Beige Book Report: San Francisco
October 21, 2020
Summary of Economic Activity
Economic activity in the Twelfth District expanded moderately on balance during the reporting period of mid-August through early October. Employment levels increased modestly on net, but hiring activity varied across sectors and somewhat across the District. Wages rose slightly, and price inflation increased marginally. Sales of retail goods rose noticeably, while conditions in the consumer and business services sectors improved somewhat. Manufacturing expanded moderately. Conditions in the agriculture sector improved modestly. Residential real estate activity increased further, while the commercial market remained broadly unchanged. Lending picked up at a fair pace.
Employment and Wages
Employment levels increased modestly on net. Hiring picked up overall in the Mountain West as most businesses have reopened. Employment levels in California and the Pacific Northwest increased more slowly than in other parts of the District. Hiring in these regions for lower-paid service positions especially lagged, partially due to relatively more stringent social-distancing guidelines and partly due to smaller labor supply as people fled from wildfires. Employment levels in the information technology sector were generally stable over the reporting period, although one contact reported layoffs connected to strategic discontinuation of some product lines. Hiring in lumberyards and construction firms was somewhat constrained by a shortage of skilled workers. Employers in the financial and energy sectors mostly engaged in replacement hiring only. Employment levels in restaurants, hotels, retailers, and the entertainment and tourism sectors remained low. Hiring firms reported receiving plentiful applications for open positions and ease in filling them. Instances of absenteeism decreased, but workers showed continued concern about COVID-19 exposure and grappled with childcare needs.
Wages increased slightly overall, although some employers reported keeping wages fairly unchanged over the reporting period. Labor shortages in the construction sector fueled increases in wages. Some employers in the financial sector observed higher wages over recent weeks despite still high unemployment in their communities and regions. Following other businesses in the Mountain West, a provider of animal health-care products planned to distribute merit increases. Wages in retail and agriculture in some areas in California increased due to regulatory developments concerning overtime pay. Some firms reported that wage increases are not currently under consideration but noted that plans for next year may change, partially due to renegotiations with unions.
Prices
Price inflation increased marginally on balance. Increased demand and low inventories for durable goods, building materials, and processed foods resulted in markedly higher prices for consumers. Constrained supply chains also put upward pressure on costs faced by restaurants and some retailers, though some firms were able to absorb these costs. In contrast, prices decreased for many agricultural goods, including animal proteins. Many bankers reported charging lower interest rates on loans. Similarly, scheduled price increases for undergraduate tuition and some technology services were deferred this year. A few contacts also noted that prices for air travel and hotel rooms remained subdued.
Retail Trade and Services
Retail sales rose noticeably over the reporting period. The retail sector benefited from further easing of social- distancing restrictions and better adherence to health and safety guidelines. Contacts reported that consumers felt more comfortable shopping, and foot traffic increased. Sales in brick-and-mortar stores picked up strongly but remained below pre-pandemic levels, while online sales continued to be robust. Demand for durable goods such as home appliances, home improvement goods, and vehicles increased noticeably, and retailers noted low inventories. Grocers in Southern California and the Pacific Northwest highlighted limited supplies of many products and more customers stocking up and switching brands. A specialty retailer in Arizona noted strong sales for pet products but weak department store sales for women's fashion products.
Conditions in the consumer and business services sectors improved somewhat over the reporting period. High demand remained for logistics and transportation services, including home deliveries and shipment of health-care products. Activity remained strong in the information technology and health-care sectors as well as the mental health services subsector. Food service, travel, and hospitality providers reported incremental sales increases over recent weeks, though the pickup in activity has been comparatively faster in the Mountain West relative to other areas in the District. Generally, firms in these sectors continued to operate at a fraction of their pre-pandemic levels, and contacts expressed concern regarding prospects for the winter. Conditions in the entertainment and the health and beauty sectors continued to be precarious. One contact in the education sector reported decreased enrollment rates at both two- and four-year undergraduate institutions, which is unusual during economic downturns.
Manufacturing
Manufacturing expanded moderately. Demand for manufactured wood products and building materials soared on the back of a very active residential real estate market. Construction activity also underpinned strong sales of fabricated and recycled metals over the reporting period, although one contact attributed the rise in demand mainly to niche markets. Manufacturers of home appliances and recreational equipment reported limited increases in production, given pandemic-related capacity reductions. In the Mountain West, meat-processing plants saw increased demand for beef products but a reduction in pork sales. These plants continued to experience COVID-19-related staff shortages but remained open per local officials' orders aimed at ensuring adequate food supply.
Agriculture and Resource-Related Industries
Conditions in the agriculture sector improved modestly. Most of the grain crops in the Mountain West and the eastern Pacific Northwest have been harvested, with high yield and quality. Yields of grapes, nuts, peaches, and tomatoes in California's Central Valley also were good. Potato output was not as high as expected, though quality remained high. Domestic sales of peaches, wine grapes, vegetables, oils, seafood, and beef rose on the tailwind of ameliorated supply chain disruptions and reduced costs. Higher output and a recent depreciation in the U.S. dollar contributed to increased international sales of grain, fruit, raisins, and nuts, principally to Asian markets. Growers throughout the District reported the potential risks of new COVID-19 cases among their workforce as well as wildfires, which could harm supply chains and production.
Real Estate and Construction
Residential construction activity increased further, supported by a low interest rate environment. Contacts reported increased demand for new and existing homes throughout the District, which kept inventories low and construction permitting high. Home prices continued to climb at double-digit rates, partially fed by increased demand for suburban homes in the current telework environment. Rents in metropolitan areas dipped. Contacts expressed some concern over the undersupply of affordable housing, especially after some regions suffered from wildfire-led destruction. Homebuilders in the Mountain West and Pacific Northwest reported backlogged projects, increased costs of building materials, and finalized sales well in advance of project completion.
Activity in the commercial real estate market remained broadly unchanged. Demand for commercial and office space was either stagnant or decreased in most of the District. However, new hotels and offices continued to be built in the Mountain West. In other areas, demand for new industrial and warehouse space expanded. A contact in Alaska noted that prices for commercial real estate remained unchanged despite subdued local activity and more emigration from the area.
Financial Institutions
Overall lending activity picked up at a fair pace. Contacts noted that the bulk of demand was for home mortgages and refinancing as households took advantage of low interest rates, as well as for auto loans. In contrast, utilization of commercial lines of credit was down, as was demand for unsecured personal loans. Financiers noted strong asset quality, liquidity conditions, and capital positions. Deposits continued to grow at double-digit rates. Some contacts suspected that deposit levels remained high partially due to PPP funds being kept in firms' checking accounts. Contacts highlighted some uncertainty regarding loan demand in coming months given expected decreases in activity over the winter. Some bankers in California reported that a few retail bank branches closed due in part to wildfires. One contact expressed concern over mortgage forbearances and eviction moratoriums and their implications for loan servicing and the health of the real estate market once the deferral periods are over.