March 4, 2020
Summary of Economic Activity
Economic activity in the Twelfth District continued to expand at a modest pace during the reporting period of January through mid-February. The labor market remained tight, employment increased somewhat, and wages rose further. Reports on prices suggested inflation was largely stable. Sales of retail goods increased markedly, and activity in consumer and business services was up somewhat. On balance, commerce in the manufacturing sector contracted minutely, and activity in the agriculture sector picked up slightly. While the residential real estate market expanded modestly, commercial real estate activity was mixed. Lending grew further.
Employment and Wages
The labor market remained tight, with persistent worker shortages reported across various skill levels and industries. Hiring increased somewhat, despite limited availability of workers. Businesses in several sectors, including information technology, finance, payment processing, and legal services, reported larger payrolls. Other contacts in the construction, utilities, manufacturing, and health-care sectors reported that the pace of hiring was flat. They attributed the lack of additional hiring primarily due to continued difficulties in finding and employing workers. Some businesses mentioned seeking new hires to fill only positions vacated due to retirements or voluntary departures. A few contacts highlighted their firms’ efforts to avoid having to rehire workers in the future, with a manufacturer in the aerospace sector reducing layoffs to a minimum despite weakened activity, and a transportation services provider keeping typically seasonal employees on the payroll during the off-season. Others reported increasing their investment in offshoring and automation to combat labor shortages. Some employers characterized low worker availability as a significant deterrent to business expansion.
Wages continued to rise over the reporting period, as companies tried to attract and retain qualified workers. The reported main drivers behind increased compensation pressures were heightened labor market competition and increased minimum wage requirements. Some employers mentioned failing to match wage and benefit packages requested by candidates. A health-care provider reported being unable to attract individuals from outside the labor force and into entry-level positions due to unattractive wages. A hotelier in Southern California raised concerns about wage compression resulting from new minimum wage legislation, highlighting smaller wage increases for middle-level staff than those for either entry-level or top-level workers. A few employers in the finance sector noted slightly lower wage pressures for specific sets of expertise due to improved labor availability in those particular skill areas.
Prices
Business contacts suggested that price inflation was mostly unchanged from the previous reporting period, on balance. Many reports mentioned no significant changes in prices, including those from the finance, energy, health-care, and professional services sectors. Other businesses, such as builders, hotels, and food service providers, experienced some uptick in prices due to increases in input costs. In the agriculture and natural resources sectors, some grape and lumber producers reported a more noticeable rise in prices over the reporting period, while grain and potato prices remained stable. A contact in Washington highlighted double-digit price increases for professional landscaping services. A banker in California mentioned negotiating with vendors to lower automatic price increases, specifically to bring those increases more in line with the national inflation rate.
Retail Trade and Services
Sales of retail goods increased markedly. Most reports indicated that consumer demand was robust over the reporting period. Retailers continued to note that online sales grew faster than brick-and-mortar sales. Auto dealers reported a brisk rise in activity, especially in the used vehicle market. Specialized retailers focused on home improvement products, pet care items, or pharmaceuticals also reported continued solid activity. One contact in California mentioned some difficulty in replenishing inventory due to lingering trade tensions.
Activity in consumer and business services increased somewhat. Food service providers reported continued solid activity but noted that the rate at which new restaurants opened has decelerated somewhat due to higher input costs. Tourism was mixed, with some decline in airline travel associated with the COVID-19 outbreak. Nonetheless, a hotelier in Southern California reported modest growth expectations for early 2020. A legal practitioner in Hawaii and a health-care provider in Nevada highlighted generally stable conditions within their respective sectors.
Manufacturing
Activity in the manufacturing sector contracted minutely, on balance. Energy use by manufacturers in the Pacific Northwest increased, and across the District, production and sales of manufactured wood products and building materials accelerated due to increased construction of residential units. However, activity in the aerospace sector weakened following the announcement of delays in planned production from a large Northwestern manufacturer. Additionally, the COVID-19 outbreak led to decreased aircraft demand from China and Southeast Asia, with one supplier reporting no orders received in January. Solar energy equipment manufacturers also experienced delayed order fulfillment due to supply chain disruptions related to the COVID-19 outbreak.
Agriculture and Resource-Related Industries
Activity in the agriculture sector increased slightly, on net, with domestic sales remaining at healthy levels. Log and lumber sales benefited from attractive mortgage rates and a pickup in residential construction across the District. Export sales continued to falter somewhat due to international developments. On the one hand, contacts welcomed international trade deals and the prospects of easing tariffs on products including dairy sold to the Chinese market. On the other hand, reports mentioned that the COVID-19 outbreak has already started to negatively affect exports of nuts and other California crops. One contact in central California mentioned that precipitation levels so far this year are lagging somewhat relative to historical averages, which could affect future almond and cherry yields. In the energy sector, reports noted generally flat sales, expectations for increased capital expenditure to bolster resiliency, and low capacity utilization apart from renewable sources.
Real Estate and Construction
Residential real estate activity grew modestly. Contacts from most areas within the District continued to report brisk buyer demand, low inventories for single-family homes, and high occupancy rates for multi-family units. Construction activity increased on the back of agreeable weather, but at a somewhat slower pace than the previous reporting period due to labor and land costs constraints. A financier from the Pacific Northwest noted that construction activity in rural areas also expanded recently. A few other areas within the District reported less robust sales and flat construction activity. Home prices accelerated in many regions, intensifying affordability concerns.
Conditions in commercial real estate markets were mixed. Some contacts continued to highlight sluggish demand for retail and office space. Reports out of California pointed to higher retail vacancies, as well as longer periods in between leases. A building materials supplier mentioned the conclusion of large construction projects connected to the technology sector in the San Francisco Bay Area, leading to expectations of slower activity in the immediate future. Industrial construction and warehouse leasing activity in some other areas increased somewhat. One contact in the Pacific Northwest noticed brisk commercial construction activity in the area.
Financial Institutions
Lending activity grew further. Reports noted stronger demand for new mortgages, refinancing credit, and auto loans. Lending to the commercial sector also increased relative to the previous reporting period, especially for industrial real estate. Agricultural lending weakened in the Pacific Northwest. Overall, capital levels and asset quality remained high. Tighter competition for loans narrowed net interest margins and profitability. Credit availability was generally stable, and underwriting standards tightened somewhat. An investment financier in California reported stable private equity conditions.