Beige Book Report: San Francisco
March 2, 2022
Summary of Economic Activity
Economic activity in the Twelfth District strengthened moderately during the reporting period of January through mid-February. Employment grew further while overall labor market conditions remained tight. Wages and price levels continued to climb notably, driven by materials and labor shortages. Sales of retail goods increased solidly, while conditions in consumer and business services picked up following a decrease in new COVID cases related to the Omicron variant. Conditions in the agriculture and resource-related industries remained unchanged on balance, whereas the manufacturing sector was mixed. Activity in the residential real estate market continued to increase robustly, while commercial real estate activity improved slightly. Lending activity was steady over the reporting period.
Labor Markets
Employment levels grew further, with reports focusing on labor market tightness. Firms across the District continued to cite difficulties attracting qualified candidates for both high- and low-skilled positions, with many reporting elevated numbers for job openings and few applicants. Labor shortages for entry-level and low-wage positions were widespread, especially in the consumer services and farming industries. Firms in the finance, manufacturing, and energy sectors reported stable employment levels and comparatively lower turnover. Meanwhile, firms looking to fill openings for accounting, legal, technology, architecture, construction, and engineering positions continued to compete intensely for talent. Many contacts across the District mentioned higher rates of voluntary quits and early retirements, partially due to concerns about health risks during the recent Omicron wave. A few employers in Alaska and Utah highlighted especially difficult hiring conditions, citing candidates who missed scheduled interviews and newly hired workers who failed to show up on the first day at their new job.
Wages increased considerably over the reporting period. The mismatch in supply and demand for workers continued to put upward pressure on wages, especially in the consumer services sector. Contacts across the District reported increasing wages from 3 to 20 percent, depending on the skill level and sector. California contacts mentioned additional pressure from new minimum wage legislation that came into effect in early 2022. A few from the manufacturing sector observed a slight deceleration in the rate of wage inflation.
Prices
Prices climbed notably across the District. Contacts reported widespread price increases as higher material and labor costs were partially passed on to clients. Energy, transportation, and storage costs also contributed to further price increases across most sectors, including prices for construction materials and paper products. In agriculture, lower export sales increased domestic supply levels, which partially offset upward price pressures from higher input costs. A few contacts raised concerns that price hikes arising from wage increases may fuel further wage pressures going forward.
Retail Trade and Services
Sales of retail goods increased solidly over the reporting period. Retailers across the District generally reported strong brick-and-mortar and online sales. Shipping delays and increased input costs continued to considerably affect the retail sector, causing inventory levels to be erratic in some areas. Contacts in the textile and garment sector reported tighter inventory, with some taking over their own wholesale supply in response. A few retailers noticed that sales of high-end or discretionary goods declined somewhat due to price increases. In the Mountain West, a contact mentioned that local and regional firms expanded into locations vacated by national brands. A contact in Arizona highlighted even tighter availability of retail goods in certain tribal communities, partially due to a higher incidence of COVID-19 cases.
Activity in the consumer and business services sectors picked up in recent weeks, following a decrease in new COVID cases related to the Omicron variant. Consumer services, such as those related to tourism, hospitality, entertainment, and restaurants, observed increased demand in many areas, including Hawaii and Alaska. Nonetheless, providers continued to report supply chain disruptions and worker shortages, which impacted their ability to meet demand. Some professional services, including business consulting and legal services, observed increased demand and faster fulfilment of existing contracts despite difficulties in hiring. Health care, with still-elevated demand for medical services and hospital beds, struggled to reconcile with supply and staff shortages.
Manufacturing
Conditions in the manufacturing sector were mixed. Many manufacturers continue to report difficulties in filling orders due to supply chain disruptions, worker shortages, tight inventories, and increased material costs, such as those for lumber and steel. Manufacturers in the tourism-related sectors, such as for luxury products including leisure boats, noted a push to hire management consulting services from local markets as a way to respond to supply chain issues. Other contacts reported experiencing a better standing in dealing with supply hurdles and higher costs, resulting in fulfillment of more orders and elevated capacity utilization. A manufacturer of packaging machinery noted increased demand for process automation equipment in the face of widespread worker shortages. A manufacturer of renewable energy equipment highlighted uncertainty regarding fiscal policy and continued infrastructure investment.
Agriculture and Resource-Related Industries
Conditions in the agriculture and resource-related industries remained largely comparable to the previous reporting period. Sales of agricultural goods remained strong overall, with shipping delays and slightly fewer orders from abroad somewhat offset by domestic customers looking to fill back orders. Inventories of crops such as nuts and raisins remained at reasonable levels, while those for cut flowers, potted plants, fruits, and other tree crops dwindled a bit. Short supply of labor, materials, machinery, water, and fertilizer impacted the early pollination process for this year's crop. One exporter in the Pacific Northwest highlighted that the recent shift in sales toward the domestic market negatively affected profitability, while another grower in California expected this shift to be reverted once supply chain issues are alleviated.
Real Estate and Construction
Activity in the residential real estate market increased robustly. Residential construction and sales remained strong in both single-family and multifamily housing sectors. Nonetheless, ongoing shortages for material, workers, and land, as well as increased costs for lumber in particular, continued to delay construction projects' completion times. The pace of home price increases remained elevated but decelerated slightly relative to recent trends, while inventories remained tight. A contact in Alaska noted that supply chain delays from Canada further tightened the availability of materials in the area. A few contacts mentioned increased uncertainty concerning fiscal support for infrastructure investment. Reports also highlighted higher rents for multifamily units in major metropolitan areas.
Commercial real estate activity increased slightly on balance, with recovery in the sector reportedly lagging that of the overall economy. Sales and rentals of commercial and office spaces have picked up somewhat over the reporting period, but new business investment in commercial real estate remained generally lackluster. A financier in the Pacific Northwest noted that expectations for increased borrowing rates have already affected demand for new commercial construction. Conversely, demand for construction of manufacturing, storage, and distribution facilities remained strong.
Financial Institutions
Lending activity was steady over the reporting period. Loan demand remained high despite long-term rate increases, but demand for commercial loans lagged that of consumer loans. Liquidity remained elevated, which further contributed to tight competition for loans. Most bankers reported high and improving credit quality, but a few others cautioned against a slight relaxation of underwriting requirements. A financier in Arizona highlighted that lending conditions within traditionally underserved communities remained quite tight.