Beige Book Report: San Francisco
September 8, 2021
Summary of Economic Activity
Economic activity in the Twelfth District increased at a moderate pace during the reporting period of July through mid-August. Employment levels continued to expand despite labor shortages, and upward wage pressures intensified in almost all sectors. Prices rose substantially, driven by rising input costs and continued supply chain disruptions. Retail sales increased modestly, while conditions in the services sectors deteriorated somewhat due to the spread of the Delta variant. Manufacturing activity strengthened slightly, as did activity in the agriculture and resources sectors. Conditions in the residential real estate market deteriorated somewhat, while activity in the commercial real estate sector picked up slightly. Lending activity was largely unchanged.
Employment and Wages
Overall employment levels continued to increase at a moderate pace. Employment gains were led by agriculture, leisure, hospitality, and government, as well as education as schools reopened for the fall 2021 semester. However, almost all employers across the District reported significant challenges in attracting and retaining talent at all skill levels. In particular, contacts in the transportation, manufacturing, construction, hospitality, and retail sectors mentioned having many unfilled positions. Employment levels in energy and financial services were more stable. Employee turnover was noted to have increased, with one contact in the hospitality sector observing that almost half of new employees quit after only one or two months on the job. Several employers across the District mentioned implementing vaccine mandates for all new hires. Some contacts in the financial services sector highlighted increased reports of skilled workers demanding more flexible work arrangements. A few contacts noted a rise in Delta variant outbreaks among employees, which led to an increase in absenteeism, reinstatement of indoor face covering requirements, and delays in return-to-office plans.
Wage pressures intensified further, especially for entry-level service jobs. To combat low availability of labor and high turnover rates, many employers significantly increased wages, including those in the leisure, hospitality, manufacturing, technology, and health-care services. In addition, employers reported offering sign-on and retention bonuses, overtime pay, and one-time cash benefits such as gift cards. Several contacts in the health-care and financial services sectors mentioned planning further wage increases across the board in 2022.
Prices
Prices rose substantially over the reporting period. Although lumber prices have dropped significantly, prices for other building materials, such as metals, cement, and wallboard have continued to climb. Other price increases were noted for energy, information technology, textiles, airline tickets, and agricultural products, such as fruits, meats, and seafood. The reported biggest drivers of these price hikes included higher shipping and logistical costs, continued supply chain disruptions, and rising labor costs. One contact in California noted that recent import tax changes in Europe have also added to e-commerce costs domestically.
Retail Trade and Services
Retail sales increased modestly in the past several weeks. Online spending, as well as shopping at big box retailers and grocery stores, strengthened further, driven by pent-up demand and excess savings. However, foot traffic at large shopping centers retreated a bit due to the spread of the Delta variant. In addition, reports across the District mentioned widespread shortages of various goods, such as paper products, food products, and hardware equipment, which limited sales growth. These shortages were caused by continued supply chain disruptions, especially at ports in China and Europe. Sales at home improvement stores and specialty retailers decreased as more consumer spending shifted from goods back to services.
Conditions in the consumer and business services sectors deteriorated somewhat. The spread of the Delta variant and reinstated social-distancing restrictions have led to a slowdown in demand for travel, leisure, hospitality, and food services. Labor shortages have severely reduced capacity at some hotels, airlines, and restaurants, with one hotel in the Mountain West having to close off several floors due to a lack of housekeeping staff. Demand for health-care services and medical testing increased with the spread of the Delta variant. The entertainment industry, which had been recovering well during the summer, was also affected recently by the spread of the variant, causing some production shoots to shut down.
Manufacturing
Manufacturing activity continued to strengthen, albeit slightly. New orders grew further for fabricated metals, renewable energy equipment, and aerospace manufacturing. Capacity utilization rates at metal and steel manufacturers were noted to have exceeded pre-pandemic levels. However, supply chain disruptions and raw material shortages continued to be a major problem, causing lean inventories and delays in order fulfillment. These obstacles were further exacerbated by outbreaks of the Delta variant in Asia, which caused some auto manufacturers to curb production heading into the fall. A wood product manufacturer in the Pacific Northwest noted that after a year of strong growth, supply has now exceeded demand, and sawmills in the District have curtailed hours and shifts in the past several weeks.
Agriculture and Resource-Related Industries
Conditions in the agriculture and resource sectors improved modestly on net. Domestic and international demand for meats, fruits, vegetables, nuts, and seafood remained strong. Supply chain disruptions continued to hinder trade with Asia, although shipping delays were noted to have eased somewhat in the past several weeks. At the same time, several growers in the Pacific Northwest noted that extreme heat and drought conditions have caused considerable damage to this year's wheat and tree fruit yields, which is projected to reduce available inventory even further. A contact in California observed that recalls of poultry, fish, and other food products caused temporary disruptions in final sales.
Real Estate and Construction
Activity in the residential real estate market edged down somewhat compared to the previous reporting period. The spread of the Delta variant and rapid home price increases have led some potential buyers to delay their purchases. Despite the recent drop in lumber prices, homebuilders across the District continued reporting delays in construction due to shortages of labor and other raw materials. Additionally, several contacts in the Pacific Northwest noted a shortage of undeveloped land. Growth in home prices was noted to have slowed down a bit. Order backlogs remained high, as did new permit issuances. Demand for multifamily homes increased further, with one contact noting a surge in apartment permitting heading into the fall. A housing developer in Alaska observed that, although rental applications have increased, there has also been an increase in less qualified applicants, with some of them moving to new housing to forestall the impact of the end of eviction moratoriums.
Demand for commercial real estate picked up slightly on balance. Sales of office and retail spaces were noted to have increased in the Mountain West and California. On the other hand, demand for new hospitality spaces decreased following the spread of the Delta variant. Demand for industrial, warehouse, manufacturing, and other mixed-use spaces continued to be strong. Many contacts across the District noted that they have postponed or reversed their return-to-work plans until 2022 due to the Delta variant, causing some to reconsider their office space needs.
Financial Institutions
Lending activity was largely unchanged over the reporting period. Most new loan origination concentrated in mortgage refinancing, construction activities, and commercial real estate purchases. Credit card activity among consumers increased slightly, while demand for commercial and industrial loans was muted. Reports from across the District mentioned increased competition for loans, although credit quality and liquidity levels remained healthy. A contact in Southern California observed that while SPAC (special purpose acquisition companies) activity decreased dramatically in recent months, investor interest in sustainability and clean energy technology remained high.