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 slightly during the mid-November through December reporting period. T1Employment levels were largely unchanged, and employee retention improved further. Wages were up slightly overall, and year-end pay increases were in line with historical averages. T2Price levels were generally stable in recent weeks. T3Retail sales grew modestly as contacts reported a solid holiday shopping season. Consumer and business services sectors saw steady to slightly higher activity over the reporting period. Manufacturing activity varied by product category, while conditions in the agriculture and resource-related sectors softened slightly. Residential real estate markets were stable overall, and commercial real estate conditions were mixed. Lending activity was steady.

Demand for services related to affordable housing, food assistance, and mental health remained high from communities across the District. T4Contacts' economic outlook worsened slightly relative to the prior reporting period.

Labor Markets

Employment levels were stable on net over the past few weeks. Employers generally noted improved retention rates, expanded applicant pools, and higher quality candidates. Open positions were easier to fill overall. However, T5a larger share of contacts expressed caution in their hiring decisions and hesitation to adjust their headcounts going forward relative to prior reporting periods, citing uncertainty regarding the business environment. A few reports highlighted a mismatch between job requirements and applicants' skill sets for some entry-level positions in information technology and the skilled trades. Additionally, employers noted lingering challenges hiring engineers, accountants, as well as mid-level managers in business services, finance, and health care.

Wages were up slightly up on balance. End-of-year pay adjustments and merit-based bonuses were generally in line with historical averages across sectors and geographies. T6Wage pressures eased in construction, manufacturing, real estate, and business services but remained somewhat elevated for engineers as well as for some senior positions in finance and information technology. Some contacts mentioned that the recent collective bargaining agreements between hotels and labor unions as well as changes to some minimum wage requirements made the leisure and hospitality sector more attractive to hourly wage workers in other sectors.

Prices

Price levels were generally stable in recent weeks. On balance, nonlabor costs were unchanged in several industries, such as manufacturing, consumer and business services, and financial services. Business owners continued to report large increases in insurance premiums and health- care costs, but some noted that recent declines in energy prices, particularly for fuel, helped ease some of the cost pressures. Looking ahead, contacts generally expected their ability to pass on higher costs to customers to remain limited, and most said their prices will likely increase at a slower pace in 2025 relative to 2024, or even remain flat or decline.

Community Conditions

T7Demand remained elevated for community support services such as affordable housing, food assistance, and mental health services. Funding for nonprofit organizations from both individual donors and government sources fell. Contacts across the District reported that public and private educational institutions of all levels faced tighter financial conditions due to lower funding inflows and higher labor costs. Generally easing inflation trends lessened strain on small businesses, though challenges persisted with insurance premiums, rents, and financing costs. Small businesses and nonprofit organizations reported that recent integration of software technologies allowed them to expand their outreach efforts and provide more personalized services.

Retail Trade and Services

Retail sales expanded modestly over the reporting period. Contacts observed a solid holiday shopping season, similar to last year's spending. Retailers noted higher demand for outdoor products and increased foot traffic in shopping centers across the District. Sales at organic specialty stores reportedly outpaced those at regular grocery stores, particularly in the Mountain West states. Consumers continued to take advantage of promotional pricing, which bolstered overall retail sales. However, demand for some products reportedly softened, including pet specialty items and wood products at home improvement stores. Retailers generally reported adequate inventory levels, although they were somewhat lower than levels observed last year.

Activity in consumer and business services was stable to slightly up in recent weeks. Activity in the leisure and hospitality sector picked up on balance, with increased travel demand from groups and businesses that slightly offset flat demand for leisure travel. Reports indicated lower guest counts at bars and restaurants in recent weeks, which were impacted by bad weather in parts of the District despite typical holiday-related activity. Demand for consulting services increased of late as firms inquired about the potential impact of economic policy adjustments on their business operations. Demand for health-care services remained strong. Conditions in the legal services sector were mixed by firm size, with smaller ones faring worse.

Manufacturing

Activity in the manufacturing sector varied by product category. T8Demand strengthened for capital equipment as more customers invested in using automation for cost savings on existing and new tasks in response to elevated labor costs. Demand for manufactured lumber products was unchanged. A contact in the Pacific Northwest reported some general slowdown in manufacturing activity in the region but noted strengthening demand for defense manufacturing.

Agriculture and Resource-Related Industries

Conditions in agriculture and resource-related sectors softened slightly. Demand was stable for agricultural and animal products such as fruits, vegetables, meat, and dairy. Yields of food crops were solid but down compared to prior harvests. Drought conditions in the Mountain West negatively affected grain yields, while growers in California reported that water supply was not an issue. Exports of almonds fell. Log harvesting activity experienced seasonal slowing, which reduced market supply and put upward pressure on log prices. Additionally, log exports remained low because of muted demand from China. Materials and agricultural inputs were generally available. Some contacts reported persistent challenges with labor availability and generally high energy costs.

Real Estate and Construction

Residential real estate activity was largely unchanged from the last reporting period. T9High financing costs and excess supply of multifamily housing properties continued to hold back new residential construction projects. Finding skilled labor remained a challenge. High mortgage rates and home insurance costs curtailed demand in single-family markets in some regions in California and Oregon. Contacts in the Mountain West noted that strong demand for housing in areas with a growing population put upward pressure on home prices.

Conditions in the commercial real estate market were mixed. Demand for office space remained sluggish overall, though one contact reported an uptick in demand and rental rates for the most desirable office spaces. Developers put some retail and industrial projects on hold due to a recent slowdown in demand. Demand in other sectors, including infrastructure projects and government offices, was reportedly strong. Availability of raw materials generally improved of late but remained an issue for some products such as electrical and HVAC components. Construction costs, including those for insurance, electrical equipment, and steel, increased overall.

Financial Institutions

Lending activity was steady. Demand for business loans improved somewhat over the reporting period. Demand for consumer loans, including mortgages, was subdued due to elevated interest rates. Credit quality remained healthy overall. However, T10reports highlighted some credit quality concerns coming from small businesses and low-income households. Demand for deposits was unchanged, and deposit flows were stable.