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Beige Book Report: San Francisco

October 18, 2017

Summary of Economic Activity
Economic activity in the Twelfth District continued to expand at a moderate pace during the reporting period of mid-August through September. Overall price inflation was flat and remained low, while upward wage pressures strengthened somewhat, and labor market conditions tightened further. Sales of retail goods picked up, and growth in consumer and business services remained strong. Conditions in the manufacturing sector improved, while activity in the agriculture sector was flat. Contacts reported continued strong activity in residential real estate markets, and conditions in the commercial real estate sector remained solid. Lending activity grew at a moderate pace.

Employment and Wages
Conditions in the labor market tightened further. Wage gains increased in a few sectors. Increased competition for warehouse employees in the retail industry boosted wages. One contact at a major logistics and delivery company noted rising demand for manual labor, with these jobs increasingly being filled by workers wanting to supplement their income with additional part-time hours. Continued elevated demand for skilled IT professionals in the technology, financial services, and health-care industries supported strong wage growth. Shortages of health-care workers in Eastern Washington worsened. Labor shortages and increased unit labor costs in the agriculture sector fueled investments in automated technology. In the retail grocery industry, the continued shift of consumer preferences towards online purchases further reduced labor demand.

Prices
Overall, price inflation was flat and remained low during the reporting period. Stronger demand for manufactured steel products boosted price growth relative to the same period last year. In the restaurant industry, contacts reported that rising input costs pushed up final sales prices. Elevated inventory levels pushed down prices for some agricultural commodities. Economies of scale continued to put downward pressure on prices of cloud computing and data storage services.

Retail Trade and Services
Retail sales picked up over the reporting period. Continued improvement in economic conditions and favorable weather nudged up sales of beverage products. Sales in the retail grocery industry were unchanged from their solid pace in the previous period. Contacts in the industry reported that online sales continued to more than offset declines at traditional brick-and-mortar outlets. One lender with a large national presence in the retail sector noted that same store sales at small merchants rebounded after slight declines following recent hurricanes. Growth in demand for legacy computing products slowed slightly to a moderate pace. Contacts expect these markets to experience a more modest growth environment in the future.

Activity in consumer and business services generally grew at a strong pace. Accelerating investments in cloud computing and data analytics in the technology and financial services industries boosted sales at large technology companies. Additionally, demand for cybersecurity services is expected to be a major source of growth for the technology industry over the medium-term. Boosted by e-commerce sales, transport volumes expanded at a robust pace. Contacts noted that improving economic conditions fueled demand for high-end shipping services in particular. Demand for entertainment services was strong, and one contact reported that technological gains and favorable tax conditions spurred investment. Demand in the hospitality industry slowed slightly from its strong pace over the summer, and contacts expect hotel stays to soften a bit more over the remainder of the year. Restaurant sales declined in the late summer, due in part to less foot traffic at large retail centers.

Manufacturing
On balance, conditions in the manufacturing sector continued to improve. Production of semiconductors reached a 10-year high, driven primarily by demand for memory chips. Electricity usage by manufacturers in Eastern Washington picked up further. Deliveries of commercial aircraft dipped slightly, but new orders were up notably over the same period last year. Contacts expect strong overall demand for steel over the next few months as construction efforts in other parts of the country ramp up following recent hurricanes. Demand for manufactured steel products slowed from its moderate pace in the first half of the year as orders from automobile manufacturers waned somewhat.

Agriculture and Resource-Related Industries
Activity in the agriculture sector was flat. Harvest yields of grains and potatoes were down slightly due to a wet spring, but overall quality was up. Demand for pork products dipped slightly, and profitability in the industry remained challenging. Reduced input prices boosted profitability in the feedlot industry. Contacts noted that foreign demand for some agricultural goods remained solid, and they did not expect exchange rate movements to slow exports. In the energy generation sector, capacity increases continued to outpace demand growth, a trend that contacts expect to persist as more states adopt renewable energy generation targets.

Real Estate and Construction
Real estate market activity continued to grow at a strong pace. Residential construction activity remained robust throughout the District. However, disruptions from recent hurricanes exacerbated existing shortages of materials, somewhat slowing activity. Contacts in the Pacific Northwest reported construction delays of up to two months due to shortages of available land, labor, and materials. Strong demand for housing and continued low inventory levels pushed up prices further. Contacts in some metropolitan areas noted that the lack of affordable housing slowed growth of existing home sales to a moderate pace. On balance, commercial construction activity continued to expand at a moderate pace. In Eastern Washington, permits for commercial construction were up over the same period last year. Contacts in Southern California reported that construction of hotel and retail spaces were at an all-time high. Contacts noted that interest rate increases have not substantially slowed demand for residential or commercial real estate.

Financial Institutions
Lending activity continued to expand at a moderate pace over the reporting period. Overall loan demand remained moderate. One contact noted that demand from small- and medium-sized businesses slowed to a modest pace. Deposit growth inched up slightly. One contact in the Mountain West observed a slight uptick in deposit rates, indicating an increased demand for liquidity from lenders. Overall credit quality remained strong. However, one contact noted a decline in credit quality in the agriculture industry, as continuing price declines hampered profitability.