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San Francisco: October 2021

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Beige Book Report: San Francisco

October 20, 2021

Summary of Economic Activity
Economic activity in the Twelfth District strengthened moderately during the reporting period of mid-August through September. The overall price level moved up notably, driven by increases in transportation and input costs. Conditions in the labor market tightened further as modest increases in employment were accompanied by strong upward wage pressures in almost all sectors. Retail sales moderately expanded while activity in consumer services slowed down somewhat. Conditions in the agriculture and resource sectors as well as the manufacturing sector strengthened somewhat, as consumer demand remained solid. Activity in the residential real estate market expanded at a strong pace, while commercial real estate activity was largely subdued. Lending activity picked up further over the reporting period.

Employment and Wages
Conditions in the labor market remained tight while overall employment levels expanded modestly. Demand for workers continued to be exceptionally strong. Contacts across the District reported having substantial difficulties finding qualified candidates, particularly for lower-skilled positions. Industries reporting the tightest constraints included hospitality, retail, and food services. In fact, a few contacts in these sectors noted that they did not see any significant improvement after the expiration of supplemental benefits or the start of the school year. Worker shortages were also noted in manufacturing, higher education, nonprofit organizations, and financial institutions. Most contacts mentioned needing longer time for filling open positions, although some reported they were having an easier time finding remote workers, especially those from nonurban areas.

Wage growth climbed further due to intensified competition for talent and workers' willingness to switch jobs, with one contact from the banking sector characterizing it as a wage war. Apart from increasing starting salaries as much as 20 percent by some employers' estimates, most contacts across sectors reported offering hiring bonuses, gift cards, and other incentives. Conversely, wages in the entertainment and energy sectors remained mostly flat. In addition, an entertainment industry contact in California reported an upcoming union vote to decide whether its members will go on strike to oppose low wages and long working hours.

Prices moved up notably over the reporting period. Construction material costs, such as steel, asphalt, and wallboard, increased sizably. Lumber prices, despite receding and stabilizing during the summer months, started noticeably increasing in some areas recently. Robust demand for the regions' agricultural products together with lower crop yields continued to drive food prices up. Additionally, price pressures arose from increased transportation, energy, and labor costs. One banking sector contact noted rising labor costs as having the biggest impact on their business and prices.

Retail Trade and Services
Sales of retail goods, notably for food and beverage, picked up over the reported period. Several contacts mentioned strong e-commerce sales. High demand, labor shortages, and supply chain disruptions have kept inventories low, in some cases restricting retailers from meeting consumer demand. Sales of vehicles and electronics were hindered by semiconductor shortages and other ongoing disruptions to inventory building.

Activity in the consumer and business services sectors slowed down somewhat. Although demand in travel, leisure and hospitality, and food services had been rising, the recent spike in Delta variant cases has dampened growth in these sectors. Hospitality services related to business travel also continued to underperform. One contact noted many reservations were cancelled as in-person business events were switched to only being held virtually. On the supply side, reports across the District noted that labor shortages in hospitality and food services have constrained business capacity. One contact reported that many hotel rooms remained vacant due to the lack of staff to service them. Demand for health-care services remained high, particularly for COVID-19 testing. Several contacts noted an increase in clinical volumes especially due to pent-up demand for elective procedures that had been delayed by COVID-19.

Activity levels in the manufacturing sector rose slightly. Operational disruptions due to the pandemic have eased somewhat, normalizing manufacturing activity and capacity utilization. Nonetheless, supply-chain bottlenecks and labor shortages continued to hold back many manufacturing processes. Manufacturers expecting disruptions to persist mentioned plans to stockpile raw materials and find suppliers closer to their production sites. High demand for renewable energy continued, although with some delays in orders as customers await more clarity on new federal policies.

Agriculture and Resource-Related Industries
Conditions in the agriculture and resource sectors strengthened somewhat. Demand for the regions' agricultural products continued to be robust both domestically and internationally. Crop yields on tree fruit, wheat, and grapes were lower due to warmer temperatures and water shortages. A few contacts reported farmers leaving a portion of their acreage fallow to use water on more profitable crops. As a result, some fruit inventories were reduced. Several contacts noted price pressures coming from increased transportation and labor costs. Some producers in the Pacific Northwest highlighted that labor shortages led them to hire most of their seasonal workers through the temporary workers visa program as opposed to locally. Supply chain disruptions and shipping delays continued to weigh on producers with one contact reporting about 25 percent of orders being unshipped. The overall sales volume for the energy sector remained at normal levels, despite the shift in customer usage from commercial to residential during the pandemic.

Real Estate and Construction
Activity in the residential real estate market expanded at a brisk pace. Demand for both single and multifamily housing was strong across the District. Lack of affordable single-family housing is further increasing the demand for multifamily houses, with several contacts observing growth in new construction to meet current demand. Additionally, a few contacts noted increases in building permit activity and construction loan requests for single-family and multifamily projects. Reports from Alaska point at continuing delays in construction due to uncertainty about the availability and cost of labor and materials. House prices continued to increase across the region. Several Southern California contacts reported noticeably strong price surges in recent weeks, including rents. However, a report from Arizona suggested that prices have stabilized somewhat in the region, yet at a higher level.

Commercial real estate activity was largely subdued. The spread of the Delta variant as well as labor shortages hindered the recovery of office, retail, and hotel sectors. Consequently, rents and leases in commercial real estate were noted to have fallen, and vacancy rates increased largely in California. Conversely, conditions in the industrial real estate sector strengthened, partially due to increased demand from manufacturers.

Financial Institutions
Lending activity picked up further over the reported period. Consumer demand for loans remained strong, with most origination stemming from residential loans and credit card lending. At the same time, auto lending was muted due to inventory restrictions. Bankers across the District highlighted that loan competition was reportedly at record highs, as liquidity levels remained elevated and interest margins were further squeezed. Business investments were largely muted due to uncertainty faced by business owners.