Beige Book Report: San Francisco
April 15, 2020
Summary of Economic Activity
Economic activity in the Twelfth District contracted notably during the reporting period of mid-February through March. Many businesses reported employment or wage declines due to disruptions related to the outbreak of coronavirus disease 2019 (COVID-19). The rate of price inflation decreased modestly. Sales of retail goods and vehicles declined precipitously, and activity for providers of consumer and business services slowed sharply toward the end of the reporting period. Manufacturing contracted moderately, and activity in the agriculture sector slowed somewhat. Conditions in residential and commercial real estate were mixed, though the residential market saw slight growth on balance. Lending declined moderately.
Employment and Wages
Due to disruptions stemming from the outbreak of COVID-19, many businesses reduced employment levels, and others scrapped plans to expand employment. Developments such as these were reported across various skill levels and industries, though most occurred for lower hourly wage jobs in the retail, food services, and tourism industries. A freeze on television and film production in the District resulted in widespread layoffs in the entertainment sector. A major hotel chain in Southern California put 80 percent of employees on furlough and reduced hours for remaining employees. A restaurant-chain owner in Seattle laid off several hundred employees. Some businesses reported no change in employment levels but expected to have to cut jobs in coming weeks if mandated business closures continue. One metal manufacturer in the Pacific Northwest anticipated reducing payrolls as new orders have declined significantly. A financial technology company in Northern California put on hold a plan to hire 1,500 additional staff members.
Wages declined at some employers. The Southern California hotel company also cut managers' pay 10 to 15 percent in response to a severe decline in occupancy rates. A building supplies manufacturer in Northern California cut wages somewhat to contain costs. One restaurant chain in Washington reported salary cuts of up to 20 percent for office and administrative staff.
Prices
The rate of price inflation decreased a bit. Prices for building materials declined moderately on balance as new construction projects were put on hold. Some contacts reported lower fuel and energy costs along with lower airfares. Changes in prices of agricultural products were mixed. For some growers, prices were stable with solid demand from domestic grocery stores. Selling prices for other growers, especially those dependent on exporting, fell as demand from abroad remained subdued. Many businesses expected heightened slack in the labor market going forward, eliminating any prior upward pressure on wage and price growth. Steel manufacturers in the Pacific Northwest reported no changes in input or selling prices. There were a few reports of price gouging on essential household goods in short supply.
Retail Trade and Services
With few exceptions, contacts reported that sales of retail goods and vehicles declined precipitously on net over the reporting period; this decrease was due to mandated closures of nonessential businesses in all District states in mid- to late-March in response to the spread of COVID-19. Activity came to a standstill for most retailers in California, Hawaii, Idaho and Washington, with exceptions reported for grocery stores and some building product retailers. In Idaho, vehicle sales along with sales of parts and accessories fell from a solid level in late-February and early-March to near zero in mid-March. Some business owners anticipated that retail sales will decline further as job losses decrease incomes. Additionally, lasting impacts of the COVID-19 outbreak could accelerate the trend towards online sales, hurting small retailers with brick-and-mortar stores. Many respondents deemed concessionary government loans essential to prevent widespread small business closures.
Activity for providers of consumer and business services also declined sharply toward the end of the reporting period. Restaurant sales fell sharply. Pivots to take-out operations did not compensate for lost dine-in revenue. A hotelier in Southern California reported that occupancy rates entered free fall in mid-March, and many hotels decided to close temporarily. This contact had previously expected stable growth in the first quarter of the year. The tourism industry in Hawaii essentially shut down in March, a blow to the state's economy. A major shipping and logistics company reported that small business shipments slowed markedly, and international volumes fell by almost half. Home deliveries from big box stores held solid though. Television and film production in Southern California halted. A contact in the health-care industry in Nevada reported that providers were facing limited supplies of essential items like masks, gowns, and ventilators and have been forced to begin rationing care for COVID-19 patients.
Manufacturing
Activity in the manufacturing sector contracted moderately. Most manufacturers, while still operating, noted that the supply chains that deliver raw material inputs have been negatively affected by the outbreak of COVID-19. A contact in Southern California reported that manufacturers of components for renewable energy production have seen decreases in the supply of raw materials. A metal fabricator in Oregon had a healthy backlog of orders but noted emerging difficulties in obtaining inputs and a decline in new orders. A building products manufacturer in the Mountain West saw a severe drop in demand from retailers, who instead bought in smaller quantities from intermediary wholesalers.
Agriculture and Resource-Related Industries
Activity in the agriculture sector slowed somewhat as growers grappled with disruptions due to the COVID-19 outbreak. Several contacts noted that most agriculture businesses in states with shelter-in-place orders, like California and Washington, were designated as "essential" and allowed to continue operations. Therefore, some farming contacts in Central California and Eastern Washington reported that activity was broadly stable, sales to grocery stores were solid, and production inputs and labor supply were generally available. However, a bulk food producer and distributor noted that starting in mid-March sales to restaurants across the District were virtually nonexistent. Washington fruit growers and Idaho corn growers saw a noticeable decline in domestic demand, which has severely jeopardized profitability for some businesses. A contact in Eastern Washington noted that production could be disrupted if the flow of migrant workers from Mexico is impacted by restrictions on Mexico-U.S. border crossings. On the export side, fruit and nut growers in California have seen continued weak demand from China, though wheat growers in Idaho saw an increase in new orders from China in the past few weeks. In general, contacts noted that the strong dollar also hampered export sales.
Real Estate and Construction
Residential real estate activity was mixed but grew slightly on balance. Contacts reported that most in-progress home building continued throughout March, while the future status of residential construction vis-à-vis nonessential business closures was unclear. In most states, construction is expected to continue, though the demand outlook for new residential projects is highly uncertain. Reports also painted a mixed picture of sales activity in the District. Buyer response to the COVID-19 outbreak varied by local market as did local government restrictions on selling. Some reports for Idaho, Oregon, California, and Washington indicated that sales activity and prices were stable around recent levels. Other reports for Idaho and California indicated that sales fell severely in the second half of March.
Conditions in commercial real estate markets were mixed. In Southern California, major infrastructure projects proceeded amidst the statewide shelter-in-place order though some reports emphasized that continuation depends on maintaining a healthy workforce. In the Mountain West, commercial projects generally proceeded though new project proposals declined noticeably. Some reports highlighted the potential for building owners to face strain if commercial tenants are unable to make rental payments.
Financial Institutions
Lending activity declined moderately amidst ample liquidity. Reports noted that new loan origination fell sharply, and many banks received payment deferral requests from small business borrowers. Several banks readied emergency credit lines and expected credit quality to deteriorate as broad economic conditions turn for the worse. A few lenders expressed concern that new government lending programs would not allow speedy distribution of funds to small businesses. Venture capital investing slowed severely and investors are expected to become highly selective regarding new funding opportunities. Home mortgage refinancing activity was robust following decreases in the federal funds rate in early March.