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San Francisco: January 2021

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Beige Book Report: San Francisco

January 14, 2021

Summary of Economic Activity
Economic activity in the Twelfth District continued to expand at a modest pace during the reporting period of mid-November through December. Overall employment levels and the existing modest pace of price inflation were largely stable, and wages increased slightly. Retail sales picked up, but activity in the consumer and business services sectors was mixed. Manufacturing activity increased somewhat, and conditions in the agriculture sector strengthened slightly. Contacts reported continued strong activity in residential real estate markets, while conditions in the commercial sector weakened. Lending activity continued at high levels.

Employment and Wages
Employers in most reporting sectors maintained generally stable staff head counts, following a sustained period of employment volatility due to the pandemic. Some contacts reported increased employee turnover but also highlighted little difficulty finding qualified applicants. Others reported labor shortages in the construction and building materials manufacturing sectors, which was intensified in some areas by reconstruction efforts following the wildfire season. Contacts in tourism and food services noted employment cuts in response to the recent surge in COVID-19 cases and resulting renewal of mobility restrictions in some areas. A contact in automotive services reported reduced numbers of workers and hours due to slower activity. A few contacts in the financial sector mentioned operational efficiencies that led to the elimination of redundant positions. Demand for labor in the technology and health-care industries remained solid.

Wages increased slightly near year-end. Contacts reported little change in entry level wages, except for workers affected by minimum wage legislation. For higher-paying positions, employers noted either no noticeable changes to wages or only typical merit increases for existing employees. Some firms in the construction and manufacturing sectors offered extra vacation days and extended holiday season bonuses to help reduce turnover. There were a few reports of decreased wages for some financial service providers due to a reduction in interest margins. Others, however, mentioned slight increases in wages and rising pressures.

Most contacts reported stable and low price inflation over the reporting period. While manufacturers noted that input costs had increased, some highlighted that they had not passed those increases to end users. Consumer service providers generally did not change their price structures, but some business service providers implemented holiday season surcharges in response to strong demand. Prices for building materials rose significantly, while those for agricultural products rose modestly.

Retail Trade and Services
Retail sales picked up in general, but reports varied somewhat by region. Holiday sales were stronger than expected given the pandemic but weaker than past holiday seasons. Retailers in areas where local governments reinstated limitations on commerce and mobility in response to the recent virus surge saw a large negative impact on sales. Reports highlighting foot traffic varied widely, with some contacts noting empty stores and shopping malls, and others mentioning customers in long wait lines. Sales at auto dealerships were boosted somewhat by year-end tax incentives. Some specialty retailers, including for pet products, reported strong sales. Others mentioned weaker sales for discretionary products due to customers' focus on purchases for essential products. E-commerce volumes increased notably relative to brick-and-mortar stores, and contacts reported that the pandemic has further accelerated the shift toward online sales. Contacts in areas that depend more heavily on tourism, such as Alaska and Hawaii, reported that holiday retail sales were significantly below levels from past seasons.

Activity in the consumer and business services sector was mixed. Demand for logistics and delivery services rose further, with providers working at full capacity. Shipping service quotas were implemented on many big box companies, with some reported order backlogs and shipping delays due to increased online sales volume during the holiday period. In health care, demand for elective procedures and mental health assistance continued to rebound from the pause earlier in the year, though providers expressed concerns about the recent surge in COVID-19 cases potentially limiting the volume of such services. Contacts in the tourism industry noted that demand for air travel and hotel rooms was still subdued. The pandemic continued to severely impact restaurant and dining services, with reports noting that many smaller restaurateurs have struggled to stay open. Production in the entertainment sector has returned slowly under strict safety protocols. Capacity utilization among automotive service providers remained low, and store hours were reduced to reflect the current environment. Demand for nonprofit services focused on housing assistance remained at average levels, while enrollment numbers for higher education stayed tepid.

Manufacturing activity increased modestly on balance. Production and capacity utilization for renewable energy equipment and supply chain services continued to grow at a strong pace, with some factories engaging in considerable overtime to meet pent-up demand. Production and capacity utilization in metals and wood products manufacturing remained robust, and contacts reported adequate access to materials. Demand for energy from manufacturers other than aerospace rebounded faster than power providers had anticipated. Aerospace manufacturing activity continued to be plagued by the pandemic-related drop in air travel demand. One contact also mentioned that pre-pandemic technical issues continued to hamper demand for manufactured aircraft parts.

Agriculture and Resource-Related Industries
Agricultural activity increased slightly over the reporting period. Demand for agricultural products grown in California and the Pacific Northwest expanded both domestically and internationally, as exports benefitted from a depreciated dollar. Sales of wheat, fruit, raisins, and nuts to global markets picked up near year-end, with shipments of almonds reaching record highs according to a contact who provides transportation services for the agricultural sector. Inventories fell somewhat from the prior reporting period but remained high. Fires in California's Central Valley impacted production capacity for some farmers and livestock ranchers, but the total impact is yet to be determined.

Real Estate and Construction
Activity in residential real estate markets continued to grow robustly across the District, yet the pace of growth was slightly slower than in the previous reporting period. Demand for homes continued to be boosted by historically low mortgage rates and wider geographic searches by those able to work remotely. New construction and prices for housing rose further while inventories remained tight, especially for homes at more affordable price ranges. Contacts in the Mountain West noted that many homes were sold prior to completion. Across the District, contacts reported constraints on the availability of qualified construction labor, building materials, and lots with ready access to public utility services. Demand for residential rental units in metropolitan areas continued to fall. In contrast, contacts reported increased inquiries for suburban rental spaces. One contact in the Pacific Northwest highlighted an increase in the number of past due rent payments.

Demand for new commercial construction weakened, and contacts observed that high uncertainty continued to cloud plans in the District. Reports focused on increased vacancies in retail space but continued modest competition for warehouse space. Construction permitting for industrial and storage facilities was still in high demand, partially due to increasing rents. A contact in Utah noted increased demand for office and hotel space due to population growth in the area. One contact in California mentioned that the positive news concerning vaccines was a material input in their firm's decision to partially renew their commercial space lease.

Financial Institutions
Lending activity remained at high levels but the pace of new loan generation slowed somewhat. Reports indicated that expectations for a new round of government-backed lending programs with favorable terms have encouraged many business borrowers to postpone their loan applications slightly. Demand for new mortgages and refinancing remained strong. Deposits were robust and banks reported having significant liquidity, high asset quality, and generally healthy balance sheets. Nonetheless, some bankers expressed concern over potential loan losses should payment deferrals and loan forbearances be terminated, especially in relation to loans extended to restaurants, bars, and hotels. In venture capital markets, contacts noted increased investor interest in clean energy and other businesses oriented around environmental sustainability.