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San Francisco: July 2020

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Beige Book Report: San Francisco

July 15, 2020

Summary of Economic Activity
Economic activity in the Twelfth District contracted modestly on balance during the reporting period of mid-May through June. Employment levels increased slightly, as rehiring activity proceeded cautiously. Wages were generally stable, as were prices. Sales of retail goods rose moderately, while activity for providers of consumer and business services continued to contract sharply. Manufacturing activity was mixed, and conditions in the agriculture sector remained weak. Conditions in residential real estate improved moderately, while the commercial market was mixed. Lending activity ticked up.

Employment and Wages
Employment levels increased slightly, as reopening and rehiring activity proceeded cautiously after the prior months' surge in layoffs and furloughs. Most companies that reduced employment in the wake of the COVID-19 outbreak added only a fraction of previously separated workers to their payrolls, while others that did not lay off or furlough workers scaled back hiring plans going forward. IT and business services companies noted continued hiring, albeit at a slightly slower pace. Building material producers reported a tick up in payrolls in response to growing demand from the construction sector. In Los Angeles, restaurants increased employment modestly, but anticipated having to reinstate furloughs due to a reversal in the reopening process. Entertainment streaming services increased employment slightly, while unemployment in film and television production in Southern California remained historically elevated. Over the next several months, tourism industry employers in Hawaii expect to recall only about 10 to 15 percent of the workers who were laid off or furloughed in March and April. Some contacts reported generous unemployment compensation limited the pace of hiring.

Wages were broadly stable. While contacts noted modestly to moderately falling wages for some lower-skilled jobs and rising salaries for in-demand jobs in IT and finance, most reported stable compensation. A few contacts cited firms' tendency to try to ride out the initial shock of a downturn before adjusting wages and other business costs. However, some firms have suspended or postponed bonuses and merit increases in response to deteriorating business conditions.

Most contacts reported stable prices over the reporting period as businesses generally took a cautious approach to potential price changes. A few observed slightly higher prices at restaurants, perhaps to account for the cost of new cleaning and safety supplies and supply constraints for certain foods. Some restaurants limited price changes in an attempt to retain customers. Building materials' prices ticked up with construction projects restarting or continuing in several regions and residential permitting rising in some areas. Electricity and fuel prices were unchanged on balance. Selling prices for most crops fell, as supply outstripped demand, especially from foreign markets. A credit union in California suspended most fees on consumer accounts. Hoteliers and airline operators decreased some prices for tourist destinations.

Retail Trade and Services
Retail sales rose moderately, as restrictions on nonessential businesses eased in the early part of the reporting period. Contacts observed a broad reversal in the negative growth trajectory of retail activity, with foot traffic to brick-and-mortar establishments picking up. However, in several areas, a late June resurgence in COVID-19 cases slowed or reversed the reopening process, jeopardizing further recovery in consumer spending. In the Mountain West, retail sales beat expectations in June and auto dealers saw strong demand over the past two months. However, auto dealers anticipated a falloff in sales over the next several months as vehicle inventories reached rock-bottom levels and were not expected to recover until the fourth quarter. Sales of wood products at home improvement stores in the Pacific Northwest increased solidly. An Arizona big box retailer reported lower in-store sales and ample inventory. Steep declines in tourist arrivals in Hawaii and Southern California have severely limited foot traffic to stores dependent on visitors' spending during summer months.

Activity in consumer and business services contracted sharply. In the Los Angeles area, most restaurants operated at a loss or remained closed entirely. Moreover, restaurants that were operating maintained narrow inventories in case shelter-in-place restrictions were reimposed, a decision that weakened sales at restaurant suppliers. Hawaii hotel occupancy rates continued to run at a tiny fraction of normal levels, while a Southern California hotel owner reported a moderate improvement in room bookings to a level still significantly below prior years. A provider of business advisory services in California reported that many client firms curtailed spending on nonessential business services and declined to extend some contracts, suggesting a weak consensus business outlook. Domestic visitor levels ticked up in some Mountain West national parks, yet the absence of international travelers more than offset this positive development, leaving revenues depressed on a year-over-year basis. Electricity usage fell slightly on balance, as higher residential demand only partially offset lower industrial demand. In the entertainment sector, film and television production was still frozen while media subscription services saw a further tick-up in sales.

Manufacturing activity was mixed but remained tepid in general. Where demand warranted firms' returning to full capacity, their ability to do so depended largely on how readily they could adapt to social-distancing regulations, a factor that varied significantly from business to business. A steel producer in Oregon reported that funds from the Paycheck Protection Program helped them stay afloat over the reporting period but that work orders were still a fraction of their pre-COVID-19 level. On the other hand, a building product manufacturer saw an encouraging increase in production and sales but attributed some of the jump to making up for April's very weak activity rather than improved market conditions. Elsewhere, a renewable energy equipment manufacturer noted a modest rebound in capacity utilization as supply chains passing through China and Mexico reopened. Spotty availability of input materials generally posed an additional challenge for some manufacturers attempting to move toward more normal operations.

Agriculture and Resource-Related Industries
Agriculture sector activity remained weak on balance over the reporting period. While yields were generally solid for most crops, including wheat, potatoes, and fruit, domestic sales were mixed and foreign sales poor. This combination of strong crop yields and subdued demand further deteriorated profit margins for many growers. Contacts in the Pacific Northwest and Mountain West reported continued weakness in domestic wholesale distributors' and restaurants' demand for grains and potatoes. On the other hand, fruit and vegetable growers in California noted moderately higher demand from domestic grocery stores. On the export side, the strong dollar and continued tepid foreign demand due to the COVID-19 outbreak limited export sales for growers across the District. For example, California nut exports fell further after planned holiday celebrations around the summer solstice in China were cancelled.

Real Estate and Construction
Residential construction activity increased moderately. In most areas, contacts reported solid permitting and building activity. In Seattle, residential permits were slightly higher than in the same period last year, and a Northern California contact noted that permitting activity was picking up, reflecting a return to construction after some stoppages in March and April. Overall, home sales picked up noticeably while inventories declined, putting some upward pressure on home prices. In Oregon, a large backlog of homeowners wanting to list their home for sale indicated that inventory in some areas may rise in coming months. In Idaho and Eastern Washington, observers saw early evidence of buyers moving from higher-cost coastal markets after starting permanent teleworking. A Northern California contact reported that a number of renters were unable to pay rent, while some homeowners were delinquent on mortgage payments.

Activity in the commercial real estate market was mixed. Contacts in the Mountain West and California noted that some commercial projects that paused due to virus concerns have restarted. Office occupancy was generally stable in this region. However, the outlook for office occupancy and new office construction in District cities is highly uncertain, with some predicting a steep decline in occupancy and a freeze in new construction. Demand for warehouse space picked up in Northern California.

Financial Institutions
Overall lending activity ticked up, with contacts noting home mortgage refinancing and PPP loans as key drivers. Bankers reported that households capitalized on lower interest rates and PPP loans helped businesses maintain solvency and solid credit standing. Fiscal support to households supported their credit standing too. However, a fin-tech firm in San Francisco saw a marked decline in the overall credit quality of its small business customers. A few contacts continued to express concern about the ambiguity of certain PPP forgiveness terms. Liquidity conditions were solid across the District, and the supply of deposits increased modestly.