Federal Reserve Bank of San Francisco · Beige Book

Federal Reserve Bank of San Francisco

Summary of Economic Activity

Economic activity in the Twelfth District grew slightly during the mid-February through March reporting period. Employment levels were stable, while labor market conditions remained tight overall. Elevated wage and price levels persisted though grew at a slower pace relative to the last reporting period. Sales of retail goods softened slightly, while activity in the consumer and business services sectors maintained strength. Demand for manufactured products was steady, while conditions in the agriculture and resource-related sectors continued to slow slightly. Residential and commercial real estate markets weakened. Lending activity decreased substantially. Communities across the Twelfth District faced heightened challenges in their ability to provide food, shelter, and services due to credit constraints and reduced philanthropic giving. Looking ahead, contacts had a weaker overall economic outlook and expressed uncertainty in their business planning amid current market conditions.

Labor Markets

T1Labor market conditions remained tight overall despite reported softening in some sectors such as financial services and technology. Employment levels remained mainly stable, although hiring challenges continued in most sectors due to skill mismatch and limited labor supply. Contacts reported difficulty finding workers across all skill and experience levels. There were some signs however of easing, which several contacts attributed to an increase in labor supply from recently laid-off workers seeking employment. Several contacts noted improved worker retention in recent months, although job turnover remained generally elevated. While employers in leisure and hospitality continued to hire, which alleviated ongoing staff shortages, T2businesses in the financial services, technology, and entertainment sectors reduced head counts in response to waning demand.

Wage growth moderated during the reporting period, but wage levels remained high. Although wage pressures eased somewhat, workers continued to demand higher pay, and employers maintained offers of higher wages to attract and retain workers in the face of consumer price inflation and high housing costs. Contacts noted that with stiff competition for labor, firms attracted talent with pay increases and better benefits.

Prices

T3Overall price levels rose during the reporting period, though at a somewhat slower pace. Reports indicated higher final prices for goods and services in several sectors, including manufacturing, leisure and hospitality, consumer services, legal services, and agriculture. One contact in California noted that produce prices rose following supply disruptions due to recent flooding in the state. Firms largely continued to experience rising input costs, such as transportation, food, some construction materials, and insurance, though the pace of these increases moderated. Changes in energy prices were reportedly mixed, and a few contacts observed some softening in steel and aluminum prices.

Community Conditions

Conditions in the community support and services sector worsened in recent weeks. T4Nonprofit organizations reported that heightened uncertainty in the banking sector limited their access to credit and delayed ongoing affordable housing and community support projects. Nonprofit organizations noted that recent banking developments led many corporations to cut back on charitable donations, which further constrained their ability to meet demand for basic needs, including shelter, rental and food assistance, and mental health services. Employers across the District reported increased burnout and mental health strain among workers, particularly low-wage earners, due to higher living costs.

Retail Trade and Services

T5Retail goods sales softened slightly, as reduced savings and rising household debt hampered consumption expenditures. Food spending decreased somewhat as households continued to trade down to lower cost items. One contact from Washington noted that sales of organic produce weakened relative to conventional products. However, home improvement and do-it-yourself projects continued to support strong sales at home centers.

Conditions in the consumer and business services sectors remained strong. Demand for health-care services continued an upward trend. Demand for air travel was strong, while that for leisure and hospitality moderated somewhat in parts of the District, including Southern California, due to consumers' concerns about economic uncertainty. At the same time, the tourism industry in Hawaii and Nevada remained strong. Record rain and snowfall across the West Coast had a mixed effect. While the hospitality sector in Southern California saw a significant slowdown, Northern California saw higher demand for outdoor recreation.

Manufacturing

Activity in the manufacturing sector was steady. Some reported softness in orders from the construction industry was offset by strength in metal production, engineering, and food manufacturing. Demand for capital equipment and metal recycling products increased in recent months, while demand for wood products weakened as rising mortgage rates and bad weather slowed down residential construction. Production costs remained above historical averages, and labor tightness persisted. While supply disruptions continued to improve, contacts across the District reported delays in getting various electrical components.

Agriculture and Resource-Related Industries

Activity in agriculture and resource-related sectors decelerated slightly. Exports of agricultural goods weakened, and domestic demand for agricultural products was mixed. While growers in the Pacific Northwest reported weaker sales overall, producers in California noted strong, stable demand for fresh produce and other agricultural goods. T6Persistent rains and flood conditions in California affected plant pollination, delayed the planting of crops like tomatoes and cotton, and cast doubt on the viability of some orchard crops. One contact in Central California reported that the recent rains made large portions of grazing lands unsuitable for cattle. Seafood output in the Pacific Northwest remained stable. Sales of harvested timber cooled further, while investor demand for timberland remained elevated.

Real Estate and Construction

T7Conditions in the residential real estate sector worsened over the reporting period. Demand for single-family homes softened, and homes stayed on the market longer. Selling prices fell below initial asking prices, and the cancellation rate for purchase agreements reportedly increased. Multifamily housing demand was stable to weaker, depending on the region, and asking rents or the rate of rent increases fell. Uncertainty and high financing costs dampened new construction, but some reports indicated stronger activity in the lower-cost home category. Ongoing projects continued to be developed as planned across the District, but builders highlighted shortages of electrical equipment as a constraint to construction activity in the region.

Activity in the commercial real estate market weakened. Demand for office and health-care space continued to wane. Office vacancies rose as leases expired and occupants reduced their need for space due to hybrid and remote work arrangements. Demand for warehouse and industrial space remained generally strong, as did the demand for new data centers. One contact in Oregon highlighted local government's ongoing plans for continued development in downtown areas.

Financial Institutions

T8Lending activity fell significantly in recent weeks amid higher interest rates and elevated uncertainty in the banking sector. Lending standards tightened notably, and several depository institutions opted to reduce loan volumes, especially for new clients, despite reporting ample liquidity. Reports indicated that existing and planned projects across sectors were delayed or cancelled due to higher funding costs, heightened uncertainty, and more limited access to credit. Following recent volatility in deposit levels at regional and community banks, outflows have reportedly stabilized since late March.