
November 27, 2019
Summary of Economic Activity
Economic activity in the Twelfth District expanded at a modest pace during the reporting period of October through mid-November. The labor market remained tight, employment growth picked up moderately, and wages rose modestly. Reports on price inflation were mixed. Sales of retail goods increased somewhat, and activity in consumer and business services was solid. The pace of commerce in the manufacturing sector was little changed, and activity in the agriculture sector was mixed. Residential and commercial real estate markets expanded moderately. Lending grew further.
Employment and Wages
The labor market remained tight, and employment growth picked up moderately. Businesses in sectors including health care, finance, and manufacturing noted solid hiring activity, while others reported that shortages of qualified labor prevented them from filling vacancies. In the Mountain West, a producer of building products hired tradespeople in response to improved construction activity, and a contact in Boise reported that a major e-commerce business was opening a distribution center in the area, resulting in anticipatory hiring. In the Pacific Northwest, a health-care provider expanded its workforce in response to higher demand. Worker turnover also spurred hiring activity, as in the case of a credit union in Northern California. A community banking contact in Oregon saw previously robust demand for workers moderate slightly.
Wages rose modestly across sectors as companies tried to attract qualified workers in highly competitive labor markets. Wages picked up further for skilled finance and technology workers, according to community banks, credit unions, and financial technology companies across the District. A provider of business security services in Seattle observed that labor costs have risen to the highest level in company history. A few businesses in higher cost urban areas noted efforts to relocate jobs to lower cost areas of the District in order to contain labor compensation. Several reports mentioned that forthcoming increases in the minimum wage taking effect in the new year would result in higher wages for most hourly workers as employers adjust pay scales upwards.
Prices
Reports on prices were mixed, but suggested that inflation was up slightly on balance. A handful of businesses, such as a quick service restaurant chain and a professional security provider, reported that selling prices were higher due to a pickup in wage costs that could not be sustainably absorbed by profit margins. Health-care service providers noted that inflation ticked up for many products and treatments due to solid patient traffic. Some producers of building materials and wood products increased selling prices in response to improved construction activity, while others lowered prices somewhat in response to weak export demand. Contacts in metals manufacturing and public utilities reported stable prices on inputs such as copper and natural gas. In Southern California, subdued demand for hotel lodging resulted in a slowdown in room rate inflation and, for some hotels, modest declines in prices.
Retail Trade and Services
Sales of retail goods increased somewhat. Most reports indicated that consumer demand was steady, with spending supported by increasing incomes borne of tight labor markets. Sales at specialized outlets, such as home improvement stores and pet supply stores, rose noticeably. Retailers were generally optimistic about holiday sales, given solid consumer spending over the past year and other factors like continued service improvements at e-commerce outlets. A few businesses expected to rely more on discount pricing schemes than in previous holiday seasons due to brisk competition. Some businesses that depend primarily on brick-and-mortar sales were concerned about inclement weather constraining foot traffic; one contact noted that, with Thanksgiving falling later than usual, the shorter holiday shopping season could damp sales.
Activity in the consumer and business services sectors was solid. Across the District, demand for health services was strong and in some cases led service providers to open new locations. In the entertainment sector, the robust growth of streaming services has resulted in a boom in television and movie production that could lead to expansion in locales in the District outside of Southern California. Sales at quick service restaurants grew steadily, though one contact in Southern California noted a few restaurants closed in response to labor and operating costs that exceeded sales revenue. In California, the tourism sector saw mixed activity, with sales at leisure cruise companies rising somewhat and occupancy rates at hotels around San Diego falling modestly.
Manufacturing
Activity in the manufacturing sector was little changed. A metals manufacturer in the Pacific Northwest reported that demand was steady, though order backlogs for most producers were no longer growing. Domestic wood product manufacturers saw the pace of sales pick up modestly thanks to the stabilizing housing market, which followed the broad decline in mortgage rates. In general, these manufacturers also noted stiff competition with producers from countries that have not been targeted with tariffs. However, one contact noted that production constraints at sawmills in Canada have benefited domestic producers by reducing Canadian supply to the United States.
Agriculture and Resource-Related Industries
Reports on activity in the agricultural sector were mixed. In the Central Valley of California, one contact noted solid yields and sales for crops like tomatoes, beans, and grapes, while another observed disappointing nut yields and continued weak export demand. Profitability for growers improved slightly, however, as they adjusted their supply levels in response to the new environment of subdued demand from abroad. Activity in the livestock sector was also mixed, with demand for beef and dairy cattle ticking down and demand for swine picking up somewhat. A lumber producer from the Pacific Northwest reported that production has been steady, but exports continue to decline due to trade tensions and slowing foreign economies. For some wheat growers in Eastern Washington, recent inclement weather prevented them from planting, while tensions with trading partners have resulted in an oversupply in domestic markets and tighter profit margins.
Real Estate and Construction
Residential real estate activity expanded moderately on balance. Several reports noted that permitting picked up, along with sales, due in part to lower interest rates spurring construction and demand. Labor shortages and higher materials costs still limited construction starts somewhat, but a few respondents indicated that materials were now more readily available and wait times for contractors had shortened modestly. Prices grew a bit, with historically elevated selling prices and rents leading buyers in some urban areas to relocate. Robust demand continued to outpace supply and push up prices in the Mountain West, especially in metro areas like Boise. In Seattle and Los Angeles, contacts noted a mixed picture of the residential market, with some indicating that time-on-market for houses increased amid flagging demand and others observing robust construction activity and sales.
Activity in commercial real estate markets also expanded moderately. Demand for industrial spaces like factories and distribution centers was brisk in Southern California. Commercial construction activity was stable to up slightly in Oregon. In Seattle, major developers have initiated new commercial projects to meet the demand of businesses that have expanded employment and operations. In the Los Angeles area, rents have risen to such high levels in response to past robust demand for office space that leasing activity has cooled slightly. A contact in the Central Valley of California observed a modest decline in commercial permitting.
Financial Institutions
Lending activity grew solidly, with most reports noting a further pickup in loan demand and a few noting no change over the reporting period. In general, lower interest rates drove more lending activity, but also resulted in narrower interest margins for many banks. A financial technology company that lends primarily to small businesses reported steady activity. Credit quality was strong across most of the District, though a few banks reported tighter underwriting standards for new loans in the face of uncertainty about future economic conditions.