Beige Book Report: San Francisco
July 14, 2021
Summary of Economic Activity
Economic activity in the Twelfth District expanded notably during the reporting period of mid-May through June. Employment levels expanded moderately, accompanied by further upward wage pressures resulting chiefly from labor shortages in many sectors. Prices rose considerably, driven by low availability of raw materials and supply chain disruptions. Retail sales increased at a solid pace due to pent-up demand, whereas further easing of social-distancing restrictions led to a notable increase in demand for services. Manufacturing continued to expand at a modest pace, while activity in the agriculture and resources sectors increased somewhat. Conditions in the residential real estate market remained very strong, while activity in the commercial real estate sector was generally subdued. Lending activity grew slightly, bolstered by demand for residential and auto loans.
Employment and Wages
Overall employment levels expanded moderately, although labor market conditions varied. Employment accelerated more notably in sectors that benefitted from recently eased business restrictions, such as food services, travel, and hospitality. At the same time, employers reported difficulties in hiring and retaining workers for lower-wage positions and increased competition for higher-wage jobs. Contacts noted a widespread shortage of truck drivers and other workers in the transportation and logistics sector, which exacerbated supply chain disruptions and delays. Worker shortages were also noted in construction, manufacturing, agriculture, and consumer services. Labor supply was more steady in the technology, financial, higher education, and entertainment sectors. Most employers reported improved worker productivity. A few contacts noted a persistent lack of affordable childcare options and an increase in retirements as factors holding back labor force growth. Employers in the agriculture sector highlighted a lack of support for immigrant labor and difficulties in obtaining work visas for transient workers.
Wage pressures increased further, chiefly due to labor shortages and increased competition for workers in many sectors. Many employers reported having to increase wages to attract and retain workers for both low- and high-paying jobs, including those in the construction, manufacturing, utilities, technology, retail, logistics, aerospace, health-care, food services, and hospitality sectors. Employers additionally mentioned extending more generous offers including sign-on bonuses, reduced or flexible hours, childcare-related benefits, and even vaccination cash incentives. Wage pressures were more subdued in the entertainment and higher education sectors, as well as for some positions in financial services and local government.
Prices
Prices rose considerably in recent weeks. Continued supply chain disruptions, low availability of raw materials, and increasing labor costs all contributed to upward pricing pressures. Contacts observed pronounced price increases in agricultural goods, fuel and transportation costs, and certain building materials such as asphalt, concrete, and metals. Surging demand for dining and lodging services resulted in some increase in prices at restaurants and hotels. Fees for legal and professional services remained generally stable.
Retail Trade and Services
Retail sales increased at a solid pace. Sales growth was supported by elevated household savings, pent-up demand, and favorable credit conditions. Demand was particularly strong for clothing, personal care products, and gasoline. A number of contacts reported increased foot traffic in retail stores, while e-commerce sales continued to be strong. Retail trade in Hawaii as well as other tourist destinations also improved over the reporting period. Retailers across the District noted that back orders and logistical delays resulted in reduced inventories and shortages for some products.
Contacts observed a continued shift in consumer spending from goods back to services. This resulted in slightly lower sales of certain products such as electronics and furniture but increased activity in the consumer and business services sector. Further unwinding of pandemic-related restrictions led to improved conditions in the travel, leisure, entertainment, food service, and hospitality industries. However, demand for business travel and hospitality services remained weak. Despite some materials shortages, health-care spending picked up owing to increased overall capacity. Demand for technology and logistic services remained elevated, although sales volumes were somewhat restrained by capacity constraints.
Manufacturing
Manufacturing activity continued to expand at a modest pace. New orders grew further over the reporting period, especially for fabricated metals, aerospace and transportation equipment, renewable energy equipment, and manufactured food products. Contacts reported low inventories and increased capacity utilization. Continued logistical bottlenecks and shortages of raw materials caused additional delays in order fulfilment. Contacts also noted reduced productivity at factories due to inclement weather and higher temperatures. Wood product manufacturers observed that demand for lumber may have already peaked in recent weeks, given dropping prices and excess inventory at lumberyards. One manufacturer in the Pacific Northwest noted lower demand for certain wood products from large home improvement retailers and housing job sites.
Agriculture and Resource-Related Industries
Activity in the agriculture and resources sectors increased somewhat. Eased local restrictions led to generally increased domestic demand for agricultural and resource-related products. International demand for logs, fruits, vegetables, seafood, and other products increased over the reporting period despite an appreciating dollar. Producers noted reduced but still adequate supply and inventory levels of fruits, raisins, and nuts. Supply chain disruptions continued to cause costly delays with trade from Asian markets in particular. Growers in California reported drought conditions and increased costs associated with irrigation. This led some farmers to leave a portion of their acreage fallow, prioritizing water usage on more profitable crops.
Real Estate and Construction
Conditions in the residential real estate market remained very strong. Strong demand for single-family homes outpaced existing home supply, driving sales prices up further. The lack of available homes was further exacerbated by increasing labor and raw materials costs, which somewhat reduced the rates for project completions and sales over the reporting period. Contacts commented on the recent drop in lumber prices, noting that it boded well for construction activity in the near future. Homebuilders also reported an elevated backlog of orders, especially in the suburbs, as well as robust permit issuance. Additionally, contacts highlighted a persistent shortage of affordable housing throughout the District. Demand for multifamily homes also increased, with one contact in California mentioning increased multifamily construction around entertainment, media, and gaming locations. A housing developer in Alaska observed that builders are reluctant to commit to final pricing due to volatility in materials and supply chain costs.
Demand for commercial real estate remains subdued. Although sales of commercial spaces picked up somewhat over the reporting period, general activity in this sector remained lackluster, and commercial permit issuance decreased in some areas. Demand for new retail and hospitality spaces stayed muted with reports highlighting the use of existing capacity as mobility restrictions eased. Demand for industrial, warehouse, and distribution spaces remained robust but generally unchanged. Demand for office space increased slightly due to many businesses' initialization of return-to-work plans.
Financial Institutions
Lending activity grew slightly over the reporting period. Loan demand remained relatively strong and stable across the district, with new loan originations focusing on residential mortgage and refinancing, auto financing, and credit card activity. Reports from across the District noted increased deposits, high liquidity levels, and healthy consumer balance sheets. Contacts mentioned offering lower lending rates due to increased competition for loans but observed small credit quality deterioration. In investment markets, valuations for firms dedicated to intellectual property, environmental, and energy transition grew notably, showing continued investor interest around innovation and sustainability investment opportunities.