Beige Book Report: San Francisco
September 7, 2022
Summary of Economic Activity
Economic activity in the Twelfth District expanded modestly during the July through mid-August reporting period. Hiring activity continued to grow at a modest pace, and wages grew further amid tight labor market conditions. Inflation remained elevated, albeit with some indication of slight moderation. Retail sales were stable, and activity in the consumer and business services sectors was reportedly strong. Manufacturing output grew, while conditions in the agriculture and resource-related sectors were mixed. Residential real estate activity eased despite strong demand for multifamily housing, and activity in commercial real estate was mixed. Lending activity was unchanged on net. Communities across the Twelfth District were challenged by housing affordability and elevated living costs. Looking ahead, contacts expected prices to moderate further and overall economic conditions to weaken.
Labor Markets
Hiring activity continued to grow at a modest pace, although a notable portion of recruiting efforts was dedicated to replacing existing employees rather than expanding payroll. Firms reported increased employment levels despite difficulty attracting workers in health care, retail, education, professional services, travel, and skilled trades. Employment in leisure and hospitality remained far below target levels, with some employers in Southern California relying more heavily on temporary immigrant workers. Conversely, providers of financial services, construction, and utilities reported an easing of labor supply constraints, partly due to slower activity in the real estate market. In entertainment, one contact noted that recent mergers and acquisitions could lead to significant layoffs. Reports indicated some improvement in employee retention, but many employers continued to highlight persistently high turnover rates. Several business and community representatives noted that worker fatigue has become a more significant driver of voluntary quits. Employers of skilled trades workers highlighted early retirements and skill mismatch as additional constraining factors. Many contacts revised their future hiring plans due to the uncertain economic outlook.
Wages grew further over the reporting period but at a more moderate pace. Reports indicated that the increasing cost of living across the District, including the rising costs for essential expenses such as food and rent, continued to drive wage pressures upward. Several manufacturers and financiers reported some easing in salary expectation from new hires. Nonetheless, employees across sectors continued to demand more comprehensive benefits, flexible work arrangements, and upfront hiring incentives.
Prices
Prices continued to rise during the reporting period, albeit with some slight moderation in the rate of increase. Reports noted persistent inflation across industries and products, including prices for food, entertainment, insurance, packaging, natural gas, and some manufacturing products due to continued pressures from material or labor costs. However, falling oil prices and cooling overall demand helped alleviate some price pressures in recent weeks. Reduced port backlogs and a stronger dollar also helped moderate inflation of imported goods and services. Contacts additionally noted more stable prices for used vehicles, construction materials, and airfares.
Community Conditions
Communities across the District reported being challenged by housing affordability, homelessness, higher cost of living, and food insecurity. Contacts highlighted that the lack of affordable childcare has continued to impede parents' access to employment. Small business owners noted limited ability to compete for workers in the tight labor market. Mental health and wellness service providers mentioned the inability to meet higher demand for support due to the tight availability of licensed practitioners. Some contacts also noted that increased safety concerns in downtown areas have led some businesses to relocate.
Retail Trade and Services
Retail sales were stable during the reporting period. Demand for retail goods remained strong but elevated prices and economic uncertainty shifted consumer spending away from discretionary goods and toward food and energy. Contacts noted that sales growth for apparel and durable goods such as motor vehicles, electronics, and appliances softened noticeably. Although labor challenges and supply disruptions impacting the retail sector eased slightly, these pressures remained as major headwinds to productivity.
Activity in the consumer and business services sectors strengthened. Demand for consumer services, such as those related to leisure and hospitality, was strong, and demand for live performances and attractions was robust. While business and group travel activity remained weak, demand for leisure travel continued to grow. A Las Vegas contact reported record-breaking tourist spending in the city in recent months. Demand for health-care, wellness, and legal services remained at or near capacity.
Manufacturing
Manufacturing production grew moderately during the reporting period. Sales and new orders were strong across many industries, and capacity utilization improved on balance. Demand for capital equipment was notably strong, as firms in the food, beverage, chemical, personal care, and pharmaceutical industries sought to boost productivity. Despite some reported improvement, supply bottlenecks persisted, and input costs remained elevated. Several manufacturers reported accumulating vast inventories to meet demand amid materials shortages. Contacts expected supply disruptions and cost pressures to ease in the coming months, although uncertainty related to the war in Ukraine and pandemic developments in China remained high.
Agriculture and Resource-Related Industries
Conditions in the agriculture and resource-related sectors were mixed. Drought conditions in many areas continued to impact the growing season, with some producers letting portions of their farms go fallow to prioritize water usage. Farmers throughout the District reported strong international demand for both fresh and processed foods. Shipping bottlenecks eased slightly in recent weeks, but overall supply chain disruptions persisted. Utilities reported continued challenges meeting demand as labor and materials shortages delayed maintenance and expansion projects. Input costs, despite some relief in fuel prices, remained elevated.
Real Estate and Construction
Residential real estate activity eased further over the reporting period. High mortgage rates and overall economic uncertainty cooled demand for existing and new single-family homes. Conversely, demand for multifamily housing units remained strong and rental rates grew in many regions. A Northern California banker reported a recent increase in financing requests for multifamily construction projects. Despite cooling demand, housing prices remained elevated and inventories strained, by historical standards. Homebuilders' confidence declined further as materials shortages continued to delay existing projects.
Activity in the commercial real estate market was mixed. Demand for industrial and warehouse space remained robust, while demand for office and retail space weakened in most of the District. One contact in Los Angeles expected office vacancies to rise when leases are renegotiated as businesses continued to struggle to return workers to the office. Contacts noted that commercial real estate permits and construction slowed down in some areas due to cooling activity.
Financial Institutions
Lending activity was steady over the reporting period. Business lending grew, especially for commercial and industrial loans, and many contacts reported solid loan pipelines. While demand for credit cards and home equity loans remained elevated, mortgage originations and refinancing activity dipped further as higher interest rates and limited inventories dampened housing activity. Many contacts mentioned a notable increase in competition for loans and continued ample liquidity. Credit quality remained high, but contacts expected some deterioration going forward on account of increasing interest rates and moderating deposits. Financiers in the private equity and venture capital space reported lower valuations as financial conditions tightened.