Beige Book Report: San Francisco
November 30, 2016
Economic activity in the District continued to expand at a moderate pace during the reporting period of early October through mid-November. Overall price inflation was limited, while upward wage pressures increased further. Sales of retail goods continued to expand at a moderate pace, and growth in the consumer and business services sectors was solid. Manufacturing activity changed little on balance. Agricultural yields and sales grew further. Activity in the residential and commercial real estate sectors remained high. Lending activity expanded moderately.
Employment, Prices, and Wages
Overall price inflation was limited over the reporting period. Commodity price growth remained quite limited on balance, but one contact noted that steel prices picked up somewhat in anticipation of a possible increase in public infrastructure spending. Price pressures for semiconductors were mixed, with some contacts reporting firming while others noted that supplier competition continued to hold down prices.
Wage pressures picked up from the previous reporting period but were uneven across industries and regions. Labor shortages in the financial services, health-care, and technology sectors pushed up wages further for skilled IT professionals. In metropolitan areas, concerns about housing affordability and long commute times, coupled with strong demand for entry-level labor, increased compensation pressures in the hospitality industry. In response to recent minimum wage increases, some restaurants in Southern California are actively considering replacing tips with a mandatory service charge that would be distributed equitably among staff. Contacts in the aerospace industry reported that modest employment cutbacks have eased upward wage pressures for skilled workers such as machinists and engineers. Upward wage pressures in the steel industry remained weak for all except the most experienced workers, with one contact noting that many companies have reduced labor inputs significantly over the past few years to reduce production costs.
Retail Trade and Services
Retail sales continued to expand at a moderate pace on balance. Sales of gaming products grew strongly, and one contact reported that labor shortages were a key constraint to growth. Demand for beverage products increased further, although sales at grocery stores more generally were flat. Apparel sales continued to grow at a modest pace, and one contact reported that sales were slower than expected given the moderate pace of overall economic growth. Sales at brick-and-mortar stores were held down by an ongoing consumer shift towards purchasing products online.
Demand for consumer and business services continued to expand at a solid pace. Activity in the hospitality sector strengthened, with one contact noting that bookings at Southern California hotels were slightly ahead of last year's holiday season. Demand for IT and cloud computing services remained solid, and contacts expect infrastructure investments in the financial services, manufacturing, and health-care sectors to boost future growth. E-commerce sales continued to drive growing domestic demand for transportation services, while international shipments picked up slightly. Contacts reported that demand for health-care services remained strong, but the election outcome had greatly increased uncertainty around the Affordable Care Act and raised concerns about the possibility of slower industry growth and cutbacks in the near term.
Manufacturing
Manufacturing activity changed little on balance compared with the prior reporting period. Conditions in the steel and manufactured metals industries remain challenging as the elevated dollar and excess global supply continue to hold down exports. Additionally, capacity utilization rates remain below historical averages. By contrast, demand for aluminum products picked up, and one contact reported that production was at a historical high and firms are adding capacity. Activity in the semiconductor industry continued to expand at a moderate pace, although one contact noted that revenue growth was somewhat sluggish. New orders and deliveries of commercial aircraft were down from the same period last year and are expected to continue declining modestly. Contacts from both the defense and commercial side of the aerospace industry noted that growth prospects have been clouded by increased uncertainty over the direction of national fiscal and trade policies.
Agriculture and Resource-Related Industries
Activity in the agricultural sector expanded further. Ample harvests propelled crop supply and sales growth but pushed up inventories, depressing prices and undermining grower profitability. High yields for wheat, corn, onions, and potatoes caused supply to outstrip demand. Contacts expect ranchers to reduce herd numbers due to persistently low prices for cattle. The elevated dollar continued to hold back exports of agricultural products, particularly apples and pears. Harvests in California were better than expected, but growers remain concerned that drought conditions will present ongoing operational challenges.
Real Estate and Construction
Real estate market activity remained solid on balance. Residential construction activity eased slightly from its strong pace in the previous reporting period, as a slowdown for multifamily dwellings offset a pickup for single-family units. Real estate market conditions were particularly strong in the Intermountain West, where economic activity is expanding faster than in other parts of the country. House prices and rents continued to rise, particularly in regions where robust growth in the technology sector has driven strong local economic expansions. Commercial construction activity, sales, and leasing continued to expand at a strong pace. Shortages of qualified labor and materials held back growth in construction activity in parts of the District; however, a contact reported that competition for contractors in the Seattle area had eased somewhat. Contacts expect real estate investment by foreign buyers to pick up in the Pacific Northwest following the recent enactment of a tax on foreign buyers in Vancouver, Canada.
Financial Institutions
Lending activity grew at a moderate pace over the reporting period. Loan demand expanded further, and one contact noted that community banks have been able to expand their market share of loans of less than $10 million as larger banks appear focused on larger projects. Deposits ticked up, and liquidity was ample. Credit quality remained strong, with low delinquencies. Contacts reported that regulatory costs and the low interest rate environment continue to depress net margins, but some anticipate a rise in rates, which is likely to boost profitability.