Beige Book Report: San Francisco
December 2, 2020
Summary of Economic Activity
Economic activity in the Twelfth District expanded modestly on balance during the reporting period of October through mid-November. Employment levels increased slightly on net, though the pace of job recovery slowed down in certain regions. Wages increased marginally, whereas price inflation showed little to no change on balance. Sales of retail goods rose appreciably, while conditions in the consumer and business services sectors remained unchanged overall. Manufacturing activity expanded moderately, with capacity utilization rates increasing a bit. Conditions in the agriculture sector also improved slightly. Residential real estate activity increased further, while commercial market conditions changed little on net. Lending activity increased at a mild pace.
Employment and Wages
Employment levels increased slightly on net. A large logistics and distribution firm with a national presence reported continued strength in hiring activity, as did construction and steel manufacturing firms. However, employers in the financial and energy sectors reported little to no change in their employment levels. In addition, employment in the hotel, restaurant, and entertainment industries remained well below pre-pandemic levels. In California and the Pacific Northwest, the job recovery pace slowed during the reporting period. A few contacts in California and Washington noted an unusual uptick in voluntary employee attrition, which they attributed to various reasons including changes in childcare needs, decisions to move out of state, or fear of contracting COVID-19. Several employers expressed difficulty attracting qualified workers, especially in industries that require employees to be on-site, such as payment processing companies, hotels, and food services. Some contacts in financial services mentioned implementing employee assistance programs and flexible work schedules to allow employees to coordinate with their managers ways to accommodate them to meet their children's schooling needs.
Wages increased marginally, although conditions varied widely by industry. Wages continued to increase in construction and financial services. Several contacts in California mentioned that the forthcoming change in the minimum wage taking effect in the new year would result in wage increases for most hourly workers. A wood product manufacturer in the Pacific Northwest reported plans to distribute year-end bonuses to reward employees for their efforts during the pandemic. Retail and other consumer-facing businesses reported little to no change in employee compensation. Employers in financial services and information technology mentioned reconsidering their wage structures as employees work remotely in areas with varying degrees of cost of living.
Prices
Price inflation showed little to no change on balance. Contacts in wholesale retail, energy, and food services reported stable prices. Prices of building and construction materials including wood products, wallboard, cement, and paint continued to be highly elevated. Increased demand from the automotive industry as well as from foreign markets put upward pressure on prices of recycled metals and steel products. In contrast, a few hoteliers noted recently further downward pressure on rates due to increased discounting by competitors. Prices for crops such as nuts, grapes, and stone fruits were lowered mainly due to shipping constraints and export tariffs.
Retail Trade and Services
Retail sales rose appreciably over the reporting period. Many retailers moved up their holiday marketing by several weeks, and some have already benefited from an earlier start for holiday shopping. Online sales continued to be strong, and demand for home improvement goods, vehicles, delivery services and food products increased further. A contact in Southern California noted a recent spike in demand for bicycles. However, given the recent rise in COVID-19 cases and stricter containment measures across the District, brick-and-mortar stores expressed high uncertainty, with many being cautious about stocking up for the holidays. Most retailers expected the big shift to e-commerce to continue this holiday season, while overall sales volume is expected to be flat or slightly lower compared with last year. Several grocers reported intermittent supply issues and low inventories of certain products.
Conditions in the consumer and business services sectors remained unchanged overall. Activity remained strong in information technology, health care, and legal services. Logistics and transportation services reported continued strength in home deliveries and increasing holiday shipments. A contact in Southern California noted that demand for lodging in areas within easy driving distance of major metropolitan areas increased in the fall, especially among younger people. However, weakening activity in leisure and travel industries began in mid-October, and restaurants and hotels continued to operate at fractional capacities. Furthermore, contacts across the District expressed concern over renewed containment measures, including shutting down or reducing capacities for indoor dining, gyms, movie theaters, and beauty services. One contact in Hawaii suggested that lower levels of tourism may be at least partially attributable to testing and quarantine protocols.
Manufacturing
Manufacturing expanded moderately, with capacity utilization rates improving. Demand for manufactured wood products and building materials remained strong, as residential construction continued its rebound. A wood products manufacturer in the Pacific Northwest reported most sawmills were operating at near capacity, though still somewhat constrained by COVID-19, with related staff shortages and challenges in acquiring raw materials. Sales of recycled metals and fabricated steel products increased further, underpinned by strong demand from the automotive industry. Although energy usage by manufacturers has mostly rebounded from its lows, it has slowed down somewhat, which one contact attributed to a slowing recovery of the manufacturing sector as winter approaches. Durable goods orders increased robustly as businesses resumed investment, though several contacts reported continued disruptions to supply chains.
Agriculture and Resource-Related Industries
Activity in the agriculture sector increased slightly. The harvest for most agricultural crops, including grains and potatoes, has been completed in the Pacific Northwest and California, and ample water supply has contributed to high yields. International demand for wheat, raisins, and nuts has increased recently due to droughts in other parts of the world as well as a slight depreciation of the dollar. Despite the increase in exports, inventories remained elevated, especially for raisins, nuts, and almonds. Domestic demand for logs and timber continued to be strong, and demand from Asia increased. Several contacts expressed concern over the short to medium-term impact that wildfires could have on crops as well as on wood supply.
Real Estate and Construction
Residential construction activity continued to grow strongly, supported by low interest rates and the current telework environment. Contacts throughout the District reported increased demand for new and existing homes, especially in suburban areas and vacation home destinations, which kept inventories low and raised home prices further. Activity in the multifamily property sector was mixed, with lower rents and higher vacancies in metropolitan areas, while the opposite occurred in suburban areas. Several contacts noted increases in construction costs and longer project timelines due to labor shortages and supply chain disruptions. A contact in the Pacific Northwest noted that many people who were impacted by the wildfires plan to rebuild their homes, which could further spur demand for construction labor and materials.
Activity in the commercial real estate market was little changed on net. Although commercial construction projects that began prior to the pandemic continued, new development projects were put on hold. Demand for commercial office and retail space continued to be weak throughout the District. By contrast, demand for new industrial and warehouse spaces increased in the Pacific West. A contact in Washington noted plans for a large new warehouse facility in their region.
Financial Institutions
Overall lending activity increased at a mild pace. Most of the demand continued to be for residential and commercial real estate loans, particularly refinancing. Demand for auto loans continued to grow, albeit at a slower pace as compared with the summer. Demand for commercial and industrial loans edged down slightly, and utilization of commercial lines of credit remained low. In contrast, consumer lending activity has picked up a bit. Deposits continued to grow at double-digit rates, and deposit rates declined further. Banks noted strong asset quality, with low delinquency rates and ample liquidity. Several contacts across the District expressed concern over potential loan losses in the coming months should payment deferrals and mortgage forbearances no longer be extended. A contact in Southern California noted that capital markets and investment activities have rebounded in recent months, especially in the sustainability and clean technology areas.