Beige Book Report: San Francisco
October 18, 2023
Summary of Economic Activity
Economic activity in the Twelfth District was stable on net during the mid-August through September reporting period. Employment levels were little changed, and labor market tightness eased slightly. Prices and wages both rose, but at slower rates. Retail sales were robust, while activity in the service sectors moderated somewhat. Demand for manufactured products remained largely unchanged, and conditions in agriculture and resource-related sectors strengthened slightly. Activity in residential and commercial real estate markets eased. Conditions in the financial sector moderated further over the reporting period. Communities across the Twelfth District faced challenges with the availability of affordable housing and saw continued high demand for support services. Looking ahead, contacts expected weaker economic conditions overall.
Labor Markets
Labor market tightness eased slightly over the reporting period as labor supply and demand came into better balance. Employment levels were little changed. Across the District, hiring was somewhat easier with contacts reporting more job applicants, higher quality candidates, and lower employee turnover. Still, challenges persisted in recruiting high-skilled workers in several sectors including nonprofits, financial services, hospitality, construction, and retail. Manufacturing and medical services providers noted continued investment in labor-saving technology. While several contacts reported hiring freezes in sectors such as business services and technology, others took advantage of easing labor market tightness to fill job vacancies. In the financial services and technology sectors, firms lowered head counts through attrition and continued layoffs.
Wages grew over the reporting period, but at a slower rate. Several firms reported stable wages for new hires and annual wage increases for staff normalizing, while other contacts noted employees' wage growth expectations remaining elevated. An employer in Northern California reported that employee demands to work from home eased, and a contact in Washington reported some firms are less willing to offer nonwage benefits such as remote work. However, a firm in Oregon noted employee demands for higher wages and benefits rising recently.
Prices
Prices continued to rise, albeit at a more moderate pace than in the last reporting period. Contacts noted price increases for inputs, such as business insurance, health insurance for employees, and raw materials, with particularly higher prices for petroleum-based products and fuel. Still, prices of some inputs fell, such as wood and steel products. Retail prices overall for food and gasoline rose, while one contact in the Pacific Northwest noted that seafood prices fell. A Southern California restauranteur observed more consumer resistance to menu price increases, limiting their pricing power.
Community Conditions
Demand for community and support services remained elevated. In particular, households and community members sought support for house affordability, food assistance, rental assistance, childcare, and mental health services. Nonprofit organizations continued to report notable drops in funding and charitable donations, which further constrained their ability to meet demand for basic needs. Some contacts highlighted the negative impact on housing affordability from the ongoing transformation of many old residential properties to newer upscale units in urban areas across the District.
Retail Trade and Services
Retail sales were robust in recent weeks. Demand for groceries, particularly health-oriented and fresh products, was strong. Retailers reported robust demand for furniture and some home improvement products. Higher gasoline prices pushed some consumers to pull back on discretionary spending. Nonetheless, reports suggested higher energy prices impacted household spending decisions to a lesser degree thus far relative to last summer's spike in energy prices.
Activity in the consumer and business services sectors moderated slightly. Demand for leisure travel was largely unchanged in recent weeks, while business travel strengthened somewhat as attendance of in-person conferences and conventions continued to recover. International inbound travel activity remained subdued relative to pre-pandemic levels due to a strong dollar, brisk competition from foreign destinations, and reportedly longer visa-processing times. Some contacts in the Pacific Northwest reported demand for restaurants and regional resorts softened since Labor Day. Production activity in the entertainment and media industry remained weak as labor contract negotiations continued between the studios and the actors' union. Demand for health-care services and laboratory testing reportedly rose.
Manufacturing
Manufacturing activity remained largely unchanged over the reporting period. Manufacturers reported generally stable demand despite a tighter credit environment and continued labor challenges. Demand for manufactured wood products softened due to the impact of higher interest rates on residential construction activity. Capacity utilization remained high in food manufacturing but weakened somewhat in metal production. Raw materials availability was steady overall, though electrical supplies were limited. Supply chain disruptions continued to improve, although some manufacturers mentioned lingering delays.
Agriculture and Resource-Related Industries
Conditions in the agriculture and resource-related sectors strengthened slightly overall. Growers reported strong demand for fruits, vegetables, and cotton, as well as steady demand for nuts. Inventories from prior harvests bolstered supply, and the upcoming harvest season is expected to produce large yields. Production at fisheries was stable. Overall exports of agricultural products softened somewhat due to a strong dollar and weaker growth abroad. While input costs remained generally elevated, increased water availability from higher rain and snowfall helped reduce the costs of irrigation. Nonetheless, severe weather events had negative impacts on the production of some food crops, including grapes. Producers expressed concern about the ramifications of geopolitical and extreme weather events on future food availability. Investment in timberlands rose as investors continued to seek alternatives to more traditional investment vehicles.
Real Estate and Construction
Activity in residential real estate slowed somewhat over the reporting period. Inventories of single-family homes remained tight as owners with existing lower-rate mortgages stayed out of the market. Despite high rates for new mortgages, demand continued to exceed supply, and prices rose further. Activity in the multifamily sector was mixed: while some regions, like the Pacific Northwest, reported continued strength, others experienced softening demand, lower rents, and rising vacancies. Residential construction activity weakened due to high interest rates and constrained availability of labor, lots, and materials. In contrast, one contact observed better availability of labor and materials in parts of California.
Commercial real estate activity softened on net. Weakness in office leasing activity persisted, and vacancy rates rose. In contrast, some contacts in Utah and California reported continued solid demand for retail space. While demand for new industrial construction was strong, commercial construction activity weakened overall, with builders reporting lower demand from the technology and professional services sectors. One contact mentioned higher construction demand for public projects from local governments.
Financial Institutions
Lending activity moderated further in recent weeks. Demand for business loans, particularly commercial real estate loans, was weak, and higher mortgage rates kept residential lending activity muted. Consumer lending, particularly for credit cards, remained solid. Deposit flows were stable on net despite strengthening competition from other depository institutions and money market funds as people sought higher rates. Lending standards remained tight, and credit quality was strong. Some contacts highlighted demand shifting away recently from large and regional banks to community banks and credit unions.