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San Francisco: June 2022

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Beige Book Report: San Francisco

June 1, 2022

Summary of Economic Activity
Economic activity in the Twelfth District expanded moderately during the April through mid-May reporting period. Overall labor market conditions remained tight, accompanied by wage increases that showed some signs of leveling off. Price levels increased briskly, driven by food and energy price increases. Retail sales continued to increase, while conditions in the consumer and business services sector improved significantly due to pent-up demand for leisure travel and other services. Activity in the manufacturing sector remained strong, while conditions in the agriculture and resource-related sectors deteriorated a bit. The residential real estate market remained robust overall, while conditions in commercial real estate improved somewhat. Lending activity was little changed over the reporting period.

Labor Markets
Conditions in labor markets were little changed and remained tight across all sectors. Many employers mentioned difficulty attracting skilled workers, such as IT and finance professionals, data scientists, mechanics, pilots, underwriters, and loan officers. Hourly workers, especially in the leisure and hospitality sector, have also been hard to find, which has led to rising burnout among existing workers. A few contacts noted a slight decrease in employee turnover, although levels remain higher than before the pandemic. In addition, recent hiring freezes at a few large tech firms combined with the tightening financial conditions have led a few employers to expect the labor market to cool down in the near future. Several contacts also mentioned a resurgence of unionization efforts in the health-care, retail, and distribution sectors.

Wages continued to rise, although with some slight signs of leveling off. Contacts in the health-care, agriculture, food services, and financial services sectors reported the highest wage increases. Some contacts mentioned budgeting several more wage increases in the middle of the year to keep pace with price inflation, while others mentioned having no such plans. A few small companies reported difficulty competing for talent with larger companies able to absorb more costs. A retailer in the Mountain West recently stopped increasing wages after noticing no significant impact in the number of applicants from previous wage increases.

Prices continued to increase briskly over the reporting period, most notably for food and energy products. Price increases were noted across many industries, including manufacturing, construction, food services, and health care. Cost pressures associated with energy price increases were expected to be passed on to consumers relatively quickly. Prices for agricultural products, such as seafood and tree fruits, also continued to rise, partly due to elevated shipping and fertilizer costs. On the other hand, price levels for steel and other manufactured metals were noted to have edged down in the past few weeks compared to their highs following the onset of the Russia-Ukraine war.

Retail Trade and Services
Retail sales continued to increase, although with some moderation. Consumer demand for food and energy products slowed down somewhat due to pricing pressures, and a few contacts observed that consumers are curbing their spending and focusing more on necessities, especially in lower-income households. However, spending of higher-income households has not yet been affected as much, and auto sales were noted to have increased. Going forward, contacts across the District expected further pullback in demand due to increased uncertainty and concerns over high inflation.

Conditions in the consumer and business services sector improved considerably thanks to low reported numbers of new COVID-19 cases, warmer weather, and pent-up demand for services. Demand for domestic air travel is now above pre-pandemic levels and international travel is also on an upward trend. Despite increasing airfares, the strong recovery in leisure travel has also increased activity at hotels, restaurants, and entertainment venues. Business travel was also noted to have ramped up. Demand for food services was generally strong, although one contact in the Pacific Northwest noted a recent decrease in restaurant diners after the rapid increase in fuel prices. Demand for health-care services remained stable but showed signs of normalizing away from COVID-related services.

Activity in the manufacturing sector remained strong. New orders continued to increase, and manufacturers' capacity utilizations rates were either at or above pre-pandemic levels. However, supply chain disruptions and limited availability of raw materials as well as shipping issues continue to have a significant impact on production and delivery times. Several contacts expressed concern that recent COVID-19 lockdowns of major cities in China could exacerbate these issues further. To combat these disruptions, one contact mentioned maintaining approximately three months of additional inventory of supplies, while another manufacturer noted a modest inventory reduction in the past few months. A large equipment manufacturer in the Pacific Northwest observed that higher labor costs have led some businesses to look into automation.

Agriculture and Resource-Related Industries
Conditions in the agriculture and resource-related sectors deteriorated a bit. Exporters of agricultural products faced more challenges due to further shipping bottlenecks and container shortages stemming from an appreciating dollar, the war in Ukraine, and the lockdowns in China. Growers throughout the District noted rising costs for labor, fertilizer, and transportation, and one contact expected costs to continue accelerating in the near future. Another contact in the Pacific Northwest mentioned that these export challenges have led them to look at markets within the United States or Canada and Mexico. While demand for energy remained stable over the reporting period, a public utility contact noted that price increases in natural gas have not yet been passed on to consumers due to regulatory lags—once they do, demand is expected to decrease.

Real Estate and Construction
Residential real estate activity remained robust overall despite some signs of easing. Demand for existing and new single-family homes, while still strong, has slowed down somewhat as higher prices, rising mortgage rates, and low inventories thwarted some potential buyers, especially those at the entry level. In addition, supply chain disruptions and rising labor and construction costs contributed to further price increases. As a result, several contacts noted a significant increase in demand for multi-family properties as they tend to be more affordable than single-family homes. In fact, a contact in the Pacific Northwest observed an increase in repurposing commercial downtown real estate into high-density residential units. Both single- and multi-family rental markets continued to be strong, with increases in rental prices and low vacancy rates.

Conditions in the commercial real estate market improved slightly. Demand for industrial and warehousing space continued to be strong, and a few contacts noted a pickup in construction of commercial real estate. However, a contact in the Pacific Northwest observed that some potential commercial projects are being reevaluated due to rising interest rates. Furthermore, a few others expressed uncertainty over demand for office space going forward as leases expire and hybrid work leads companies to downsize their footprint.

Financial Institutions
Lending activity was little changed on balance. Several contacts observed a slowdown in deposits and refinancing activity, most of which was driven by fixed-rate mortgages due to rising interest rates. On the other hand, commercial, construction and auto loans were noted to have increased over the reporting period. Several contacts in California also mentioned a notable increase in home equity line of credit activity as homeowners take advantage of higher home values. Many banks continued to experience strong competition for new loans, although asset quality and liquidity remained high. One contact in the venture capital space noted that cleantech public company valuations have decreased notably in the past few months, although private company valuations remained strong.