Beige Book Report: San Francisco
March 8, 2023
Summary of Economic Activity
Economic activity in the Twelfth District expanded modestly during the January through mid-February reporting period. Hiring activity grew modestly and labor supply improved somewhat. Wage and price growth moderated further, although overall levels remained elevated. Demand for retail goods was strong, and activity in the consumer and business services sectors was robust. Demand for manufactured products remained unchanged on net, while conditions in the agriculture and resource-related sectors softened slightly. Activity in residential real estate markets eased further, while commercial real estate activity was little changed. Lending activity declined modestly over the reporting period. Communities across the Twelfth District sought more workforce development and childcare services and continued to experience price pressures due to high inflation. Contacts expected a weaker outlook for the economy going forward as well as increased overall uncertainty.
Labor Markets
Hiring activity grew modestly during the reporting period. Labor supply improved somewhat across most sectors, allowing employers to fill long-standing job vacancies. Firms reported higher applicant counts and lower staff turnover rates in many sectors, including finance, tourism, and agriculture. Despite improved labor availability, competition remained tight across skill levels, including for positions in food services, hospitality, construction, health care, and manufacturing. In fact, labor market tightness continued to be an issue for many providers for consumer services, except for those in the technology industry. Additionally, contacts in both health care and business services reported an increased demand for part-time positions in recent weeks. Many financial firms either slowed their hiring or contracted somewhat their employee head counts due to fewer real estate loan originations in an elevated interest rate environment. Other contacts reported stable employment levels, reduced job postings, or hiring freezes due to slowing demand and increased uncertainty. Contacts in the technology, entertainment, and transportation sectors mentioned that layoffs have either continued or are being considered as firms seek cost-cutting strategies amid lower demand.
Wage growth moderated somewhat across most sectors. Strong competition for workers and elevated living costs continued to drive wages upward, but increased labor availability lessened wage pressures overall. Some employers reported that pay for entry- and mid-level positions increased at somewhat faster rates than for those at management and executive levels. Workers continued to demand flexible work arrangements where applicable but were faced with firms' mixed appetites for remote work.
Prices
Price levels remained elevated and rose further, albeit at a slightly slower pace. Firms generally reiterated their ability to continue passing higher costs through to clients, although the degree of which varied by sector. Contacts noted higher prices for natural gas, produce, eggs, electrical components, ferrous metals, packaging, food services, and hotel rooms. Conversely, some products and services saw stable or lower prices, including those for transportation, rents in certain areas, advertisements, cardboard, lumber, and other building materials.
Community Conditions
Demand for community and workforce development services remained high as elevated prices, interest rates, and uncertainty continued to challenge low-income households and rural communities across the District. In particular, households and community members sought support for childcare, food assistance, rental assistance, house affordability, mental health services, and financial literacy programs. Reports highlighted a recent increase in the number of new small businesses, especially those with diverse leadership, despite strong competition for labor. Some small business financiers raised concerns about capital access and increasing delinquency rates. Educators highlighted efforts to improve compatibility between their community college programs and local workforce needs.
Retail Trade and Services
Retail sales were strong overall but started to show signs of softening in recent weeks, in part due to consumers' rising credit card debt. Shopping centers experienced softer retail sales despite strong foot traffic. Reports also indicated that more consumers substituted usual purchases with lower quality or less expensive products, when possible, to compensate for higher prices. One retailer noticed that elevated energy prices led to moderated spending at the gas pump in recent weeks. These customers reportedly spent the freed-up funds at convenience stores located at the fuel stations. A specialty retailer with a national presence highlighted that inventory levels were stable.
Activity in the consumer and business services sectors was robust. Demand for health-care services was high. Activity in the food services sector trended up, supported by good weather and more people returning to on-site work and to school campuses. Demand for leisure travel and accommodations started to moderate somewhat. A contact from Southern California noted that demand for accommodations during spring break was strong but lower than anticipated. Demand for business travel continued to modestly improve as conference and convention attendance remained strong. A contact from the Pacific Northwest highlighted the negative impact of technology firm layoffs on local retail and services sectors.
Manufacturing
Demand for manufactured products remained unchanged on net. The metal production and recycling industries reported favorable conditions supported by inventory investment by domestic firms and demand from South Asia. However, offsetting factors arose from a softening of the construction industry and global macro concerns. Food manufacturing and capital equipment sectors reported robust demand, although a contact from the Pacific Northwest noted a slowdown in local manufacturing activity. Availability of raw materials normalized further as most contacts reported improvements in supply chain disruptions, except for inputs dependent on semiconductors. Demand for manufactured building supplies and home heating equipment weakened, although a contact from Southern California noted an increase in demand for specific building products, such as steel tubing and line pipes.
Agriculture and Resource-Related Industries
Conditions in agriculture and resource-related sectors softened slightly. While international transportation bottlenecks eased further, demand from abroad continued to be hampered by the strong dollar. One contact observed that producers continued to shift sales to domestic markets, and another commented that domestic demand has been high enough to largely absorb available supply. However, demand for produce from retailers and food services providers was reportedly either stable or down in recent weeks. Contacts continued to report low crop yields due to drought conditions, while a contact in Alaska noted continued stability in some major seafood stocks. Input costs, such as labor, energy, water, and fertilizer, increased, though one contact in the Pacific Northwest noted that food transportation costs fell substantially.
Real Estate and Construction
Activity in residential real estate eased further over the reporting period. Demand for single-family homes continued to soften. Properties took longer to sell, and prices were lowered. Multifamily housing demand remained steady, though contacts reported that asking rents or the rate of rent increases declined. One contact in Oregon noted strong demand for larger rental units as renters shared spaces to keep shelter costs down. New residential construction fell moderately or remained steady across the District, with contacts citing financing costs and concerns about future demand. Price pressures for raw materials were reportedly mixed, rising in some areas, such as Northern California, and falling in others, such as the Mountain West.
Activity in the commercial real estate market was little changed on net. Demand for office space showed continued weakness with low rents and high vacancies. A contact in Oregon reported slowing demand for warehouse and industrial space, though other contacts reported continued strength in these sectors. One contact in Nevada observed that businesses expressed interest in purchasing commercial spaces, rather than renting them.
Financial Institutions
Lending activity declined modestly in recent weeks. Contacts reported that overall economic uncertainty and higher interest rates led to a drop in demand for most commercial and personal loans, with notable softness in residential and commercial real estate lending. Deposits moderated, and in some cases fell, but liquidity remained elevated overall. According to reports, credit quality was generally healthy, but financial institutions continued to tighten lending standards in response to increased economic uncertainty.