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Beige Book Report: San Francisco

March 7, 2018

Summary of Economic Activity
Economic activity in the Twelfth District continued to expand at a moderate pace during the reporting period of mid-January through late February. Conditions in the labor market remained tight, and upward wage pressures increased. Overall price inflation increased moderately. Sales of retail goods picked up slightly, and growth in consumer and business services remained solid. Activity in the manufacturing sector continued to pick up, and conditions in the agriculture sector deteriorated modestly. Contacts reported that residential real estate market activity continued at a strong pace, and conditions in the commercial real estate sector were robust. Lending activity ticked up.

Employment and Wages
Conditions in the labor market remained tight, and upward wage pressures increased over the reporting period. Contacts noted labor shortages in various sectors, especially for high-skilled positions. Across the District, contacts reported difficulty finding workers experienced in information technology, accounting, and finance. To attract stronger job candidates, some contacts in Seattle and the Mountain West increased nonwage compensation, including vacation time and stock grants. A banking contact observed moderate wage growth for entry-level positions to increase retention. Contacts in the health insurance sector increased their use of offshore labor and automation in response to tight labor market conditions. Minimum wage laws continued to put upward pressure on labor costs generally. A utility provider in Southern California reported flat employment growth in the industry because of muted sales activity.

Overall price inflation increased moderately around the District. Continued strength in construction activity drove an increase in price growth for various building materials. A health-care provider in the Mountain West reported a jump in insurance premiums, partly due to a reduction in federal subsidies for low-income families. Decreased competition from abroad and solid domestic and international demand sustained elevated steel prices. Contacts in Idaho noted that animal health product businesses were able to pass on increased shipping costs to customers. Declines in input costs put downward pressure on electricity prices. Agricultural commodity prices decreased moderately due to excess supply.

Retail Trade and Services
Sales of retail goods picked up slightly over the reporting period. Contacts in the Mountain West saw stronger-than-expected sales in furniture and home entertainment equipment. A contact in the food and beverage industry reported solid sales. While automotive sales remained elevated, growth over the reporting period was flat. Unseasonably warm weather throughout the District restrained winter clothing and equipment sales.

Activity in the consumer and business services sector remained solid. A major health insurance provider in Utah reported an uptick in enrollment and ample capacity for further growth. Demand for health-care services increased slightly. Demand for business services in California's entertainment sector increased due to favorable state tax incentives. Restaurants continued to experience a decline in foot traffic.

Activity in the manufacturing sector continued to pick up. A contact in the Mountain West noted that strong demand for microchips boosted production and caused some longer wait times for deliveries. Capacity utilization in the steel sector grew at a solid pace, driven by reduced overseas competition. Contacts in Washington noted that new orders for commercial aircraft were steady. Profitability in the aerospace sector increased, partly due to a pickup in sales of military aircraft and systems.

Agriculture and Resource-Related Industries
On balance, conditions in the agriculture sector deteriorated modestly. Low snow and rainfall over the reporting period limited new planting in Central California and resulted in weak crop yields. Contacts in Idaho noted that excess supply drove a decline in dairy sector profits to breakeven levels, with smaller producers being hit particularly hard. Grain inventories in the Mountain West were at record levels. Conditions in the swine industry continued to improve on a year-over-year basis. Increased global demand for beef products boosted feedlot utilization.

Real Estate and Construction
Activity in real estate markets continued at a strong pace. Construction activity in the residential market moderated slightly, limited by persistent labor shortages and increasing material costs. Contacts in Eastern Washington observed a notable decline in permits and starts for single-family and duplex dwellings. In Hawaii, housing development starts declined, and several projects were scaled back as prices for building materials increased. In Idaho, construction of residential properties grew at a fast pace. Throughout the District, low construction starts and resale volumes kept residential prices elevated over the reporting period. Contacts in Northern California reported rising home prices stemming from strengthening demand. Brisk demand from out-of-state buyers drove price increases in Oregon. Commercial real estate activity also continued at a strong pace. Large transportation infrastructure projects drove construction activity in Southern California. In Eastern Oregon, demand for warehouse and distribution sites was robust. Contacts in Washington noted an increase in the demand for warehouse space due to the expanding marijuana industry, which drove up industrial rents.

Financial Institutions
Lending activity ticked up over the reporting period. Loan demand was mixed but increased slightly overall. Contacts in Oregon noted that increased commercial real estate development drove growth in loan demand. In Central California, however, loan demand slowed modestly, leading to a slight loosening of lending standards. Across the District, interest margins widened slightly, though they remained narrow due in part to robust competition. In Eastern Washington, venture capital lending registered a slight pickup.