Beige Book Report: San Francisco
May 27, 2020
Summary of Economic Activity
Economic activity in the Twelfth District contracted markedly during the reporting period of April through mid-May. Most businesses reported dramatic employment declines, due to disruptions related to the COVID-19 outbreak. Changes in wages were mixed. Price inflation was generally muted with exceptions in a few sectors. Sales of retail goods declined sharply, and activity for providers of consumer and business services contracted noticeably. Manufacturing contracted moderately, and activity in the agriculture sector slowed further. Conditions in residential real estate were mixed, while the commercial market showed a notable decline in activity. Lending activity increased moderately, fueled by Paycheck Protection Program (PPP) loans.
Employment and Wages
Business disruptions related to the COVID-19 outbreak caused a surge in layoffs and furloughs over the reporting period. Many nonessential businesses reported double-digit percent reductions in their employment levels as well as cancelled hiring plans. Businesses in the entertainment, food services, retail, and tourism sectors were among the more severely affected. A large specialty retailer laid off or furloughed 85 percent of its employees. Conversely, some banks either maintained or increased hiring levels to accommodate increased demand for PPP loans. Some customer-facing essential businesses mentioned that some separations came at the request of employees who were afraid of contracting the coronavirus. Other contacts noted that some workers' current ability to receive more income through unemployment insurance and other social programs than through employment has hindered employee retention and rehiring efforts. Contacts across the District reported cutting workers' hours. Work arrangements became more flexible where possible, including teleworking and expanded leave periods. A banker in Central California recorded increases in worker absences of up to 10 percent primarily due to a lack of available childcare. A payment processing firm reported that job applications for current openings soared, though many candidates did not have the stated requirements.
Wages declined at some firms, but many reported no changes in hourly rates or salaries. A Southern California hotel reduced workers' pay by up to 40 percent. Building materials manufacturers and transportation providers either suspended or postponed bonuses, merit increases, and cost-of-living adjustments. Some small businesses said that PPP loans helped them maintain their wages at current levels. A Seattle firm reported offering hazard pay bonuses to 87 percent of its workforce.
Prices
Most contacts reported stable prices over the reporting period. Uncertainty about the timing of a rebound in activity inhibited price movement overall. However, prices for building materials increased modestly on balance with new construction projects restarting near the end of April in some areas. Hard-to-find products at grocery stores also showed some price increases. In contrast, contacts noted lower prices at gas pumps and heavy discounting at restaurants and hotels. Steel prices declined sharply due to a slowdown in auto manufacturing. Widespread closures at processing facilities generated oversupplies of livestock and dairy inputs and decreases in prices paid to farmers.
Retail Trade and Services
Retail sales across a variety of sectors fell by double-digit percentages in general as nonessential brick-and-mortar stores largely remained closed. Sales of many consumer goods have shifted heavily to online platforms, including footwear, pet care products, and seasonal merchandise. Online sales partially attenuated the impact of sharply reduced in-person sales. Big box retailers that remained open faced supply chain disruptions for some goods including paper and cleaning products. Demand for certain specialty home products such as do-it-yourself home improvement supplies and gardening materials remained stable or even increased. Auto dealers in the Mountain West reported a sales pickup in late April and early May compared with prior weeks, especially for larger vehicles such as trucks and SUVs, though inventory remained tight.
Activity in consumer and business services contracted noticeably. Transportation fell moderately with the exception of residential delivery services. Restaurants remained closed apart from those able to offer take-out alternatives. Hotels, sports venues, in-person educational institutions, daycare centers, and movie theaters remained largely nonoperational. Spending on most discretionary medical services halted, but demand for mental health and veterinary services remained robust. In the Pacific Northwest, consumers avoided cash heavy expenditures such as auto repair services. A contact in the Pacific Northwest also warned of reduced local government revenue collection and its implication for potential cuts in fiscal spending and public services. In the entertainment sector, demand for broadcasting and voice-over services increased.
Manufacturing
Manufacturing activity declined moderately. Reduced global industrial activity negatively impacted sales, availability of raw materials, distribution networks, and capacity utilization. Demand for finished steel products decreased significantly, driven primarily by a suspension in auto production and lower demand from energy producers. A large metal manufacturer in the Pacific Northwest mentioned that capacity utilization is now below the long-term U.S. average. Manufacturers of building products saw reduced sales and limited production schedules, though one producer observed a pickup in demand as construction sites reopened in late April in some areas. Renewable energy machinery manufacturers cut their domestic production by up to half following health and safety concerns for their workers. Fruit, meat, and dairy producers across the District faced supply chain disruptions and production bottlenecks following the closure of many processing and packing facilities.
Agriculture and Resource-Related Industries
Activity in the agriculture sector slowed further over the reporting period. Domestic demand from the commercial food sector continued to be just a fraction of what it was before the COVID-19 shock. Potato and barley growers in Idaho faced reduced sales to distributors who had retained leftover inventory from the previous season. Fruit growers in California saw some increased demand from food banks, social service providers, and governmental programs, but, a decline overall in domestic demand. Timber producers in the Pacific Northwest also saw a pullback in domestic demand for logs due to the slowdown in manufacturing activity. On the supply side, some producers in Idaho and Arizona have reduced live animal herd sizes in response to bottlenecks at meat processing plants. Agricultural export markets were similarly downbeat. Milk exports declined notably. Slowdowns in the entertainment and restaurant sectors abroad hit exports of nuts and raisins. Energy producers saw steep declines in industrial and commercial demand, but rapid increases in residential usage. Timber loggers witnessed some additional demand from Asian markets facing reduced supply from other western countries.
Real Estate and Construction
Residential construction activity was mixed on net. After a temporary halt in construction, residential projects restarted in some areas in late April or early May, depending on local social distancing relaxation schedules. Overall, home sales slowed dramatically and inventories decreased as sellers held back amid in-person home tour restrictions. Nonetheless, a few local markets in California and Idaho continued to see strong home sales, especially within higher price ranges. Uncertainty around future construction and sales remained high. A contact in Southern California mentioned that residential rent prices were flat or even down slightly as tenants sought and gained payment concessions.
Commercial construction activity declined notably throughout the District. Reports highlighted that weak business prospects for restaurants, hotels, and other commercial venues have severely depressed commercial construction and permitting across a large portion of the District. One contact in Idaho emphasized that commercial projects were only postponed, as opposed to terminated, mostly due to delays in the delivery of building materials.
Financial Institutions
Overall lending activity increased moderately, fueled by PPP loans. Financiers reported that, outside of PPP loans, the level of regular commercial loan origination fell modestly as firms focused instead on drawing down preexisting lines of credit and applying for loans through the federal relief program. Contacts noted that banks' participation in the federal program has increased, though uncertain guidelines have discouraged engagement in the program somewhat. Some banks continued to offer PPP loans to existing customers only. Reports mentioned that loan repayment deferral requests continued to soar. Credit quality remained generally stable though. A banker in Central California did record increased loan write-offs. Refinancing activity for residential mortgages was robust following a decrease in interest rates. Even though application requirements tightened, credit remained widely available for first mortgages and refinances in most areas within the District. Venture capitalists reported they were scrutinizing start-up financing more strictly both for new investment and continued funding.