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San Francisco: November 2022

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Beige Book Report: San Francisco

November 30, 2022

Summary of Economic Activity
Economic activity in the Twelfth District expanded modestly during the October through mid-November reporting period. Labor market conditions remained tight, and employment levels grew at a modest pace. Wages and prices rose at a slower pace relative to the previous reporting period. Demand for retail goods was robust, and activity in the consumer and business services sectors trended up. Demand for manufactured products strengthened on net, while conditions in the agriculture and resource-related sectors were stable but weak. Activity in residential real estate markets weakened moderately, while commercial real estate activity was unchanged overall. Lending activity declined moderately over the reporting period. Communities across the Twelfth District, and lower-income households in particular, were challenged by elevated living costs. Contacts expressed concern over a weaker outlook for the economy and increased overall uncertainty.

Labor Markets
Employment levels grew at a modest pace during the reporting period. The labor market remained tight despite some signs of easing. Employers generally mentioned ongoing difficulties in filling vacancies despite rising employee head counts. Labor supply was particularly constrained in agriculture, hospitality, health care, retail, food services, transportation, and skilled trades. Hotels and restaurants, in particular, continued to operate below capacity due to labor shortages, causing reduced hours of operation and restricted availability of add-on services. Contacts in Alaska, Hawaii, and Utah highlighted especially tight labor markets across most sectors. Conversely, contacts in other sectors observed some easing in hiring conditions with manufacturing, finance, and professional services reporting lower turnover and voluntary quits, as well as more applications per open position. Hiring freezes and layoffs have spread widely across the technology and entertainment sectors, and some contacts observed similar developments in the real estate sector. Contacts also highlighted a slowdown in hiring activity due to continued investment in automation and growing uncertainty for the economic outlook. A few contacts mentioned increased efforts in employee training.

Wages grew further but at a slower rate, especially for lower-paid positions. Reports indicated that workers continued to ask for higher wages primarily because of elevated costs of living, and employers continued to offer hiring incentives, retention bonuses, and comprehensive benefits packages. Workers' preference for flexible work arrangements remained, but employers observed more room to push back against such requests. A few contacts highlighted upward wage pressures from the increases in minimum wages regionally and ongoing discussions with labor unions.

Prices rose at a slower pace relative to the previous reporting period, but overall levels remained elevated. Ongoing rises in the costs of labor, raw materials, and input services led to higher final prices in several sectors, including hospitality, food services, business services, electronics, health care, pet care, insurance, and financial services. Conversely, gradually improving supply chain constraints, cooling overall demand, and high uncertainty for domestic and global economic outlooks have resulted in flat or lower prices for many products, including metals, lumber, wood products, some food (fish, bacon, and potatoes), and apparel.

Community Conditions
Communities across the District continued to report high inflation, food insecurity, and lack of affordable housing as well as the heavy toll of overall economic uncertainty as key challenges for lower-income households. Nonprofit organizations reported a sharp drop in donations from both individuals and corporations in recent weeks and highlighted that these declines in funds have constrained them from meeting the elevated demand for behavioral health and substance use services as well as basic shelter needs. Contacts also noted that elevated operational costs and a limited ability to compete with larger corporations for labor led a number of small businesses and community service providers to close their operations.

Retail Trade and Services
Demand for retail products, although softening somewhat, continued to be robust. Contacts in the Pacific Northwest and Intermountain West reported strong retail sales that were backed by population and employment growth. At the same time, reports in the Mountain West noted inflationary pressures slowing down the demand for food at grocery stores. Labor shortages continued to hinder the retail sector despite higher wages. The outlook by retailers for the holiday season was generally positive, though holiday sales were expected to fall short of those observed last year.

Activity in the consumer and business services sectors trended up. Stronger tourism supported higher demand for food and beverage services, hospitality, and air travel. A pickup in business travel and related events further boosted demand for leisure and hospitality services. Demand for insurance, legal, and banking services remained unchanged. One contact reporting shifting towards more online services partly due to higher costs and labor shortages. Laboratory testing and medical services ran at or near full capacity due to medical worker shortages.

Demand for manufactured products strengthened on net. Softer residential construction dampened demand for metals and lumber, although the impact was partially offset by home improvement investments by existing homeowners. Operational backlogs in food manufacturing have eased substantially as COVID-19 disruptions have ameliorated, allowing production to move to near capacity. A contact in the capital equipment industry noted continued supply disruptions in high-tech electrical components stemming from pandemic containment measures in Asia. Overall, the demand for capital equipment remained strong, driven by an overall increased push by businesses toward automation.

Agriculture and Resource-Related Industries
Conditions in the agriculture and resource-related sectors were stable, albeit weak, during the reporting period. Farmers reported solid domestic and international demand for both fresh and processed foods, especially for dairy products and nuts, but noted that global economic uncertainty and a strong dollar continued to weigh down international demand for most domestic agricultural products. Limited rainfall throughout California has reportedly impacted summer crops, such as tomatoes, and is threatening expectations for various winter crops, especially leafy greens. Contacts reported meaningful relief in supply bottlenecks in recent weeks, although one producer noted persistent disruptions and delays at some ports in Asia stemming from pandemic containment measures. Utilities providers reported challenges meeting demand as labor and materials shortages persisted.

Real Estate and Construction
Activity in residential real estate markets weakened moderately compared to the prior reporting period. Demand for single-family homes fell overall due to elevated prices and rising mortgage rates, while demand for multifamily rental units remained strong. One contact in Southern California noted that potential homebuyers have opted to rent instead, and a Northern California contact reported a change in scope for some single-family construction projects, now built to rent rather than to sell. Selling prices across the District remained high but began to stabilize, with price reductions in some markets. Across the District, inventories remained limited but increased somewhat in recent weeks as homes took longer to sell. Residential construction activity declined notably across the District. Contacts largely attributed the decline to the rising cost of capital due to rising interest rates.

Commercial real estate activity was unchanged overall. Demand for industrial space remained strong, and in some regions demand for retail space strengthened, while office space demand was subdued. One contact in Utah noted particularly weaker demand outside of the premium office space market. A contact in Northern California reported the pace of new commercial space construction continued overall but noted some slowing in warehouse construction.

Financial Institutions
Lending activity declined moderately in recent weeks. Contacts reported that higher interest rates and overall economic uncertainty led to a drop in demand for most commercial and personal loans, with notable softness in residential and commercial real estate lending. Conversely, credit card debt picked up recently. Credit quality remained high, although some contacts observed a slight deterioration. Deposits moderated, and in some cases fell, but liquidity remained elevated overall. Contacts reported tighter lending standards in response to increased economic uncertainty and noted signs of weakness in capital markets, investment banking, and asset management services.