Federal Reserve Bank of San Francisco · Beige Book

Federal Reserve Bank of San Francisco

Summary of Economic Activity

Economic activity in the Twelfth District strengthened modestly during the reporting period of mid-November through December. Employment grew at a moderate pace, while overall labor market conditions remained tight. Price levels continued to climb significantly, driven by increases in shipping and labor costs. Sales of retail goods increased notably, while conditions in consumer services deteriorated somewhat due to the latest wave of COVID-19 infections being driven by the Omicron variant. Conditions in the agriculture and resource sectors remained mostly unchanged, whereas the manufacturing sector strengthened slightly. Activity in the residential real estate market continued to increase albeit at a slightly slower pace, while commercial real estate activity was little changed. Lending activity remained steady over the reporting period.

Employment and Wages

T1Employment grew moderately, with contacts reporting no signs of easing in the tight labor market. Firms across the District continued to cite difficulties attracting qualified candidates for both skilled and unskilled positions. Contacts in agriculture, retail, and food services reported being unable to fill open positions despite repeated wage increases over the past year, leading them to reduce their hours and capacities. A few contacts observed higher turnover rates have started to extend to management levels as well. Several contacts expressed concern over what they perceive as a longer-term mismatch between the skills needed and the availability of labor, which could be further exacerbated by the aging population and the increasing numbers of people retiring during the pandemic.

A contact in the Pacific Northwest mentioned addressing the region's persistent shortage of health-care employees by plans to bring in foreign medical workers in the medium term. One employer in the technology sector noted increased competition from companies in other geographies that offer fully remote positions.

T2Wage pressures increased further over the reporting period due to the continued competition for talent. Many employers mentioned giving year-end bonuses to top performers and boosting base salaries by 3 to 10 percent. Several contacts also mentioned significantly expanding equity compensation at the executive level in order to retain talent. Two contacts noted that to help employees with the unexpectedly higher cost of health insurance renewals, one of them raised wages more than initially planned while the other absorbed the higher costs.

Prices

T3Prices continued to climb at a brisk pace across the District. Notable price hikes occurred for energy, agricultural products, construction materials, and menu items at restaurants. Additional shipping and labor costs contributed to further price increases that many companies reported passing on to consumers. Most contacts expected these pricing pressures to ease in 2022 as supply chain issues are resolved, although a few raised concerns that price increases arising from wage pressures might be longer lasting.

Retail Trade and Services

T4Sales of retail goods continued to increase notably. E-commerce sales remained robust, while sales at brick-and-mortar stores were up compared to last year's holiday season, although not as high as holiday sales in 2019. Furthermore, several contacts noted that retail store staff shortages resulted in reduced hours, which further constrained sale volumes. Although a few contacts mentioned supply chain issues and inventory shortages for vehicles and some food products, most other retailers, especially clothing and electronics, reported having ample inventory levels. A few contacts observed that higher prices moderated holiday sales somewhat. A contact in the Pacific Northwest noted that many retailers are looking into acquiring their own warehouses and manufacturing facilities to mitigate supply chain issues in the future.

Conditions in the consumer and business services sectors deteriorated in recent weeks. T5The latest wave of infections driven by the Omicron variant has negatively impacted the travel and hospitality industry, with hotel bookings being cancelled and staff shortages at airlines. Demand for food services decreased somewhat, and many entertainment shows and events have been either cancelled or postponed. By contrast, demand for laboratory testing and medical services remained high, but supply was constrained by low inventories and medical worker shortages. A contact in management consulting noted that with many businesses navigating uncertainties and hybrid work stances, demand for consulting services has surged and some strategic services are sold out for most of 2022.

Manufacturing

Activity levels in the manufacturing sector rose slightly. New orders were either steady or rising for fabricated metals, steel, and renewable energy equipment. However, T6continued supply chain disruptions and labor shortages continued to hold back production. As a result, one contact in the Pacific Northwest noted that lead times for some machinery equipment have increased to up to two years. Although manufacturers' capacity utilization rates were up and most were able to access raw materials, input costs have continued to increase and remained volatile.

Agriculture and Resource-Related Industries

Conditions in the agriculture and resource-related sectors remained mostly unchanged. Exporters of agricultural products continued to be challenged by shipping bottlenecks and port delays, with no signs of easing. As a result, one exporter reported selling more agricultural products domestically instead. Demand from food services was noted to have softened in recent weeks due to concerns related to the Delta and Omicron variants, while retail demand for agricultural products remained steady. Crop yields for tree fruit, nuts, and raisins were lower than anticipated due to weather effects and carryforward of low inventories in 2020. A grower in the Pacific Northwest noted that due to a lack of available domestic labor, many companies in the area have hired a higher proportion of foreign seasonal agricultural workers for this year's harvest.

Real Estate and Construction

T7Activity in the residential real estate market continued to increase, although at a slightly slower pace compared to the previous reporting period. Residential construction and sales remained strong in both single-family and multifamily housing sectors. However, the pace of home price increases has slightly decelerated, and brokers in California mentioned that homes were taking a bit longer to sell. In addition, supply chain challenges and labor shortages continued to hamper new construction, with one contact in the Mountain West noting delays of more than six months in getting various appliances and building materials. A few contacts also mentioned higher rents partially due to continued migration into the Pacific Northwest. A contact in Alaska noted that applications for affordable housing have increased threefold relative to the pre-pandemic period.

Commercial real estate activity was unchanged on balance. On one hand, demand for new office and retail space was noted to have decreased somewhat, with lease rates falling due to increased uncertainty stemming from the emergence of the Omicron variant. On the other hand, demand for industrial and manufacturing spaces increased further, with related lease rates increasing as well. A contact in Southern California noted that the decision by many companies to reduce their office space has pushed commercial real estate investors to look elsewhere for long-term investment.

Financial Institutions

Lending activity remained steady over the reporting period. Consumer loan demand continued to be strong especially for refinancing, while demand for commercial loans remained slow due to businesses holding excess cash. Liquidity remained high, as did the asset quality of loan and investment portfolios. Although interest margins continued to be squeezed, several banks mentioned that loan fees from processing PPP loans have helped boost margins this year. One contact in Southern California mentioned that competition for loans accelerated further, including that from fintech companies. Another contact in the clean energy investment space observed that green bond issuances and climate-focused SPAC (special purpose acquisition companies) activity have picked up in recent weeks.