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Beige Book Report: San Francisco

September 12, 2018

Summary of Economic Activity
Economic activity in the Twelfth District continued to expand at a moderate pace during the reporting period of July through August. Conditions in the labor market tightened further, and wage pressures ticked up. Price inflation increased moderately. Sales of retail goods picked up moderately, while activity in consumer and business services edged down slightly. Activity in the manufacturing sector and conditions in agriculture improved modestly. Contacts reported that residential real estate market activity expanded at a solid pace, and activity in the commercial real estate sector was healthy. Lending activity ticked up modestly.

Employment and Wages
Conditions in the labor market tightened further, with contacts across a variety of sectors reporting labor shortages. A national clothing retailer based in Seattle reported that hiring at warehouse fulfillment centers was constrained by a lack of qualified job candidates. Truck drivers continued to be in short supply. Continued labor shortages in construction contributed to some project delays. A steel manufacturer in Oregon noted that hiring picked up modestly due to an increase in demand. A print media company in Eastern Washington reported minimal net changes in employment, with gains due to business growth offset by reductions due to automation.

Wage growth ticked up broadly, and some businesses increased benefits in response to more labor retention challenges. Contacts across the District noted upward compensation pressures for accountants, software engineers, and information technology professionals. In the Mountain West, small businesses moderately raised starting wages and benefit compensation to better compete with larger national employers. In order to retain employees and attract new hires, a few businesses increasingly offered flexible work arrangements.

Prices
Price inflation increased moderately over the reporting period. On balance, pricing pressures for building materials continued to rise noticeably across the District. Contacts noted a moderate pickup in price growth for metal inputs and for finished steel. A contact in the electric utility industry of Southern California observed a jump in prices for metals used in the construction of electricity infrastructure. An industry contact in Oregon noted that the price of steel continued to increase, due in part to the implementation of tariffs and to unrelated declines in global competition. Higher fuel costs gave a slight boost to shipping and freight costs in various sectors. A few lumber producers in the Pacific Northwest reported a moderate decline in selling prices due to overproduction and a tick down in housing starts.

Retail Trade and Services
Sales of retail goods picked up moderately over the reporting period. Major global retailers based in Oregon and Washington reported that consumer demand for apparel picked up, which reduced reliance on discount pricing to stimulate sales. These businesses also noted that inventory levels were sufficient to meet continued elevated demand. Contacts in the Mountain West reported that small retailers in particular saw a jump in sales, while auto sales in the region ticked down.

Overall, activity in the consumer and business services sectors edged down slightly. A reduction in government reimbursements and an increase in labor and other input costs put downward pressure on health-care providers' bottom lines. Activity at transportation businesses continued to be slightly constrained due to shortages of truck drivers. Restaurant sales grew moderately in the Mountain West. In Hawaii, contacts reported that activity in the tourism industry expanded solidly, limited only by recent weather-related disruptions.

Manufacturing
Activity in the manufacturing sector expanded modestly. Capacity utilization at steel producers increased slightly on a year-over-year basis due to solid domestic demand and reduced competition from overseas. A contact in Northern California noted modest sales growth in the semiconductor industry, with inventory and capacity utilization levels consistent with expectations for growth.

Agriculture and Resource-Related Industries
Conditions in the agriculture sector improved modestly, though contacts noted a somewhat weakened outlook due to heightened trade tensions. In the Mountain West and California, crop yields were higher than expected due to better weather. Contacts in the Pacific Northwest reported that lumber production was solid, while demand for lumber for residential construction projects fell slightly. Lumber exporters in the Pacific Northwest noted a modest decline in demand from China after that country announced tariffs on American lumber. Profitability at pork and beef producers fell moderately on a year-over-year basis. With profit margins for many crops at only breakeven levels, agriculture contacts are keenly focused on the potential for prolonged trade-related disruptions.

Real Estate and Construction
Activity in real estate markets expanded at a solid pace. Low inventory levels in the residential market persisted due to labor shortages and rising overall material costs, which constrained otherwise robust construction activity. Contacts across the District noted that the low levels of inventory in tandem with brisk demand for housing resulted in continued upward pressures on home prices and rents. A contact in eastern Oregon observed that new buyers from regions with higher home prices drove a jump in demand. On balance, contacts did not observe a tangible impact on demand from the increase in mortgage rates.

Commercial real estate activity was healthy. In line with the residential market, construction in the commercial market was limited only by labor shortages and rising material costs. In Oregon, leasing demand for retail and warehouse spaces picked up further, due in part to the growing cannabis industry. A contact in Southern California noted that commercial leasing rates jumped, spurring some additional construction starts.

Financial Institutions
Lending activity ticked up modestly over the reporting period. Loan demand increased overall, with consumer loan growth slightly outpacing commercial loan growth. Net interest margins remained solid, despite some recent narrowing due to rising deposit interest rates. Contacts reported strong credit quality and loan performance, though in the Mountain West, lenders remained attentive to decreasing profitability in segments of that region's agriculture industry.