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San Francisco: June 2021

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Beige Book Report: San Francisco

June 2, 2021

Summary of Economic Activity
Economic activity in the Twelfth District expanded significantly during the reporting period of April through mid-May. Conditions in the agriculture and resources sectors improved notably, while manufacturing activity continued to expand at a modest rate. Contacts reported ongoing strength in residential real estate markets, but largely unchanged conditions in the commercial real estate sector. Lending activity rose somewhat, with increased competition for new loans and deals. Employment levels continued to increase modestly, accompanied by moderately higher wages. Price increases stepped up considerably, driven by increased material costs and supply chain disruptions. Retail sales increased a fair bit as vaccinations continued, allowing for further easing of social-distancing restrictions. Activity in the consumer and business services sectors strengthened somewhat.

Employment and Wages
Overall employment levels continued to increase as the labor market tightened in some regions. Employment accelerated in states that only recently lifted business restrictions, like California, and slowed modestly in states where unemployment levels were already low, as in the Mountain West. Most of the job growth was concentrated in the hospitality, retail, tourism, and food services sectors, with employers seeking to rehire workers as the economy reopens and demand for these services strengthens. However, many of these employers also reported facing difficulties hiring and retaining workers for low-skilled jobs, as did contacts in manufacturing, construction, transportation, and agriculture. Labor demand also picked up in the technology and entertainment sectors while holding steady in the financial and other professional services sectors.

Wage pressures increased moderately. Employers in the construction, manufacturing, technology, retail, health-care, restaurant, and hospitality sectors reported having to increase wages to retain and attract workers for both high- and low-skilled jobs. In addition to raising wages, these employers also mentioned offering other incentives such as sign-on bonuses, reduced or flexible hours, and the ability to work remotely. Wage increases were especially high in restaurants and hospitality services ramping up to reopen, and employers reported difficulties in rehiring workers. Wages in financial services remained stable.

Price increases stepped up considerably over the reporting period. Continuing supply chain disruptions, low inventories, and increasing labor costs have contributed to upward pricing pressures in recent weeks. These were most pronounced for users of raw materials, especially fuel and lumber. With burgeoning demand for food services, prices for many agricultural products have also risen, which translated into higher prices at grocers and some restaurants. Additionally, prices for airline tickets, rental cars, and lodging have started to normalize from previous lows.

Retail Trade and Services
Retail sales increased a fair bit over the reporting period. Sales growth was particularly strong in restaurants and drinking establishments during recent weeks, as the continued pace of vaccinations allowed for further easing of social-distancing restrictions. A number of contacts reported increased foot traffic in retail stores, while e-commerce sales continued to be strong. However, retailers across the District highlighted several supply chain disruptions, including port issues, container shortages, and manufacturing delays. As a result, most retailers, even consignment and thrift stores, reported low inventory stock and raised concerns that the current sales pace might slow in coming months. Sales of new and used motor vehicles remained robust, although constrained by low inventories, as did those of home improvement goods. Demand for airline reservations was noted to have picked up for the first time since the onset of the pandemic.

Activity in the services sector also strengthened moderately. Following the further unwinding of pandemic-related restrictions, conditions in the travel, leisure, entertainment, and hospitality industries improved, albeit slowly. Bookings for hotel rooms slightly increased due to a pickup in leisure travel. Restaurants reported operating at almost full capacity outdoors, although indoor dining capacity was still limited. Demand increased for automotive parts and services, as well as for car rentals. In health care, elective services and non-COVID-19 lab testing increased modestly, but preventive services remained subdued. Demand for transportation and logistical services continued to be strong, while that of legal and other professional services was largely unchanged.

Manufacturing activity continued to expand at a modest rate. New orders growth remained strong, especially for wood products, chemicals, manufactured metals, computers, electronics, and manufactured food products. Yet delivery delays and shortages of input materials, such as semiconductors, continued to hold back production and decreased inventories in some cases. Wood product manufacturers in the Pacific Northwest, already operating at full capacity, reported having to delay production of some orders. A contact in Southern California noted that capacity utilization rates in manufacturing of renewable energy equipment have normalized, and new orders are generally growing.

Agriculture and Resource-Related Industries
Conditions in the agriculture and resources sectors notably improved. Loosened capacity restrictions in restaurants and drinking establishments contributed to stronger demand for agriculture products, including wheat, corn, nuts, and fruits. Demand from abroad also increased, aided by the depreciating dollar in the later part of the reporting period. As a result, inventories of fruits and nuts were noted to have decreased to lower-than-usual levels. However, supply chain disruptions continued to negatively affect many producers with one reporting both domestic and international logistical issues that resulted in significant delays in seafood product sales. Growers in California noted that current drought conditions are expected to negatively impact annual crops this year, driving up labor and electricity costs as farmers depend more on wells and water pumps for irrigation.

Real Estate and Construction
Residential construction activity continued to expand at a brisk pace. Demand for single-family homes remained strong, although construction still failed to meet high demand since the previous reporting period. The lack of available homes was further exacerbated by increasing labor and transportation costs, as well as widespread shortages of raw materials, including lumber, asphalt, cement, steel, and wallboard. The lack of available land caused some homebuilders to start building smaller homes or to move further into rural areas. Contacts in the Pacific Northwest noted that bidding wars are common for newly listed properties, and some homebuilders are delaying price quotes until completion of new homes due to overall cost uncertainties. Demand for multifamily homes also increased, although a few contacts noted that projects in metropolitan areas had to be put on hold due to increasing costs. Several contacts in California mentioned a backlog of permits due to COVID-related shutdowns in local governments.

Conditions in the commercial real estate market were largely unchanged. Demand for new office, retail, and hospitality space stayed muted with reports of high vacancies and declining lease rates. However, demand for industrial, warehouse and distribution spaces strengthened especially in the suburbs, and vacancy rates were noted to be relatively low with lease rates either steady or rising. One contact in Southern California mentioned that the continued pace for vaccinations has contributed to a slight pickup in demand for retail space, as people return to metropolitan areas in preparation of in-person work.

Financial Institutions
Lending activity rose somewhat during the reporting period. Most new growth in loan origination was led by demand for commercial and multifamily real estate. Residential mortgage and refinancing activity also continued to be solid, while demand for auto loans and credit cards held steady. However, contacts across the District noted increased competition among financial institutions for new loans and deals, which led a few to raise concerns over deteriorating loan quality. Overall though, banks reported low delinquency rates, ample liquidity, and high asset quality. Mergers and acquisitions activity continued to increase, although one contact in Southern California observed a decline in SPACs (special purpose acquisition companies) origination in recent weeks.