Federal Reserve Bank of San Francisco · Beige Book

Federal Reserve Bank of San Francisco

Summary of Economic Activity

Economic activity in the Twelfth District expanded somewhat during the April through mid-May reporting period. Employment levels were stable and overall labor market conditions remained tight, accompanied by wage increases that showed some signs of leveling off. T1Price increases persisted, although at a slower pace than in the last reporting period. Retail sales grew modestly, and activity in the services sectors picked up somewhat. Demand for manufacturing goods was robust, while conditions in agriculture and resource-related sectors weakened slightly. Activity in residential and commercial real estate markets eased further. Conditions in the financial sector changed little over the reporting period and lending standards have tightened. Communities across the Twelfth District were challenged by a shortage of specialized professionals and small businesses' limited access to credit. Contacts expressed concern over a weaker outlook for the economy and increased overall uncertainty.

Labor Markets

T2Employment levels were largely unchanged during the reporting period. Labor supply remained tight across several sectors, including health care, hospitality, food services, and aviation. However, contacts from retail, manufacturing, transportation, finance, and business services reported fewer issues filling positions. Although some employers are still facing difficulties finding skilled workers, reports across the District indicated improvements in employee turnover and retention rates. Furthermore, contacts from both the agriculture and hospitality sectors mentioned better success in hiring seasonal workers this year. One contact from Alaska, however, expressed concerns over attracting enough seasonal workers for this summer. Labor market conditions in the technology and financial services sectors continue to soften. A report from the Pacific Northwest highlighted a surge of unionization efforts in the retail and distribution sectors.

T3Wage growth moderated across many sectors. The recent layoffs and hiring freezes in financial services and technology eased wage pressures in these sectors. Contacts in the health-care, retail, and manufacturing sectors, as well as non-profit organizations, reported pay increases that are closer to historical rates. However, some industries, including the gaming industry and insurance companies, are continuing to pay above-average salary increases to attract and retain qualified workers.

Prices

Price increases persisted, although at a slower pace than in the last reporting period. Production costs increased due to higher expenditures on labor, utilities, and shipping. Firms reported that they generally passed on these higher costs to consumers. Nevertheless, some contacts reported some demand pullback, which in some instances resulted in a reversal of price increases. Prices of some goods and services were reportedly stable or down in recent weeks, including those for residential rentals, lumber, insurance, business services, and banking services. Prices rose for agricultural products such as apples and seafood.

Community Conditions

Conditions in the community support and services sector were mixed. Some contacts mentioned increased availability of resources for addressing homelessness issues in areas of the Pacific Northwest, as well as assistance from philanthropic foundations and online fundraising in Nevada and California. Nonetheless, reports also highlighted the challenges in meeting the demand for housing services and accessing funds for small businesses. In addition, contacts reported difficulties hiring specialized professionals, which have contributed to staff burnout and turnover at institutions including those supporting children's health, education and training, and local journalism.

Retail Trade and Services

Retail sales grew modestly in recent weeks largely driven by strong spending on food and beverages and steady demand for furnishings, appliances, and apparel. Reports also indicated that T4elevated inflation and economic uncertainty led consumers to be more selective with their purchasing decisions. Consumers continued to trade down to lower cost items. Spending at small grocery stores and gas stations in suburban and rural areas was reportedly up. Conversely, food establishments and retail stores in downtown urban areas that traditionally relied on foot traffic from office workers continued to report weak sales as hybrid work arrangements persisted.

Conditions in the services sectors picked up somewhat. Demand for professional services remained strong, particularly for consulting, talent acquisition, catering, and janitorial services. Providers of legal and insurance services reported mixed conditions by type of service. Contacts noted weaker demand for elective medical procedures and surgeries in recent weeks. Consumer spending on pet care reportedly increased. Major tourist hubs across the District experienced a pickup in leisure and business travel as convention attendance and international travel continued to recover. Conversely, smaller tourist destinations saw lower-than-expected traveler volumes during spring break and Easter. Activity in the entertainment and media production industries slowed significantly due to ongoing collective agreement negotiations between the major studios and writers' unions.

Manufacturing

T5Manufacturing activity was robust during the reporting period. Demand was notably strong for food manufacturing, metal fabrication, and heavy machinery. Manufacturers generally reported lighter order backlogs, due mainly to softening demand. Supply bottlenecks, especially those related to ocean freight, eased significantly in recent weeks. Nevertheless, contacts continued to highlight limited availability and extended delivery times for products and equipment that rely on semiconductor chips.

Agriculture and Resource-Related Industries

T6Conditions in agriculture and resource-related sectors weakened slightly. Reports on exports were mixed as ocean freight costs eased somewhat, while the war in Ukraine continued to contribute to shipping disruptions. Contacts in California noted that wet weather conditions lowered yields for brassicas and berries. Rains also disrupted pollination for tree and vine crops, which is anticipated to reduce yields. Seafood stocks were reportedly stable in the Pacific Northwest. Contacts noted lower costs for transportation and irrigation water and higher costs for other inputs such as for packaging, fertilizer, and energy.

Real Estate and Construction

T7Activity in residential real estate slowed further over the reporting period. Contacts across the District reported stable demand for single-family homes, although high mortgage rates restrained prices. Inventories of existing single-family homes were low, and owners appeared hesitant to forego their existing low-rate mortgages. Asking rents were largely stable, and one contact in Southern California noted that new multifamily construction put downward pressure on rents in some areas. Despite reported improvement in the availability and cost of materials, construction of new homes was flat to down as developers responded to higher financing costs.

Conditions in commercial real estate were weaker overall. In the face of changing workplace needs, leasing activity for downtown office space remained weak, and new office construction stalled. Demand for retail and industrial spaces remained stable. Contacts around the District noted that plans for new projects stalled, which has led to more competitive construction bids.

Financial Institutions

Conditions in the financial sector changed little over the reporting period, and uncertainty remained high. T8Contacts cited higher interest rates, tighter lending standards, ongoing uncertainty in the banking sector, and lower overall confidence as the main dampeners of activity in the sector. Depository institutions mentioned tighter competition for deposits. Lending institutions observed reduced demand for residential loans and uneven demand for commercial loans. Contacts reported that recent stresses in the regional banking sector negatively affected access to credit, particularly for smaller businesses. Reports also noted increasing delinquencies in consumer loans, including for auto and credit card debt.