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Beige Book Report: San Francisco

May 30, 2018

Summary of Economic Activity
Economic activity in the Twelfth District continued to expand at a moderate pace during the reporting period of early April through mid-May. Conditions in the labor market remained tight, and wage pressures ticked up. Price inflation increased moderately. Sales of retail goods edged up, while activity in consumer and business services expanded slightly. Activity in the manufacturing sector expanded solidly, and conditions in the agriculture sector deteriorated somewhat. Contacts reported that residential real estate market activity remained solid, and activity in the commercial real estate sector picked up notably. Lending activity ticked up modestly.

Employment and Wages
Contacts continued to report tight labor market conditions across all sectors, leading to an uptick in wage pressures and to labor-retention challenges. Demand for workers in the restaurant industry increased markedly. Demand for construction labor continued to exceed supply, causing wages to rise moderately and wait times for project starts to increase. Across the District, contacts in banking and financial services noted persistent shortages of IT professionals, especially at companies or branches in rural areas. In response to shortages of skilled labor in banking services and manufacturing, contacts noted the growth of strategic training partnerships between these employers and colleges and trade schools to build a talent pipeline. A contact in the Pacific Northwest reported intensified labor shortages in the health-care sector, preventing service providers from meeting market demand. Employers in the business services and real estate development sectors increased compensation packages to compete with companies trying to poach well-trained employees. Employment in the utilities sector was broadly flat.

Prices
Price inflation increased moderately over the reporting period. Recent oil price increases spurred price inflation in a variety of sectors. Food and beverage businesses passed along a jump in transportation costs to consumers. Persistently brisk activity in the construction sector continued to exert upward pressure on prices for building materials. Contacts observed modest price inflation for manufactured medical devices after input costs increased somewhat. Contacts in Oregon and the Mountain West observed rising retail gasoline prices. A contact in Southern California reported that increases in commercial rents for restaurants drove some inflation for customer prices. Semiconductor prices increased modestly. A contact in the California agriculture industry noted a slight pickup in inflation due to a weak outlook for yields after subpar rainfall levels. In Eastern Washington, the price of imported wholesale natural gas declined moderately, lowering heating costs in the area.

Retail Trade and Services
Sales of retail goods edged up over the reporting period. Contacts reported solid sales at food and beverage companies. Sales activity in the pharmaceutical industry picked up due to intensifying competition that drove down market prices. Apparel sales increased marginally following recent declines, though consumer demand continued to shift to entertainment goods and services. The restaurant industry saw sales tick down further, as foot traffic remained at low levels.

Activity in the consumer and business services sectors expanded slightly. Across the District, consolidation in health provider and payment services continued at a solid pace. Health insurance enrollment in the Mountain West grew modestly, causing revenues and earnings to edge up. Demand for legal services in Hawaii picked up slightly.

Manufacturing
Activity in the manufacturing sector expanded solidly. Demand for steel and other manufactured inputs used in the production of heavy capital goods picked up noticeably, reflecting stronger industrial and consumer activity. Contacts in Northern California noted brisk semiconductor sales and the scope for demand to increase further. Deliveries of commercial aircraft over the first four months of the year increased modestly from the same period last year, while new orders grew significantly over the same period.

Agriculture and Resource-Related Industries
Conditions in the agriculture sector deteriorated somewhat. Current inventories and yield expectations for a variety of crops fell because of lower-than-expected precipitation levels in much of the District over the past few months. Unusually warm weather in the Pacific Northwest generated softer demand for heating, putting downward pressure on natural gas prices in the region. The supply of electricity continued to outpace demand in California, leading excess capacity to rise in the state.

Real Estate and Construction
Activity in real estate markets continued to expand at a robust pace. Construction in the residential market remained solid, though the shortage of labor and intense price pressures for building materials continued to act as headwinds. Contacts in Eastern Washington reported that permitting for residential units was flat on a year-over-year basis, though at an elevated level. Listing durations for single family houses fell over the reporting period, indicating a pickup in selling activity across the District. A contact in Oregon noted that the inventory of new homes remained at a low level. Commercial real estate activity picked up notably. Contacts in Eastern Washington reported that plans for the construction of a major e-commerce distribution center were announced, resulting in an anticipatory uptick in demand for commercial space in the area. Contacts in the San Francisco Bay Area noted that office rents and occupancy rates rose moderately because of increased demand by technology companies.

Financial Institutions
Lending activity ticked up modestly over the reporting period. Loan demand increased overall, with contacts in the Mountain West and Central California reporting strong loan growth. In Oregon, demand for financing for various construction projects continued to increase. Deposit rates continued to edge up, resulting in a slight narrowing of net interest margins. Contacts noted a modest increase in the rate of mergers and acquisitions among small and medium-sized banks.