Beige Book Report: San Francisco
January 16, 2019
Summary of Economic Activity
Economic activity in the Twelfth District continued to expand at a moderate pace during the reporting period of mid-November through December. Conditions in the labor market remained tight, and wage growth was moderate. Price inflation was flat. Sales of retail goods expanded moderately, while activity in consumer and business services was solid. Conditions in the manufacturing sector strengthened modestly, and conditions in agriculture deteriorated slightly. On balance, contacts reported that residential and commercial real estate market activity expanded at a solid pace. Lending activity ticked down.
Employment and Wages
Conditions in the labor market remained tight. Contacts reported that worker shortages persisted across industries and skill levels. Nonetheless, several contacts reported an uptick in the pace of hiring. A major shipping and logistics business in Northern California hired more seasonal workers than usual in response to strong holiday demand. In the restaurant industry, a contact in the Pacific Northwest observed rising employment levels, while contacts in the Mountain West and Southern California noted intense worker shortages that led one chain to cancel plans to open additional locations. A contact in the California banking industry increased employment as warranted by business demand but noted that future hiring plans would be sensitive to developments in the broader economy.
Wage growth continued to increase moderately. Contacts across the District observed intense compensation pressures for more highly skilled workers. Employers with vacancies in the information technology, cybersecurity, and management fields continued to boost starting salaries to attract qualified candidates. Wages for lower-skilled workers also rose moderately, due to brisk competition and, in some cases, in reaction to imminent minimum wage increases in the new year. A Southern California contact in the business services sector reported that training costs also increased as positions turned over more frequently given the tight job market.
Overall, price inflation was flat over the reporting period. Contacts in manufacturing and utilities observed upward pricing pressures due mainly to a further moderate pickup in the cost of metal inputs and higher financing costs for capital-intensive production. Food and beverage prices increased somewhat, reflecting higher labor costs at producers. The growth of building material prices slowed a bit, due in part to noticeably lower lumber costs, which fell because of the moderation in the housing market. Lower oil prices resulted in reduced fuel surcharges at shipping and logistics businesses and a modest decline in the price of some petroleum-based inputs to manufacturing. In the agriculture sector, prices declined modestly as demand from abroad weakened in response to trade policy changes and the stronger dollar.
Retail Trade and Services
Sales of retail goods expanded moderately. Contacts observed that a solid holiday shopping season bolstered retail activity over the reporting period, thanks in part to elevated consumer confidence and household wealth. A contact in the Pacific Northwest reported that demand at home-improvement stores increased further. In the food and beverage industry, a contact reported a modest increase in sales driven by increased demand for higher-end products. Automotive sales in the Mountain West declined slightly, due in part to higher financing costs.
Activity in the consumer and business services sectors was solid. Demand for shipping and logistics services continued to be strong. Demand for automotive repair services in the Mountain West picked up; one contact attributed the increase to drivers preferring to repair instead of replace their vehicles as financing costs increased. A contact in Southern California observed a slight tick down in tourist activity.
Conditions in the manufacturing sector strengthened modestly overall. Contacts in Northern California reported that activity in the semiconductor industry was solid, but they noted the potential for stock market turbulence to modestly limit new orders. Deliveries and new orders of commercial aircraft increased slightly from the same period last year. A contact in the Pacific Northwest observed that demand for manufactured lumber products ticked down, due in part to somewhat slower growth in the housing market.
Agriculture and Resource-Related Industries
Conditions in the agriculture sector deteriorated slightly. Many contacts cited trade policy changes and the appreciation of the dollar as drivers of weaker sales in the sector. Demand from abroad for a variety of crops declined noticeably, hurting profitability for certain growers across the District. A few contacts reported higher inventory levels for crops such as soybeans and perishable fruits, while growers sought alternative markets for their products. A contact in California noted that the outlook for crop yields in the new year improved modestly after rainfall beat expectations over the reporting period.
Real Estate and Construction
Real estate markets expanded solidly overall, though contacts continued to observe slightly slower growth in recent months, especially in the residential market. A contact in Eastern Washington reported that overall housing permits for construction were slightly lower on a year-over-year basis due to a drop in permits for multi-family units, though single-family units registered a year-over-year increase. In Oregon, housing inventory ticked up but was still very low by historical standards. A contact in Southern California reported that shortages of more-affordable housing units persisted, while construction of higher-end apartment buildings continued despite flagging demand in that segment. A contact in Oregon noted that housing prices were up substantially on a year-over-year basis, thanks in part to brisk demand from out-of-state buyers looking for less expensive housing options.
In the commercial real estate market, contacts generally noted solid construction activity and demand. Contacts in the Pacific Northwest observed strong building activity. In Eastern Washington, construction was under way on a major e-commerce distribution center. In Seattle, contacts noted brisk activity in office construction and leasing. Rents were stable at an elevated level, and contacts reported continued low vacancy rates.
Lending activity ticked down over the reporting period. Growth in loan demand slowed slightly, with contacts generally attributing most of the moderation to higher interest rates. At the same time, for many banks, competitive pressures in loan and deposit pricing increased and net interest margins narrowed. Most contacts reported that credit quality remained healthy. A few observed that lending standards loosened modestly.