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San Francisco: July 2022

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Beige Book Report: San Francisco

July 13, 2022

Summary of Economic Activity
Economic activity in the Twelfth District expanded modestly during the mid-May through June reporting period. Overall labor market conditions remained tight, accompanied by wage increases that lagged the pace of price inflation. Inflation remained elevated, driven chiefly by food and energy price increases. Retail sales were strong but moderated further, while conditions in the consumer and business services sectors deteriorated slightly. Conditions in the manufacturing and agriculture and resource-related sectors were mixed. Residential real estate activity eased, while activity in commercial real estate decelerated modestly. Lending activity was unchanged on balance. In general, District contacts communicated a somewhat worsening outlook for the year.

Labor Markets
Labor markets remained tight across all sectors during the reporting period. Employers reported difficulty attracting skilled workers in health care, technology, engineering, and finance as well as the skilled trades. Contacts in leisure and hospitality continued to operate below desired staff levels despite some reported increase in job applications. In addition, contacts in the air travel industry said that although employment remained below pre-pandemic levels, airlines began adjusting their summer schedules to better reflect crew availability. Some contacts reported improved employee retention in recent weeks, but turnover rates remained generally elevated. A few contacts mentioned that the recent hiring freezes at large technology firms could make it easier for other businesses to attract experienced professionals in the field. Several contacts also noted a pickup in unionization efforts in the retail and health-care sectors.

Wages grew across all sectors but did not keep pace with price inflation. Reports indicated that workers demanded more pay, citing higher food and energy prices. Additionally, employees continued to put emphasis on flexible work arrangements, expanded benefits, and hiring incentives. Contacts in agriculture, health care, and financial services reported the highest wage increases. Despite ongoing labor shortages, several contacts reported not planning mid-year raises because of overall economic uncertainty and previously granted pay adjustments.

Prices continued to grow during the reporting period, particularly for energy products. Price increases were reported across multiple industries, including manufacturing, construction, agriculture, health care, and technology services. Fuel surcharges were widespread, particularly in freight and manufacturing, and contacts reported little resistance to such adjustments given the current inflationary environment. Raw materials costs remained elevated, although there were reports of some relief in lumber and steel prices. Contacts from the travel and hospitality industries reported sustained increases in airfares and hotel rates amid high demand for leisure travel. Contacts generally expected cost pressures to persist, and in some cases worsen, over the next few months.

Retail Trade and Services
Retail sales growth moderated further over the reporting period. Demand for retail goods remained strong but rising prices led consumers to trade down and limit the number of items purchased. Reports indicated that rising costs for food and fuel were particularly binding for consumers when deciding what to purchase. Contacts noted that sales growth for durable goods such as motor vehicles, electronics, appliances, and furniture moderated noticeably. Despite some easing, supply chain issues continued to strain inventories, and worker shortages at stores limited business hours and sales. While one contact from Utah mentioned little to no vacancy in retail space, a specialty retailer from Arizona reported widespread excess retail capacity in the region.

Conditions in the consumer and business services sectors deteriorated slightly on net. Contacts reported slowing sales with rising costs for materials, fuel, transportation, wages, and other supplier services. Contacts noted that high inflation led both consumers and businesses to reconsider spending on discretionary services, while labor shortages made it difficult to properly train new hires. Conversely, demand for domestic and international travel, as well as hospitality services, continued to grow strongly, partly due to consumers' pent-up demand for vacationing. Demand for health-care and wellness services remained at or near capacity in some regions.

Conditions in the manufacturing sector varied by industry. Demand for capital equipment strengthened, as firms in the food, beverage, chemical, personal care, and pharmaceutical industries sought to increase productivity. However, new orders and production of wood products, electrical equipment, and fabricated metals declined over the reporting period. Manufacturers' backlogs remained elevated. Supply chain disruptions continued to negatively impact the availability and cost of raw materials and extend delivery times. A few contacts reported accumulating vast inventories of hard-to-obtain materials. Many contacts expressed concern that COVID-19 lockdowns in China have remained a source of supply chain uncertainty.

Agriculture and Resource-Related Industries
Conditions in the agriculture and resource-related sectors were mixed. Drought conditions in many areas adversely impacted the growing season, with some producers letting portions of their farms go fallow in order to prioritize water usage. Growers in the Pacific Northwest instead reported increased precipitation, with one producer expressing concern that the colder weather would reduce crop yield. Farmers throughout the District reported increased international demand for both fresh and processed foods but noted that a strengthening dollar dampened sales somewhat. Input costs, such as those for fertilizer, machinery, fuel, and feed, increased further over the reporting period, partially due to the continuation of the Russian invasion of Ukraine. Supply chain disruptions persisted, but many contacts reported an easing of port backlogs and shipping rates despite increased fuel costs. One producer in the Pacific Northwest warned declining shipping rates could indicate decreasing food sales prospects, while a contact in the seafood sector reported only minor improvement in shipping conditions.

Real Estate and Construction
Residential real estate activity eased over the reporting period. Supply chain disruptions and rising labor and material costs continued to put upward pressure on housing prices. Sharp increases in mortgage rates, combined with high home prices, cooled down demand for existing and new single-family homes. Many contacts highlighted a decline in the number of offers sellers received. Inventories remained strained by historical standards despite an increase in the number of houses available for sale in some regions. Homebuilder confidence declined further, and permit issuance weakened in most of the District. One developer in Alaska reported a considerable decline in speculative construction of housing units and a low supply of seasonal housing. Reports mentioned increasing rents and declining availability of multi-family housing units.

Activity in the commercial real estate market was balanced overall. Demand for retail space weakened throughout most of the District, while demand for industrial and warehouse space remained robust. Contacts noted that commercial real estate permits and construction slowed down somewhat, and one contact in the Pacific Northwest said that ongoing labor and material shortages delayed construction projects. In California, commercial real estate conditions were reportedly steadier.

Financial Institutions
Lending activity was unchanged on balance. The number of corporate loans and consumer credit cards issued increased, while demand for new mortgages, refinancing, and auto loans declined in most areas. Demand for industrial lending remained steady. Many contacts mentioned a notable increase in competition for loans and continued ample liquidity. Credit quality remained high, but contacts expected credit health to deteriorate somewhat on account of increasing interest rates and moderating deposits. Financiers in the private equity and venture capital space noted that the cost of leveraging has increased notably, dampening the volume of new deals in recent weeks. Demand for insurance products generally declined, with a notable exception being pet insurance.