TWELFTH DISTRICT–SAN FRANCISCO Summary Economic activity

TWELFTH DISTRICT–SAN FRANCISCO Summary Economic activity in the District grew at a moderate pace during the reporting period of July through mid-August. Overall price inflation remained limited, but upward wage pressures increased further. Retail sales grew moderately, while demand for business and consumer services picked up further. Manufacturing output grew modestly. Agricultural activity ticked up. Real estate market activity expanded at a moderate pace. Lending trended up, and credit conditions improved somewhat. Prices and Wages Overall price inflation was little changed from the limited pace noted in the prior reporting period. Prices for health-care services and pharmaceuticals rose further. Prices for agricultural products generally increased, with reduced acreage and yields creating modest supply shortages for some products.

Contacts in regions with strong residential construction growth noted moderate price increases for construction materials. By contrast, retail grocery prices were largely flat, held down in part by added supply from e-commerce retailers. Energy price declines and dollar appreciation held down prices charged by utilities and prices of assorted raw material imports. Contacts in the technology industry reported a drop in advertising costs as firms shifted campaign platforms from traditional desktop computers to cheaper mobile devices. Upward wage pressures strengthened across the District. Hiring picked up in the information technology (IT) sector, and contacts reported robust across-the-board wage gains for workers in the Internet services and information security sectors.

Wage pressures continued to mount in the construction sector with contacts from urban technology centers, such as the San Francisco Bay Area and Seattle, reporting shortages of skilled labor and significant wage increases. A few contacts in the banking sector observed strong demand for talented employees and, due to vigorous competition, were unable to pass higher wages through to the prices charged for banking services. Hospitality sector contacts in some parts of the District expressed concerns that recent minimum wage increases may raise costs in their industry. Retail Trade and Services Retail sales grew at a moderate pace over the reporting period. Contacts noted that low oil prices XII - 2 continued to raise purchasing power and boost general consumer demand. Automobile sales remained strong, particularly for trucks and SUVs, with one contact reporting that high demand forced dealers to shop around for additional inventory. Sales of computer hardware and software were strong, spurred in part by the actual or anticipated launch of new technologies. Sales of food and beverage products grew, but at a slower pace than earlier in the year. Clothing and apparel sales expanded moderately after accounting for the normal back to-school shopping boost. 

Contacts mentioned that e-commerce sales continued to grow briskly. Demand for business and consumer services expanded further. Contacts in the technology services industry reported strong growth, with some Internet-based businesses reporting double-digit sales growth over the prior year. Contacts expect business demand for IT services to remain robust, particularly for big data processing and security services. Demand for health-care services grew further, driven primarily by an aging population and the associated increase in the incidence of chronic diseases. Contacts in the legal services industry reported weak demand as firms moved away from hiring outside counselors and instead leaned more heavily on in-house staff. Manufacturing Output in the manufacturing sector grew modestly. Contacts reported that new orders of semiconductors expanded at a slow but steady pace. On balance, the biotech and pharmaceutical sectors expanded as financing remained widely available and firms continued to consolidate through new mergers and acquisitions. Deliveries of commercial aircraft were robust with some contacts reporting a backlog of orders fueled by international and domestic demand for newer fleets. Output in the aerospace and defense sector grew modestly, although contacts expressed concern over the uncertainty surrounding the outcome of looming Congressional spending negotiations. Wood product exports remained weak, with competing Chinese supply and weaker demand from that country cited as key factors. Agriculture and Resource-Related Industries 

Agricultural activity grew slightly over the reporting period. Contacts reported that drought remained a serious concern in many areas, with uneven impacts across products. Wheat and potato output grew modestly; however, harvests for nuts, grapes, and fruit trees were earlier and smaller than anticipated. Higher XII - 3 prices somewhat offset lower production in regard to farm revenue, but concerns remained that inadequate water resources pose a significant challenge to future harvests. An ample supply of corn reduced overall feed prices through substitution for more expensive feed products. Output and sales of forestry products grew slowly, and additional supply reportedly is threatened by spreading wildfires in the West.

Real Estate and Construction Real estate activity expanded at a moderate pace overall but was uneven throughout the District. Contacts reported continued growth for residential and nonresidential construction and sales, with particularly rapid growth in urban technology centers. Some contacts noted an excess supply of retail space and tighter underwriting standards for new construction projects, which constrained the growth of new commercial units in their areas. On balance, demand for new residential units remained solid, and contacts noted that consumer preferences continued to shift towards multifamily units. However, a few contacts noted that residential construction activity slowed in their region, predominantly due to tighter borrowing conditions and shortages of skilled labor and available land.

Contacts generally expect residential and nonresidential constructionactivity to grow over the rest of this year, though at a slower pace compared with the first part of the year. Financial Institutions Lending activity grew modestly over the reporting period. Healthy borrower balance sheets bolstered perceived creditworthiness and enhanced lenders’ willingness to supply credit. Delinquencies and nonperforming loans receded further. Some contacts reported that borrowers remained somewhat hesitant to leverage and expand operations, which has slowed loan demand growth slightly. Other contacts reported that ample credit availability has enabled borrowers to shop around for the best terms. Liquidity remained robust, and deposit flows continued to increase. Net interest margins remained somewhat compressed, and some contacts noted that interest rate risk will pose a challenge to returns in the near term.