U.S. Federal Reserve Beige Book: San Francisco District (Text)
The following is the text of the Federal Reserve Board’s Twelfth District-- San Francisco
TWELFTH DISTRICT-SAN FRANCISCO
Economic activity in the Twelfth District continued to grow at a moderate pace during the reporting period of October through mid-November. Price increases for final goods and services were limited, and upward pressures on wages were subdued overall. Sales of retail items rose further, and demand grew modestly for business and consumer services. District manufacturing activity edged up on balance. Sales continued to grow for agricultural producers, and activity expanded for extractors of energy and other natural resources. Demand for residential and nonresidential real estate remained weak on balance. Contacts from financial institutions reported little or no change in overall loan demand.
Wages and Prices
Price inflation for final goods and services was limited during the reporting period. Contacts noted a recent uptick in the prices for energy inputs, particularly oil, and price increases for assorted food items at the retail level. However, the combination of robust supplier competition and lackluster final demand continued to hold down price pressures for most retail goods and services.
Upward wage pressures were very modest overall, although contacts noted persistent upward pressure on benefit costs, especially for employee health care. High levels of unemployment and limited demand for new employees kept compensation gains minimal in most regions and sectors. The primary exception was workers in information technology fields, such as software developers, who continued to see high levels of recruiting activity and significant wage increases.
Retail Trade and Services
Retail sales grew further on balance. Modest gains were noted for traditional department stores and discount chains alike, with particular demand strength for small appliances and other inexpensive household products. By contrast, sales were largely unchanged for retailers of major appliances, furniture, and electronics. Sales were largely flat for grocers, and industry contacts noted that they are keeping a close eye on inventories at the start of the holiday season to avoid overstocking. Sales of new automobiles continued to strengthen, with replenished inventories for some Japanese brands supporting sales gains in response to growing consumer demand. For the upcoming holiday retail season, contacts generally expect sales to match or slightly exceed the levels reached during last year’s season.
Demand for business and consumer services was largely stable or slightly improved on balance. Sales continued to grow for providers of technology services, in particular for software applications used for mobile computing and communication devices, although the pace of growth eased a bit further. Energy utilities noted largely stable demand from businesses and households. Demand for professional services, such as legal services and accounting, also was described as largely unchanged. Providers of health-care services reported that demand softened a bit further, as reflected in a slight decline in inpatient admissions and surgical procedures. Activity in the District’s travel and tourism industry picked up: contacts in Hawaii noted an uptick in visitor volumes, reversing the slight decline in the prior period, and contacts in San Diego and Las Vegas reported ongoing increases in hotel occupancy rates.
Manufacturing activity in the District firmed a bit further on net during the reporting period of October through mid-November. For manufacturers of semiconductors and other technology products, capacity utilization rates remained quite high; demand growth stayed positive but continued to slow, especially for components used in consumer electronics products. Production activity expanded a bit from existing high levels for makers of commercial aircraft and parts, as modest growth in new orders added to an existing backlog. Activity was largely stable or up slightly for metal fabricators. For petroleum refiners, weak domestic demand for gasoline was offset by robust domestic and export demand for distillate products, notably diesel fuel, holding overall capacity utilization rates near their long-term averages. Production activity continued to expand for food manufacturers, while demand stayed stuck at depressed levels for manufacturers of wood products.
Agriculture and Resource-related Industries
Demand growth and sales were robust for agricultural products, and extraction activity expanded further for minerals and natural resources used for energy production. Orders and sales continued to grow for assorted crops and livestock products, especially for those with extensive export markets. Contacts noted that agricultural input costs remained largely stable, with the exception of significant increases in the cost of fertilizer. Mining activity expanded further, propelled by high price levels for a variety of metals. Extraction activity grew for crude oil, largely in response to robust foreign demand, and demand for natural gas was largely unchanged.
Real Estate and Construction
Home sales and construction remained anemic, and demand for commercial real estate was largely stable but weak. The pace of home sales was quite subdued, with contacts noting that despite low interest rates, relatively strict lending requirements have constrained purchasing activity. As a result of lackluster sales and the large number of financially distressed properties, the pace of home construction stayed depressed and home prices remained flat. By contrast, demand for residential rental units grew further. Demand for commercial real estate remained weak overall, as reflected in elevated vacancy rates and heightened caution by tenants to commit to long-term leases. However, declining vacancy rates were noted for selected geographic areas that are benefiting from growth in the technology sector, primarily the San Francisco Bay Area and Seattle. The vast majority of contacts expect demand in residential and commercial real estate markets to change little in the near term.
Reports from District banking contacts indicated that loan demand was largely unchanged compared with the prior reporting period. With businesses remaining cautious in their approach to capital spending, the volume of new commercial and industrial loans stayed slightly depressed overall. However, reports continued to indicate stiff competition among lenders to extend credit to well-qualified small and medium-sized businesses, which has been creating downward pressure on rates and fees. No changes in demand for consumer credit were noted. Slight improvements in overall credit quality were noted, but lending standards remained relatively restrictive for many types of business and consumer loans. In a departure from prior positive reports, contacts from the venture capital sector reported a slowdown in investment activity and funding.
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