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Beige Book Report: San Francisco

October 16, 2019

Summary of Economic Activity
Economic activity in the Twelfth District expanded at a modest pace during the reporting period of mid-August through September. The labor market remained tight, employment growth was modest, and wages grew moderately. Reports on price inflation were mixed. Sales of retail goods increased modestly, and activity in consumer and business services expanded slightly. The pace of commerce in the manufacturing sector was little changed, and agriculture sector slowed further. Activity in residential and commercial real estate markets was solid. Lending grew further.

Employment and Wages
The labor market remained tight, and employment levels grew modestly on balance. Some contacts explicitly pointed to growing customer demand as the impetus for adding employees. In general, labor demand continued to outpace supply in sectors such as construction, finance, and hospitality. However, some businesses observed that they were able to add workers because labor shortages abated somewhat over the reporting period. In Washington, large e-commerce companies continued hiring to staff new distribution centers. A community bank in Oregon added positions in response to swifter lending activity. A restaurateur in Southern California reported that a shortage of qualified workers resulted in some restaurants reducing operating hours. A contact in Oregon reported that retail job growth was slightly negative year-on-year and that some manufacturers were unable to fill positions due to skills gaps.

Wages continued to rise moderately across sectors. Labor shortages in construction boosted wages in that sector and resulted in longer lead times for projects. Contacts reported rising salaries for skilled information technology and software development personnel. A business services provider reported that wage growth has decelerated since last year, but is still very high by historical standards. Several contacts emphasized that rapid employee turnover continued to be a key challenge and was a driver of more generous retention-focused benefit packages and higher wage offers. In California, newly enacted legislation about the designation of independent contractors as employees is expected to increase labor costs for impacted companies significantly in the new year.

Prices
Reports on prices were mixed, but suggested that inflation was stable or up slightly on balance. Contacts in a variety of sectors reported no noticeable change in pricing over the reporting period. Some attributed this to brisk competition among businesses, which limited the ability to pass on higher labor costs to customers. Selling prices for some businesses in the logistics and professional services industries picked up moderately due to solid product demand, while inflation for health-care services jumped slightly. A few contacts observed higher fuel prices following supply disruptions in the Middle East. Building materials costs rose across the District, with some reports attributing this to a pickup in demand in the residential real estate market. However, lumber prices continued to run well below historical averages due to weak export demand, and some local areas saw declines in building material costs in response to limited construction activity. In the agriculture sector, crop prices softened overall due to weaker demand from abroad, though some products saw higher selling prices on net due to lower yields following poor growing conditions.

Retail Trade and Services
Sales of retail goods increased modestly. Across the Mountain West, retailers reported that sales volumes rose moderately and margins were healthy even though consumer confidence about the outlook waned slightly on rising uncertainty. Sales at home improvement stores in Oregon were robust. In Arizona, retail sales were stable, while in Alaska, sales continued to decline and a large apparel retailer left the state. Businesses continued to observe consumer demand shift to e-commerce outlets from brick-and-mortar locations.

Activity in the consumer and business services sectors expanded slightly. Health-care service providers in the Mountain West noted solid customer demand and the capacity to meet it. The restaurant industry in the Pacific Northwest was generally strong, with local tourism and rising incomes supporting spending. In Seattle, a contact noted that a new restaurant opened about every day, on average, though another contact at a quick service beverage company in the area observed flat sales growth across locations. The tourism industry in Southern California slowed somewhat, with a hotel owner reporting lower occupancy rates for that type of lodging.

Manufacturing
Activity in the manufacturing sector was little changed. A metals manufacturer in the Pacific Northwest reported steady activity across various product lines, while a contact in the semiconductor industry in California reported that sales and inventory levels were normal. The slowing trend in both housing and global growth along with the stronger dollar generally constrained sales at domestic wood product manufacturers, though some noted that a recent tick up in the housing market stabilized demand somewhat.

Agriculture and Resource-Related Industries
Activity slowed further in the agricultural sector. Poor weather in Idaho damaged wheat harvests, while potato yields were lower than last year due to poor growing conditions earlier in the season. The outlook for Idaho's corn crop was similarly weak due to colder-than-usual conditions. Demand for agricultural exports continued to run soft, with contacts generally citing tariffs and slower global growth as reasons for the decline in exports. A lumber producer in Oregon noted that lumber exports to China have dropped so much that the industry has started scaling back harvesting capacity to preserve domestic prices. An apple grower in Washington reported an oversupply of fruit in the market, and contacts in California noted that cherry and nut exports to China were down noticeably. Demand from abroad for various meat products was also weak due to tariffs, though a negative supply shock in the Chinese pork industry continued to drive stronger-than-usual demand for swine exports. A contact in California reported that demand for farmland has fallen recently due to realized and potential effects of trade policy developments, resulting in moderating land prices.

Real Estate and Construction
Residential real estate activity was strong. Permitting for single- and multi-family homes picked up in most areas, though construction starts were constrained by a lack of labor and higher material costs, which led inventories to fall noticeably and lead times to increase. Accordingly, selling prices ticked up across the District as demand outpaced supply. An exception was in the Central Valley of California, where a contact reported that permitting was down and inventory levels increased more than expected. In areas such as eastern Washington and central Oregon, sales activity was brisk due to new buyers arriving from higher-cost areas. A contact in the Mountain West reported that mortgage rates lower than earlier in the year spurred an increase in demand from formerly tepid levels.

Activity in commercial real estate markets was also solid, and vacancy rates were generally low. In the Pacific Northwest, commercial permitting was especially brisk, and contacts there noted that construction would be centered on transportation infrastructure, health-care services, and public schools. In eastern Washington, rising demand for industrial space from the cannabis industry boosted leasing rates. In central Oregon, three of the largest commercial construction contractors were booked for projects through next year.

Financial Institutions
Lending activity grew solidly over the reporting period. Across the District, loan demand was brisk, supported by lower interest rates. Some banks reported that home mortgage refinancing activity increased further. Venture capital funding was strong in Seattle. Lenders to the agriculture sector in the Mountain West were concerned about weakness in that industry leading to loan defaults down the road. Generally, however, contacts reported that credit quality was healthy, with a few bankers noting slightly tighter underwriting standards.