Beige Book Report: San Francisco
December 1, 2021
Summary of Economic Activity
Economic activity in the Twelfth District strengthened moderately during the reporting period of October through mid-November. Employment rose at a moderate pace, while overall conditions in the labor market remained tight. The overall price level moved up significantly, driven by increases in employee compensation and other input prices. Sales of retail goods rose markedly while activity in consumer services increased at a tamer pace. Conditions in the agriculture and resource sectors as well as the manufacturing sector strengthened further. Activity in the residential real estate market expanded at a strong pace despite capacity constraints on construction, while commercial real estate activity was more mixed. Lending activity picked up modestly over the reporting period.
Employment and Wages
Employment rose at a moderate pace, while overall conditions in the labor market remained tight. Demand for workers continued to significantly outpace supply across the District. Contacts across sectors reported substantial difficulties attracting and retaining qualified candidates, particularly for positions in the lower end of the wage distribution. Labor shortages reportedly affected production and service capacity in several industries, including hospitality, retail, food services, transportation, construction, and manufacturing. Some consumer service providers noted increased rates of voluntary quits and job offer rejections. In health care, contacts highlighted particular difficulties in hiring workers for nonstandard shifts. A contact in education mentioned that inability to hire teachers forced some schools to close in the Pacific Northwest. In contrast, some bankers and energy providers observed ameliorated hiring conditions. One manufacturer mentioned increased efforts in hiring from nontraditional worker programs, such as previously incarcerated individuals. A few contacts expressed concern over workers' mental health and increased difficulties balancing work with family responsibilities.
Wages grew further over the reporting period due to intensified competition for talent, widespread labor shortages, and rising living costs. Annual percent increases in pay rates reportedly reached double digits in such sectors as hospitality, construction, and professional services. Many contacts mentioned the continued use of hiring bonuses, flexible work hours, part-time job offers, and remote work arrangements as additional measures to attract qualified talent. Conversely, some employers in the technology sector mentioned more stable wage levels due to their ability to hire outside major metropolitan areas.
Prices
Prices moved up significantly across the District. Widespread price hikes affected construction materials, retail food items, and energy, to name a few. Additional price pressures arose from business services, such as transportation and warehousing. Many contacts reported passing on increased wage and other input costs to consumers. One contact in business consulting mentioned rate increases beyond 30 percent for services that required consultants to travel to and work from clients' premises.
Retail Trade and Services
Sales of retail goods rose markedly over recent weeks. Consumer demand for most retail products was reportedly strong even in the face of increasing prices. Several contacts mentioned continued robust e-commerce activity. Retailers observed labor shortages and rising costs, which were partly mitigated by an ongoing shift toward new technologies to substitute for labor, such as self-checkouts. Supply chain hurdles continue to hinder inventory building across the District, which retailers highlighted as an important risk for the high level of sales expected during the upcoming holiday season. A wood products provider mentioned that sales at retail home centers were well above pre-pandemic levels. Sales of vehicles continued to be hindered by semiconductor shortages and other ongoing disruptions to inventory building.
Activity in the consumer and business services sectors rose slightly. Demand in travel, leisure and hospitality, event management, entertainment, and food services saw an uptick as the wave of infections driven by the Delta variant subsided in recent weeks. Business travel, relative to leisure travel, has been slower to recover from recent lows. Some contacts in the hospitality sector noted higher revenues despite lower occupancy rates, which was attributed to price effects. Demand for transportation services remained elevated but supply was constrained somewhat by labor shortages and other capacity-reducing factors. Demand for non-COVID-related health-care services rose quickly of late, while inventories for medical supplies were tighter. Demand for legal services was uneven, with more client interest for estate planning than for business formations services, for example.
Manufacturing
Activity levels in the manufacturing sector rose further. Contacts noted a strong flow of new orders across industries, including metals fabrication, wood products, and processed foods. However, widespread supply chain disruptions and labor shortages continued to hold back production to a certain extent. As a response, manufacturers considered diversifying supply chains and stockpiling raw materials, despite reduced availability and rising costs for inputs. Some contacts additionally mentioned increased investment in new technologies and renewable energy as a way to improve resilience in the production process. Capacity utilization remained elevated overall.
Agriculture and Resource-Related Industries
Conditions in the agriculture and resource-related sectors strengthened over the reporting period. Demand remained strong domestically and, partly due to a more favorable foreign exchange environment, internationally, for the region's meats, produce, seafood, and lumber. Inventories were at satisfactory levels for most crops, although crop yields for tree fruit and wheat were relatively lower due to warmer temperatures and water shortages. Contacts highlighted underground water availability as being of particular concern. However, recent rains in Northern California eased drought conditions a bit in some regions. Contacts also noted that a general lack of readily available labor, continued logistical delays, interruptions related to the Delta variant, and difficulties concerning equipment maintenance further restrained production. A contact in the logging sector mentioned rapidly rising costs and competition for timberland, as well as reduced supplemental availability of logs from fire salvages.
Real Estate and Construction
Activity in the residential real estate market continued to increase at a brisk pace. Demand for both single-family and multifamily housing was strong across the District, although declining affordability in parts of the region reportedly pushed some potential single-family buyers into the multifamily market. Construction activity remained robust. However, labor and material shortages hampered the pace of construction somewhat. Building permit issuance remained solid, while the inventory of existing homes remained low. Additionally, a few contacts noted tighter availability of new lots for construction projects. A contact in Alaska highlighted that a large multifamily housing development project was postponed due to inflation uncertainty. A statement from Utah suggested that the real estate market stabilized somewhat in that region.
Commercial real estate activity was mixed. Demand for new office and retail space picked up in some areas, while it remained subdued in others. One contact in California expressed concern about permanently lower demand for office space related to a switch to hybrid workspaces. Demand for new hotel facilities was weak, partially due to the impact of the recent Delta wave. Manufacturing and warehousing spaces were in shorter supply and had high occupancy rates, especially near the busy West Coast ports where logistical delays were observed.
Financial Institutions
Lending activity picked up modestly over the reported period. Consumer demand for credit card loans, home mortgage, and insurance products remained strong, while auto loan origination continued to be hindered by low vehicle supply. Demand for commercial real estate loans lagged those for their residential counterparts. Bankers across the District highlighted elevated deposit levels, but somewhat lower than in the previous reporting periods. Underwriting standards reportedly eased of late, as competition for loans tightened further and interest margins remained squeezed. Some contacts observed increased merger and acquisition activity among regional banks, as well as accelerated business investments in fintech companies. One contact in California mentioned that credit to small minority-owned businesses remained under tight availability.