Beige Book Report: San Francisco
January 15, 2020
Summary of Economic Activity
Economic activity in the Twelfth District expanded at a modest pace during the reporting period of mid-November through December. The labor market remained tight, employment growth picked up modestly, and wages rose further. Reports on prices suggested inflation was up slightly on balance. Sales of retail goods increased moderately, and activity in consumer and business services was up modestly. The pace of commerce in the manufacturing sector was stable, and activity in the agriculture sector was mixed. While the residential real estate market expanded strongly, commercial real estate activity softened somewhat. Lending grew steadily.
Employment and Wages
The labor market remained tight, and employment growth was up modestly on balance. Demand for workers remained elevated, though shortages of qualified candidates somewhat stymied hiring growth. Businesses in several sectors including health care, finance, and information technology continued to experience difficulties in hiring high-skilled workers. Similarly, firms in retail, agriculture, and construction reported increased job vacancies across skill levels. A few contacts characterized worker shortages as a significant deterrent to business expansion. Worker turnover remained high, with firms reporting increased investment in job training and automation as ways to enhance productivity. In the Pacific Northwest, business services and manufacturing firms instituted shorter interview processes to counteract the increased competition for workers. Conversely, some firms in the consulting, counseling, and utilities sectors reported stable hiring levels. Community bankers in Oregon and Southern California saw a tick up in hiring after some large banks in these regions laid off some of their high-skilled payroll.
Wages rose further across the District as companies tried to attract and retain qualified workers. Wages picked up across skill levels as labor markets remained highly competitive. In the Mountain West, a contact in the banking sector noted paying more than double the prevailing market rate for some positions. Entry-level wages also rose in many sectors including finance, tourism, and retail despite reports of decreasing labor quality. A few employers in Seattle and Southern California highlighted regulatory increases in minimum wages as an additional source of upward wage pressures. A business services provider in the Pacific Northwest and a hotelier in California each raised concerns about wage compression in the face of increasing entry-level and minimum wages. Employers across the District also observed that benefit packages expanded, further increasing total labor costs.
Prices
Reports on prices suggested that inflation was up slightly on balance. Many businesses such as professional service providers and financiers reported increased prices due to a pickup in labor costs. Fees for transportation and logistics services continued to increase. Firms in the technology and retail sectors highlighted that brisk competition limited their ability to pass through wage increases to final prices. Prices for telecommunications services, health care, and utilities remained mostly unchanged. Some building materials producers reported lower prices over the reporting period, but others noted being able to charge higher prices following a pickup in construction activity. Contacts in metals manufacturing reported price declines.
Retail Trade and Services
Sales of retail goods increased moderately. Most reports indicated that consumer demand was robust over the holiday season, with online sales growing faster than brick-and-mortar sales. Retailers attributed strong sales this season to consumers' high disposable income, adequate product inventory levels, and improved in-store services and discounts. Luxury retailers reported a brisk rise in sales, as did those in other specialized markets such as home improvement products and pet pharmaceuticals. A few businesses that depend primarily on brick-and-mortar sales noted a shorter holiday shopping season and less foot traffic relative to previous years.
Activity in the consumer and business services sectors was modestly stronger. Demand for health services and insurance remained robust across the District, the latter especially boosted by more comprehensive benefit packages in the face of tight competition for workers. Restaurants and food service providers reported solid sales over the holidays, though a major quick service restaurant in the Pacific Northwest witnessed a slight dip in sales over the reporting period. Holiday activity in the tourism sector was mixed, with bookings for leisure cruises and airline travel rising noticeably, while year-end occupancy rates at Southern California hotels were down from earlier in the year.
Manufacturing
Conditions in the manufacturing sector were stable on net. Production in the metals recycling industry increased over the reporting period, though weak sales abroad were still a drag. A more active housing market and less competition from foreign producers stabilized demand for domestic wood products. Contacts reported that productivity increased and capacity utilization was above historical averages. Metal manufacturers in the Pacific Northwest reported healthy domestic demand and less competition from abroad, but activity was down somewhat on net. Activity in the electronics sector declined near year-end due to weakness in new orders.
Agriculture and Resource-Related Industries
Activity in the agriculture sector was mixed. Reports from contacts in the Central Valley of California indicated most crop yields performed well despite reported water shortages. Domestic agricultural product sales remained at healthy levels, while sales abroad continued to suffer from issues related to trade disputes and slowing foreign economies. For example, sales of lumber increased domestically following a rebound in the housing market, but lower selling prices squeezed profits from export markets. One report also mentioned slower activity in the market for grapes. Activity in the livestock sector decreased somewhat, with demand for cattle and swine products ticking down a bit. In the energy sector, a contact reported expectations for increased infrastructure investment but also mentioned continued excess generating capacity.
Real Estate and Construction
Residential real estate activity expanded strongly. Reports from across the District noted that buyer demand remained robust amid low inventories for both single-family and multi-family housing. Contacts attributed the brisker demand to the low interest rate environment, despite a recent tick up in mortgage rates in some areas. Construction activity was up but somewhat restrained by labor shortages. Some suppliers noticed elevated costs for building materials due to high demand, but a few others noted that materials' availability had improved. Contacts highlighted that home prices grew further, noting that affordability concerns have led some buyers to look for homes outside main urban areas. A financier from Southern California mentioned slower demand for high-end properties, noting that their development was constrained by tighter financing options and longer processing times. A multi-family housing provider in Nevada added that tenant demand for add-ons such as concierge and parcel services had also increased notably, even as rents increased.
Activity in commercial real estate markets softened somewhat. Demand for retail and office space in California weakened, with some reports noting little new construction. Commercial permitting also decreased in the Central Valley of California over the reporting period, though it remained stable in the Pacific Northwest. In contrast, demand for industrial spaces, like warehouses and distribution centers, remained elevated. Contacts noted that very low vacancy rates and increased leasing costs have spurred construction of new industrial spaces across the District. In the Pacific Northwest, public infrastructure construction also increased.
Financial Institutions
Lending activity grew steadily. Most reports noted a further pickup in demand for credit, especially mortgage and personal credit. The commercial lending sector was relatively less active, with most loans focusing on refinancing into lower interest rate contracts as opposed to new investment or construction. In general, capital levels and asset quality remained high, though lower interest rates put some pressure on banks' net interest margins and profitability. Competition for loans continued to be brisk, while that for deposits was comparatively mild. A few banks reported tighter underwriting standards for new loans. A financial technology company that lends primarily to small businesses saw better than expected activity and low default rates.