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Beige Book Report: San Francisco

September 4, 2019

Summary of Economic Activity
Economic activity in the Twelfth District continued to expand at a moderate pace during the reporting period of early July through mid-August. The labor market remained tight, characterized by modest employment growth and moderate wage growth. Price inflation was largely stable. Sales of retail goods increased notably, as did activity in consumer and business services. The manufacturing and agricultural sectors slowed somewhat. Both residential and commercial real estate market activity expanded moderately. Lending grew further.

Employment and Wages
The labor market remained tight, and employment growth was modest. Across the District, some contacts reported steady growth in employment, especially in urban areas. Others cited little change in employment, mostly due to continued difficulties in finding qualified workers. Information technology and financial sector positions were especially hard to fill. A contact in the payment-processing sector noted that job openings remained unfilled for longer than they did a year ago. Some employers suggested that shortages of qualified workers were a major factor behind a slowdown in their business expansion plans. A large provider of shipping and logistics services mentioned a restructuring-driven hiring freeze for managerial positions, as well as seasonal layoffs. A provider of agricultural transportation services noted that they were only hiring replacements for departed workers.

Wage growth rose further over the reporting period due to brisk competition for qualified workers across sectors. Apart from Alaska, wages for construction workers increased solidly in the District due to a pickup in building activity. Wages in the financial services and hospitality sectors also continued to increase at a solid pace, although one banker in Oregon suggested that wage increases were more subdued. Hourly rates for delivery drivers at a major shipping and logistics business in California rose modestly. Businesses reported continued positive adjustments to starting wages due to new minimum wage laws and tight competition for entry-level workers. Some employers noted their employees' preferences for expanded benefits packages over higher wages including signing bonuses, flexible work arrangements, paid time off, and varied health insurance options.

Prices 
Price inflation was largely stable on balance. Many businesses reported that brisk competition limited their ability to raise selling prices. Some input costs increased due to higher tariffs, though an appreciation of the dollar helped offset some of the higher import costs. Across the District, higher import costs have raised concerns over narrower profit margins. In some sectors such as lumber and natural gas, selling prices remained subdued. In other sectors, prices picked up somewhat. Wholesalers in California reported little resistance to price increases, and an online payment processer mentioned higher market prices for finished goods. In Seattle, a restaurateur reported upward price pressures from food and beverage vendors. Prices for agricultural goods remained stable overall, with slightly higher prices reported for hay, milk, and grapes. Market prices for beef, poultry, and pork softened as well as those for utilities.

Retail Trade and Services
Sales of non-auto retail goods increased notably. Contacts across the District mentioned that retail conditions remained strong, especially in areas where population and income trends are favorable. In the Mountain West, retailers reported a brisk pickup in sales over the summer despite businesses offering lower discounts when compared to the previous year. In Alaska, retail sales were down statewide. E-commerce outlets continued to highlight robust sales growth both domestically and internationally. Demand for vehicles weakened over the reporting period, attributed to general unease in the customer base regarding the economic outlook.

Activity in the consumer and business services sectors increased notably. Demand for shipping and logistics services rose rapidly, and industry projections remained favorable. A major service provider in the District noted increased investment in information technology for logistics services as well as brisk growth in shipping of health-care products. A transportation service provider noted high demand for train car space. Restaurants in the Pacific Northwest reported strong sales growth, as did hotel operators in the Mountain West. A contact in Hawaii also reported moderate growth in the hospitality sector but mentioned some concerns regarding future tourist inflows.

Manufacturing
Activity in the manufacturing sector slowed somewhat. A chip manufacturer in the Mountain West reported continued worldwide softening of orders. In the Pacific Northwest, wood product manufacturers noted faltering demand. An energy supplier mentioned lower demand for natural gas from various industrial customers ranging from asphalt and concrete producers to paper makers. Production slowed in a large aerospace business in the Pacific Northwest. On the other hand, contacts in the semiconductors and metals-producing sectors reported strong output and a positive outlook.

Agriculture and Resource-Related Industries 
Activity slowed somewhat in the agricultural sector. Inclement weather negatively affected both the timing and yield of harvests across different states. Intense storms halved cherry crops and delayed tomato and grain harvests. Unseasonably high temperatures depressed California almond yields, though their impact was somewhat offset by an increase in the number of almond trees in production.

Demand for agricultural products generally softened, both externally and domestically with notable exceptions in nuts and grapes markets. Trade tensions, a strong dollar, and a less optimistic economic outlook were identified as the main factors behind slower overall demand. Producers of beef, poultry, and pork products sought alternative markets after further escalation of trade tensions with China. Fruit and wheat farmers in the Pacific Northwest noted a decline in their export business. Lumber producers reported weakening demand for their products nationally. A contact in Central California observed stable prices but lower demand for farmland. In the utilities sector, electricity sales and excess capacity remained on par with levels earlier in the year.

Real Estate and Construction
Demand for residential real estate grew further. Construction activity and demand for single- and multi-family homes remained elevated throughout the District, aided by low interest rates and strong employment. One notable exception was Alaska where public projects dominated. Supply continued to be somewhat constrained by worker shortages, though one contact in the Mountain West noted increased availability of skilled workers coming from other regions.

On net, selling prices accelerated, and permit issuance picked up. Some local governments in California and Hawaii have started considering bans on vacation home ownership as a possible response to increased affordability concerns. In some areas, time-on-the-market increased and prices plateaued.

Activity in commercial real estate markets expanded moderately. In the Pacific Northwest and the Mountain West, construction activity was strong, vacancy rates were low, and rental rates remained elevated. Commercial permitting in Washington was in line with last year's numbers, and contacts highlighted that there are many projects in the pipeline in Oregon and California.

Financial Institutions 
Lending activity grew further over the reporting period. Contacts across the District noted healthy demand for loans, supported by low interest rates and robust commercial construction activity. Low mortgage rates spurred refinancing activity, though a few lenders expressed concerns over increasing downward pressures on net interest margins. Loan quality and capital levels remained solid, though a contact in California observed some loosening of lending standards. Competition remained tight but was somewhat less brisk for loans relative to deposits in the current reporting period.