Beige Book Report: San Francisco
October 19, 2016
Economic activity in the District continued to expand at a moderate pace during the reporting period of September through early October. Overall price inflation was limited, while upward wage pressures intensified further. Sales of retail goods picked up to a moderate pace, and growth in the consumer and business services sectors was strong. Manufacturing activity changed little on balance. Conditions in the agriculture sector improved moderately. Contacts reported vigorous activity in residential real estate markets, while conditions in the commercial sector strengthened. Lending activity grew at a moderate pace.
Prices and Wages
Overall price inflation was limited over the reporting period. Prices in the hospitality sector increased modestly, a somewhat slower pace than earlier in the year. Raw materials price inflation remained subdued, except for select agricultural commodities. Prices for generic pharmaceuticals declined further, with significant drops noted for a few products.
Wage pressures intensified further during the reporting period. On balance, growing labor shortages increased wage pressures for low skilled and entry-level workers, and a few contacts noted an increase in the time required to fill vacancies due to shortages of workers who meet basic job requirements. Some small business owners in Idaho reported the need to reinstitute previously dropped health-care benefits to attract applicants. Demand for skilled IT professionals continued to heighten wage pressures in the financial and technology sectors. One contact reported that wage growth in the Bay Area technology sector remained high but had slowed somewhat from its torrid pace over the past few years, particularly for smaller businesses.
Retail Trade and Services
Retail sales growth picked up over the reporting period and was moderate on balance. Sales of luxury consumer goods were strong, while smaller retailers noted that demand for mid-priced products improved following a summertime lull. Beverage sales remained strong. Contacts in the gaming industry reported strong sales growth and noted that retailers continued to invest in brick-and-mortar capacity, as foot traffic remained robust. Demand for new and used automobiles bounced back from a slowdown in the prior reporting period. Contacts in the apparel industry reported that sales growth improved and was moderate on balance.
Activity in the consumer and business services sector generally grew at a solid pace. E-commerce sales continued to boost domestic shipping volumes, while demand from the export sector remained weak due to the elevated dollar. Demand for payment services from small businesses slowed somewhat from earlier this year but continued to expand moderately. Overall, activity in the entertainment sector grew at a moderate pace across most platforms due in large part to heavier demand for script-based television content. Tourist activity in Hawaii increased further for both domestic and foreign travelers. Sales at restaurants slowed further. Contacts in the utilities sector reported that energy demand from manufacturers declined further due in part to weaker demand from metal producers and food processors in the Pacific Northwest. Labor market conditions remained tight, with one contact reporting difficulty in finding a sufficient number of truck drivers for the summer harvest.
Manufacturing
Manufacturing activity was mixed across sectors but largely flat on balance over the reporting period. Shipments of aluminum products reached record highs, as demand from producers of fabricated and primary metal products increased further. Sales growth of manufactured pharmaceuticals slowed slightly from its earlier rapid pace, and contacts continued to report rising production costs from government regulation and negative media coverage around industry pricing decisions. Activity in the semiconductor industry continued to grow steadily as orders for new products kept pace with final sales. Steel production weakened over the reporting period as the elevated dollar, strong global production, and weak global economic growth held back exports. One contact reported that a "fairly significant" number of small metals recyclers had closed or filed for bankruptcy. Orders and deliveries of commercial aircraft are down for the year compared with the same period last year.
Agriculture and Resource-Related Industries
Activity in the agricultural sector expanded at a moderate pace. Harvest yields of pistachios, almonds, and walnuts are expected to reach record levels. Contacts reported that both yields and quality of this year's grain harvest were high. Potato producers noted average yields and flat to slightly decreasing demand for processed potato products. Profitability improved slightly in the dairy industry, although feedlot owners face challenges. On balance, the elevated dollar continued to slow most exports, particularly for raisins, where global inventories remain elevated.
Real Estate and Construction
Real estate market activity grew at a strong pace over the reporting period. Overall, residential construction expanded significantly. However, slow permit issuance and a lack of available land continued to constrain residential construction somewhat in parts of the District. Contacts in Alaska reported that, while overall residential sales were strong, sales of luxury units slowed. House prices ticked up further throughout the District's metropolitan areas. Demand for commercial construction picked up further as occupancy rates remained high. Sales of commercial real estate in southern California grew at a strong pace, although one contact reported that purchases of existing properties remained more cost effective than investments in new construction. On balance, shortages of skilled labor constrained construction of both residential and commercial units across much of the District.
Financial Institutions
Lending activity grew at a moderate pace over the reporting period. Loan growth expanded further, but competition for borrowers remained fierce as the supply of available funds exceeded demand. Deposits picked up further, and liquidity was ample. Credit quality improved slightly and delinquencies remained low. Contacts noted that regulatory costs and low interest rates continued to hold down profitability across the sector. One contact reported that some community banks had trouble retaining experienced bankers, and investments in training new hires had increased from previous periods.