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

Summary Economic activity in the Twelfth District expanded at a modest pace during the reporting period of early October through late November. Price pressures were limited for most final goods and services, and upward wage pressures remained quite modest overall. Retail sales were a bit soft, while demand for business and consumer services was mixed. District manufacturing activity picked up. Sales and production activity in agricultural and resource-related industries expanded. Demand for residential real estate expanded on net, and commercial real estate activity improved. Reports from financial institutions indicated that loan demand edged up.

Prices and Wages Price pressures were limited for most final goods and services. Among food products, contacts noted relatively large price gains for pork and shrimp but sustained price decreases for beef. In line with the rapid expansion of the cloud computing segment of the technology industry, contacts perceived strong downward pressure on prices for cloud-related services. Legal fees were mostly flat. Prices of some construction inputs, including insulation, wood, and roofing materials, continued to increase rapidly but remained at relatively low levels. Most contacts indicated that they expect prices at their firms to be the same or higher in 2014 compared with 2013.

Upward wage pressures remained modest overall. However, contacts from various industries noted above-average wage growth for certain highly skilled workers. Overall wage growth in the technology sector was strong, particularly for software developers. Contacts in California’s restaurant industry projected higher labor costs as the state’s minimum wage increases take hold over the next few years.

Retail Trade and Services Retail sales were a bit soft. Most contacts indicated that they expect this year’s holiday sales to be about the same or a bit higher relative to last year. Contacts pointed to slow sales of certain electronic items including televisions, personal computers, servers, and digital cameras. Demand for information technology (IT) security and cloud computing software was notably strong. Retail grocers noted the possibility of aggressive and earlier-than-usual promotions during the holiday season. Department store contacts observed a trend of robust online sales and soft in-store sales. Auto sales remained at a high level, although contacts noted that the market for high-mileage used vehicles slowed. Demand for business and consumer services was mixed. Reports from the technology industry indicated robust demand for IT services. Restaurant industry contacts again experienced weaker same-store sales in the quick-service and casual dining segments of the industry, and they do not expect sales to pick up in the near term. Travel and tourism activity in Hawaii maintained its solid pace of growth. Activity remained relatively weak in the Las Vegas tourism industry, and contacts pointed to a moderate year-over-year decline in automobile traffic in the region.

Manufacturing District manufacturing activity picked up somewhat during the reporting period of early October through late November. Driven by demand for mobile technology products, business conditions in the semiconductor industry improved. The aerospace industry in the Pacific Northwest remains poised for growth, with a large backlog of orders for commercial aircraft. Providers of pharmaceuticals described innovative product launches as the force underlying ongoing modest growth in the industry. A wood products manufacturer indicated that their capital spending was up in response to stronger demand for final goods. Steel producers reported that overall capacity utilization was mostly stable, noting stronger conditions for manufacturing of automobile and aircraft-related inputs than for nonresidential construction inputs.

Agriculture and Resource-related Industries Output in agricultural and resource-related industries expanded on balance. Demand remained strong for most crop and livestock products, although weaker commodity prices caused some contacts to pare back their expectations for production activity in 2014. Water resources were sufficient in most areas. Overall demand for oil products edged down compared with the previous reporting period, and refinery utilization rates--although remaining at historically high levels--declined slightly as well. Year-over-year total refinery inputs and gasoline production activity both increased. Contacts noted increased development of wind and solar energy production facilities. Reports indicated that sales of electricity and gas to businesses increased, and contacts expect growth in industrial activity to persist in the near term.

Real Estate and Construction Demand for residential real estate expanded on net, and commercial real estate activity improved. Home prices moved up further across the District. However, contacts reported the pace of home sales slowed somewhat in parts of California and dropped off substantially in Idaho. California contacts noted robust sales activity in the market for extremely high-end homes. Residential permit issuance expanded in several regions, an encouraging sign for sustained growth next year. Construction activity appeared to increase on net, but was held back by labor shortages in some areas. Several new large construction projects broke ground in parts of Hawaii, California, Washington, Oregon, and Idaho. Technology firms continued to drive demand for commercial real estate in the San Francisco Bay Area and Seattle. High prices for commercial real estate in downtown San Francisco spurred some firms to migrate to more affordable areas of the region.

Financial Institutions Reports from financial institutions suggest that overall loan demand edged up. A few contacts mentioned that asset quality improved and some banks have eased their credit requirements. Contacts indicated that financing for construction projects made up a significant share of overall loan growth in parts of the District. Some slower growing regions experienced tepid growth of business investment that held back the pace of lending. In addition, some contacts noted that an uncertain fiscal policy environment has eroded business confidence and has led to softer demand for credit. Reports continued to highlight ample bank liquidity and substantial competition for high-quality commercial borrowers. In the District’s Internet and digital media sectors, mergers and acquisitions activity grew at a steady pace. The pace of initial public offerings normalized after a surge of activity between mid-August and mid-September. Venture capital activity in the third quarter grew in terms of both deal value and volume relative to the second quarter. Private equity financing activity waned.

SOURCE: Federal Reserve Board

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