Beige Book Report: San Francisco
April 14, 2021
Summary of Economic Activity
Economic activity in the Twelfth District expanded at a moderate pace during the reporting period of mid-February through March. Employment levels increased moderately, accompanied by higher wages. Inflation picked up, driven largely by increased material costs and supply chain disruptions. Retail sales growth accelerated, while activity in the consumer and business services sectors rose slightly. Manufacturing activity continued to expand modestly, and conditions in the agriculture and resources sectors remained generally stable. Contacts reported ongoing strength in residential real estate markets, but largely unchanged conditions in the commercial real estate sector. Lending activity grew modestly, with some tapering observed in mortgage refinancing activity.
Employment and Wages
Overall employment levels increased moderately, although conditions varied significantly by region and sector. In general, employment has recovered faster in regions where mobility and commerce restrictions were lifted sooner. Labor demand remained strong in the finance, health-care, construction, and professional services sectors. Employers in hospitality, tourism, and food services sought to rehire former or furloughed employees as local restrictions eased over the reporting period. Employment levels in the entertainment and education sectors remained subdued. Some contacts reported facing difficulties in attracting and hiring workers, but many others highlighted an adequate labor supply. Employers in technology, construction, and transportation reported being especially constrained by labor shortages. Some contacts also reported increasing hours for hourly employees. Conversely, a few contacts throughout the District in the utilities, manufacturing, and agricultural sectors mentioned scaling back work hours, reducing hiring activities, or stipulating hiring freezes. These cost-cutting decisions were brought about partially by shortages in input materials, disruptions to supply chains, and a tightening of capacity constraints.
Wages increased further over the reporting period. Employers in sectors that reported difficulties in attracting and retaining workers also highlighted tight wage competition, especially for hourly workers. Wages and benefits for positions in construction, food services, hospitality, security, and custodial services were boosted at a relatively faster pace. Wages for telework positions were more stable. A contact in California highlighted more complex wage structures brought about by a more widely dispersed remote workforce.
Prices
Inflation picked up modestly over the reporting period. Price pressures built up across the region as manufacturers, homebuilders, and providers in health care and in logistics reported rising costs for material, energy, transportation, and labor. Supply chain disruptions and production bottlenecks played a major role in inflationary pressures in recent weeks. Many contacts in construction, health care, and retail reported partially passing these costs onto final prices, while other sectors generally mentioned more stable final prices. Select agricultural products also saw some price increases, which translated into higher prices at grocers.
Retail Trade and Services
Retail sales accelerated over the reporting period. Contacts highlighted a loosening of business restrictions by local governments, a national downward trend in new daily COVID-19 cases until mid- to late March, improving vaccine distribution, and large government transfer payments which jointly bolstered consumers' willingness and ability to spend. Contacts also mentioned pent-up demand and accumulated household savings as additional factors increasing sales. Appetite for online shopping continued to grow at a faster pace than for shopping at brick-and-mortar stores. Home improvement centers and specialty retailers reported stable or slightly higher sales in recent weeks. Retail outlets that depend on tourist traffic continued to observe only a fraction of pre-pandemic sales. Contacts also mentioned a number of supply factors, including logistical delays and misallocation of empty shipping containers at the international stage which led to insufficient inventories in some retail categories, including paper goods and cleaning supplies. A contact familiar with the textile trade mentioned that inclement weather conditions outside of the Twelfth District led to impacts on the availability of chemicals and yarn used in fabric production, thereby affecting sales.
Activity in the services sector increased slightly. Conditions in food services, tourism, leisure, entertainment, and hospitality improved marginally following the relaxation of pandemic-related restrictions in some areas, but overall activity in these sectors remains significantly subdued relative to pre-pandemic levels. Demand for transportation services continued to be strong, though capacity was strained by worldwide logistical complications. Demand for health care rose modestly as capacity shifted from COVID-19 testing to other services. Demand for technology, legal, and other professional services remained largely stable relative to the prior reporting period.
Manufacturing
Manufacturing activity rose modestly. Demand remained strong for manufactured metals, food and beverage products, wood and paper products, computers, electronics, and appliances. Contacts reported widespread shortages of input materials and parts, such as semiconductors and wood adhesives, which held back production, thereby reducing inventories and postponing sales. An increase in air traffic and the resolution of aviation certification issues helped restart demand somewhat for aircrafts and parts. Capacity utilization rates in metal fabrication picked up reasonably after a temporary drop in early March but are still below historical averages for the sector. A contact in California reported improved investment conditions for manufacturers in sectors that proved more resilient to the pandemic, which helped initiate plans for new plants in some areas.
Agriculture and Resource-Related Industries
Conditions in the agriculture and resources sectors remained stable overall. Inclement weather negatively affected some crop yields, but sales of wheat, corn, raisins, nuts, fruit, and soybeans were generally steady. Inventories moved down but from relatively high levels earlier in the year. Growers reported seeing some tapering in demand from abroad on account of an appreciating dollar. Others noted ongoing negative effects of international supply chain disruptions, which were exacerbated by the temporary closure of the Suez Canal. Contacts also mentioned continued concerns about COVID-related labor shortages. In California, producers highlighted low water availability as a risk to production. Demand for timber remained elevated, and higher oil prices and additional permit issuances bode well for drillers even though little activity was observed in terms of new oil wells over the reporting period.
Real Estate and Construction
Residential real estate demand and construction continued to grow at a fast pace. Demand for single family homes, in particular, remained strong. Nonetheless, contacts mentioned that the rapid rise in home prices, the recent rebound in mortgage rates, and continued tightness of housing inventories have begun to weigh on home sales growth. Although construction activity has been strong, homebuilders reported constraints stemming from labor costs, shortages of raw materials, and lack of available land have exacerbated construction backlogs across the District. Demand for multifamily homes was more varied, with suburban locations receiving more inquires and observing higher rents than their urban counterparts. Contacts raised concerns about affordability, especially for low- and moderate-income families.
Conditions in the commercial real estate market remained mostly unchanged. Demand for new office, retail, and hospitality space remained depressed due to disruptions stemming from the pandemic. Contacts reported elevated vacancy rates and some softness in commercial space valuations. Demand for warehouse and industrial properties remained strong. One contact in Southern California noted that commercial space was being converted into warehouses in order to meet this long-observed shift in demand. Another contact reported that demand for overall commercial space held steady in Utah.
Financial Institutions
Lending activity grew modestly during the reporting period. Most banks reported further growth in business loan originations, mostly due to demand for smaller, second- round PPP loans. Demand for commercial real estate loans remained tepid outside of those involving industrial properties. Growth in residential loan origination was robust but slower than in the previous reporting period as rising mortgage rates reduced somewhat the appetite for mortgage refinancing. Banks reported rising deposits, ample liquidity, and high asset quality. Activity in the financial markets from professional investors also drove up demand for private equity and mergers and acquisitions financing. A contact in Hawaii mentioned that lending activity related to the tourism sector remained subdued.