Beige Book Report: San Francisco
October 19, 2022
Summary of Economic Activity
Economic activity in the Twelfth District expanded modestly during the mid-August through September reporting period. Hiring activity grew at a modest pace, and wages rose further amid tight labor market conditions. Inflation remained elevated, albeit with some indication of slight moderation. Retail sales grew moderately, and activity in the consumer and business services sectors was reportedly strong. Manufacturing output grew modestly, while conditions in the agriculture and resource-related sectors worsened somewhat. Residential real estate activity eased further but demand for multifamily housing remained strong. Activity in commercial real estate was flat on balance. Lending activity decreased slightly over the reporting period. Communities across the Twelfth District were challenged by housing affordability and elevated living costs. Looking ahead, contacts expected overall economic conditions to weaken and highlighted their increasingly uncertain outlook, with several respondents citing a possible economic downturn in Europe as a significant headwind.
Labor Markets
Hiring activity grew at a modest pace during the reporting period as labor markets remained tight across most sectors. Reports indicated increased employment levels despite difficulty attracting workers in manufacturing, health care, retail, professional services, and skilled trades. Real estate and construction firms as well as financial services providers reported further easing of labor supply constraints, partly due to slower activity in the housing market. Employment in leisure and hospitality remained far below target levels despite some reported increase in job applications. Airlines have adjusted their schedules in recent months to better reflect crew availability and continued to develop in-house training programs to help meet future demand. Some contacts reported continued investment in automation to address persistent labor shortages. Reports indicated some improvement in employee retention, but many employers continued to highlight persistently high turnover rates. Several contacts noted that worsening housing affordability has made it more difficult for firms to fill entry-level positions in urban areas. One contact reported a notable uptick in applications for evening shifts as people sought a second job to supplement their income. Due to an increasingly uncertain outlook, many contacts narrowed down their future hiring plans to critical positions.
Wages continued to grow, albeit at a slower pace. Reports indicated that elevated costs of living, particularly for essential expenses such as food and rent, continued to drive wage pressures upward. Employees across a range of sectors continued to demand more comprehensive benefits, flexible work arrangements, and up-front hiring incentives. However, there were several reports of hourly workers favoring higher pay over expanded benefits amid elevated price inflation.
Prices
Price levels remained highly elevated despite reported moderation in the rate of increase. Reports noted persistent inflation across industries and products, including prices for food, insurance, health care, legal services, packaging, and some manufacturing products, such as plastic and cardboard, due to continued cost pressures from materials and labor. Lumber prices also rose recently but were still significantly below their pandemic highs. Energy prices, although notably down since June, ticked up in recent weeks, and several contacts said fuel surcharges were still widespread in freight and manufacturing. Nevertheless, cooling overall demand helped alleviate some price pressures, and contacts noted more stable prices for used vehicles, construction materials, and airfares. Contacts generally expected cost pressures to persist over the coming months.
Community Conditions
Housing affordability, homelessness, and food insecurity continued to challenge communities across the district. Contacts emphasized the uneven impact of ongoing inflationary pressures and overall economic uncertainty on lower-income households and communities. Nonprofit organizations reported challenges meeting demand for behavioral health and substance misuse services. Contacts also reported an undersupply of basic shelter needs which have increased due to hiring difficulties and a notable drop in donations in recent months. Several contacts also raised concerns about worsened academic performance during the pandemic across all groups, particularly among lower-income students.
Retail Trade and Services
Retail sales grew moderately on balance. High tourism volumes in large metropolitan areas supported strong demand for retail goods, while other parts of the District saw signs of cooling due to further declines in consumers' discretionary spending. Reports indicated that demand has picked up for home improvement goods as homeowners invested more in their homes. Tight labor supply continued, although retention rates in some retail sectors reportedly increased. Supply chain disruptions continued easing, improving delivery times and allowing some retailers to realign inventory to more optimal levels. Contacts from across the District reported low retail vacancy numbers.
Conditions in the consumer and business services sectors continued to improve. The leisure and hospitality industry saw improvements as COVID-19 travel restrictions eased further for visitors from abroad. A Las Vegas contact highlighted record growth in air travel volumes, while contacts from Southern California and Hawaii noted strong demand for hospitality services. Demand for other services, including food and legal services, picked up, and activity in the health care and wellness sectors continued to be robust.
Manufacturing
Manufacturing activity grew modestly during the reporting period. Demand increased for many products, including packaging equipment, renewable energy equipment, manufactured foods, personal care products, outdoor gear, and some building materials. Meanwhile, metal production and recycling slowed down somewhat. Capacity utilization inched upward on net, while some capital spending plans were deferred due to perceived economic uncertainty. Input and transportation costs remained elevated. Supply chain disruptions and the war in Ukraine continued to hinder manufacturing, especially production of aluminum. Nonetheless, supply issues continued to ease, improving access to raw materials. A metal fabricator noted that backlogs have become more manageable, and overtime has become less necessary. One contact in the energy sector mentioned that energy use by manufacturers largely held steady over the reporting period.
Agriculture and Resource-Related Industries
Conditions in the agriculture and resource-related sectors worsened somewhat. Overall demand for produce, fruits, and seafood was unchanged. However, labor shortages, transportation delays, elevated input prices, drought conditions, and wide temperature fluctuations continued to hinder production, especially for cherries, pears, and apples. Weaker global activity and an appreciating dollar reduced demand in international markets for domestic agricultural products, especially wheat, nuts, raisins, and tree logs. One producer mentioned that increased energy costs in Europe have prevented European farmers from refrigerating and storing fresh fruit, increasing their immediate supply in the region and heightening competition in export markets. Capital spending in the logging sector remained strong, but one contact in the Pacific Northwest mentioned that persistently high timberland valuations hindered production.
Real Estate and Construction
Residential real estate activity softened further. Demand softened for single-family homes due to increasing mortgage rates, and elevated costs for some materials added strain for new home construction projects. Home prices remained high but fell in some areas, such as in parts of Nevada. Housing inventories were still low, especially in Alaska, but started to rise in some other areas. The search for affordable housing has kept demand for multifamily units strong and rental rates high. Despite some easing, ongoing labor and supply shortages continued to delay construction projects. One contact in Arizona specifically raised concerns about the availability of refrigeration and air conditioning equipment.
Activity in the commercial real estate market was flat on balance. Construction of industrial and warehouse facilities remained strong, especially in the Mountain West. One contact in Utah mentioned additional demand for public facilities such as airports and prisons. Conversely, demand for office space was weak throughout the District, and vacancies rose. Contacts attributed this weakness to ongoing remote work arrangements and general economic uncertainty.
Financial Institutions
Lending activity decreased slightly over the reporting period. Loan demand softened, chiefly due to decreased applications for single-family mortgage origination and refinancing on account of higher interest rates. Demand for multifamily and industrial construction loans was more resilient. Economic uncertainty has reportedly led businesses to approach borrowing more cautiously, reducing originations for corporate loans. Demand for auto loans remained elevated. Credit quality remained high, although a few contacts observed some slight deterioration, and competition for loans remained brisk. Liquidity was elevated, but deposits moderated somewhat despite paying higher rates. Financiers in the private equity and venture capital space reported overall declines in investment and valuations, including in clean energy markets.