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San Francisco: March 2021

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Beige Book Report: San Francisco

March 3, 2021

Summary of Economic Activity
Economic activity in the Twelfth District expanded at a modest pace during the reporting period of January through mid-February. Employment levels decreased somewhat, while wages increased slightly on net. Inflation has picked up, driven largely by increases in energy prices. Retail sales continued to expand, while activity in the consumer and business services sectors declined moderately due to ongoing pandemic-related restrictions. Manufacturing activity continued to expand modestly, and conditions in the agriculture sector improved marginally. Contacts reported ongoing strength in residential real estate markets, but weak conditions in the commercial sector. Lending activity continued to grow robustly, mostly concentrated in origination of second-round PPP loans.

Employment and Wages
Employment levels decreased slightly, although conditions varied significantly by region and industry. Employers in the hospitality and tourism sectors generally reduced their workforce and extended furloughs due to the ongoing effects of the most recent wave of COVID-19 infections. An increasing number of contacts reported difficulty filling open positions, both for high-skilled and low-skilled workers. Employers in the construction, manufacturing, auto mechanics, and healthcare sectors continued to be constrained by shortages in qualified labor. Rising employee turnover was another commonly cited concern, mainly due to workers switching industries, moving, or leaving the workforce altogether. A few contacts in financial services, energy, and logistical services reported implementing hiring freezes or plans to reduce their workforce later in the year. On the other hand, demand for labor in consulting, legal services, technology, and healthcare sectors remained stable.

Wages increased marginally on balance. In addition to mandatory minimum wage increases in some areas, a few contacts also reported increasing compensation for frontline essential workers. Employers in manufacturing, construction, and health-care services also noted upward wage pressures, mainly due to labor supply issues. By contrast, a few contacts in the financial services and hospitality sectors mentioned plans for decreased wages and merit-based bonuses compared to previous years. Most other reports mentioned little to no change in wages.

Inflation picked up modestly over the reporting period. Most of this increase was driven by hikes in oil and electricity prices, with only a few firms being able to pass on the higher costs to final consumers. Prices of building materials, such as lumber, wallboard, steel, and asphalt, continued to rise from already high levels. Select agricultural products also saw modest price increases, including wheat, corn, and soybeans. Contacts in the hospitality and financial services sectors reported either flat or decreasing prices.

Retail Trade and Services
Retail sales growth has improved overall, partly owing to the effects of the second round of fiscal relief transfers to households. Online sales continued to be strong, as did sales by brick-and-mortar grocery and convenience stores. Although most contacts reported reduced foot traffic in retail centers, a contact in Southern California noted that thrift and secondhand stores experienced a rise in demand. Auto sales have continued to increase, although more purchases are being made online rather than in person at auto dealerships. Contacts across the District noted ongoing supply chain disruptions and port delays, especially for imports from China.

Activity in the consumer and business services sector declined moderately. Conditions in the tourism, leisure, and hospitality industries continued to be severely impacted by ongoing restrictions due to the pandemic, with one contact in Southern California anticipating its weakest quarterly performance since the onset of the pandemic. Many restaurants continued to only offer delivery or pickup services to limit operating costs. Automotive service providers continued to see decreasing sales volumes, reflecting a general trend in reduced vehicle miles driven. Some production work in the entertainment industry returned in February, but many producers chose to further delay projects halted in January. The inability to secure business insurance coverage against pandemic-related risks continued to limit activity in the film, television, and sports production industries. In health care, activity has mostly rebounded back to pre-pandemic levels, with increasing demand for mental health and related services. Demand for logistics and transportation services continued to be strong. A medical laboratory in the Mountain West noted that demand for COVID-19 testing has substantially fallen in recent weeks as vaccines and point-of-care rapid testing has reduced the reliance on traditional testing.

Activity in the manufacturing sector continued to strengthen modestly, although the pace of expansion has slowed somewhat since the last reporting period. Demand for metals and wood products remained strong, driven by the continued expansion in residential construction. Sales of recycled metals and fabricated steel products have declined somewhat since their multi-year highs at the end of 2020, which one contact attributed to the potential effects of chip shortages in the auto manufacturing industry. Capacity utilization rates in renewable energy and steelmaking industries picked up, although they are still below U.S. historical averages. Energy usage has returned to pre-pandemic levels for most manufacturers, except for those in the aerospace sector.

Agriculture and Resource-Related Industries
Agricultural activity expanded marginally across the District. Demand for wheat, fruits, and nuts increased among both domestic and international consumers. Most growers benefitted from a depreciating dollar, although a few noted the ongoing negative effects of international trade restrictions on U.S. exports. Several contacts in the Pacific Northwest and California mentioned that COVID-related labor and supply chain disruptions continued to put upward pressure on costs and to reduce inventories in some cases. A large energy provider in Southern California reported that lower-than-normal revenue from non-residential customers was mostly offset by higher-than-normal revenue from residential customers, although the number of overdue payments has increased.

Real Estate and Construction
Residential construction activity continued to grow at a brisk pace. Demand for residences continued to increase, especially for multifamily homes, although inventories were at historically low levels. Construction of single-family homes continued to fail to meet the high demand. Home prices climbed further, which raised some concern among contacts in California and the Pacific Northwest about the decrease in affordable housing, especially in coastal metropolitan areas. Contacts across the District noted ongoing constraints due to shortages of construction labor, raw materials, and available land. As a result, several in the Pacific Northwest noted that construction projects are sold as soon as they are started, and most builders are at capacity. Demand for remodeling projects was also noted to have increased. Rents fell in metropolitan areas but increased slightly in suburban areas. One contact in Oregon noted that the upcoming enforcement of stricter green codes for energy consumption might put even greater upward pressure on construction costs.

Activity in the commercial real estate market weakened slightly on net. Demand for retail spaces, office buildings, and hospitality real estate continued to be negatively affected by disruptions stemming from the pandemic. On the other hand, demand for warehouse and industrial properties remained strong, and a few contacts also noted a rise in public construction projects. One contact in the Mountain West reported that demand for office space held steady in the area, partly due to the redesign of some offices to better accommodate social distancing measures.

Financial Institutions
Lending activity grew robustly during the reporting period. Most banks reported significant growth in new loan originations, concentrated in second-round PPP loans. Several contacts noted that demand was lower compared with the first round of PPP loans, primarily due to changes in eligibility requirements and the increasing ability of businesses to remain open through the pandemic. Demand for residential mortgages also remained strong, particularly for refinancing. Banks reported ample liquidity, high asset quality, and low delinquency rates, which a few contacts attributed to individuals using stimulus checks to pay down existing loans. One contact in Hawaii noted the increasing importance of community development financial institutions (CDFIs) in providing access to capital and technical assistance to low-income communities.