Federal Reserve Bank of San Francisco
Summary of Economic Activity
Economic activity in the Twelfth District was stable on net during the mid-May through June reporting period. Labor availability improved, and employment levels were generally steady. Wages and prices continued to increase at a slight pace on net. Retail sales fell slightly, after slight prior growth. Activity was mixed in services and manufacturing sectors, and conditions in agriculture and resource-related sectors weakened somewhat. Activity in residential real estate continued to slow, while that for commercial real estate was mixed. Conditions in the financial services sector were little changed. Communities across the District faced affordable housing shortages, and demand for community services generally remained high. Looking ahead, contacts expect the pace of price increases to moderate further and overall economic conditions to weaken modestly.
Labor Markets
Employment levels were again largely unchanged. Employers largely kept head counts steady, citing slowing demand for their products and services and continued investment in automation. The size of the labor force overall reportedly grew, and some firms found it easier to fill jobs, particularly those at the entry level. However, challenges continued for firms recruiting specialized workers in sectors such as information technology, manufacturing, and construction. Demand for workers with specialized skills rose more than overall labor demand in these sectors. Turnover across sectors such as finance, real estate, and retail was stable to down, and talent poaching by competing firms was less prevalent. A community banking contact noted easing in their own ability to hire because of layoffs at larger financial institutions.
Wages grew slightly on net, similar to the previous reporting period. The pace of wage growth generally subsided for workers in real estate, business services, and finance, while wages rose faster for workers in these sectors with specialized skills in high demand, such as experienced consultants and information security experts. Remote work remained an attractive nonwage benefit for workers, leading some firms to compete on the number of remote workdays offered. California contacts in retail trades, leisure and hospitality, and other sectors reported higher wage pressures following the recent increases in state and local minimum wages.
Prices
Prices rose slightly overall, similar to the prior reporting period. Costs for some inputs, such as energy, utilities, and insurance, rose at a slight pace, while prices for inputs used in construction, including asphalt, wood products, steel, and equipment, rose more slowly or even fell slightly. Higher product inventories and softer demand lowered prices for some products and services including new and used cars and consulting. Contacts reported higher prices at some restaurants but lower prices at others, particularly at large chain restaurants aiming to attract customers.
Community Conditions
Communities across the District continued to confront widespread shortages in affordable housing and associated increases in housing insecurity. Demand for subsidized and employer-sponsored housing units increased of late, but the supply of affordable housing remained very constrained. Financial stress from elevated costs, particularly for rent, reportedly pushed families to move in together and individuals to find roommates to help pay rent. More broadly, several contacts noted that demand for community services remained high, while capacity from providers was constrained by limited funding and challenges attracting and retaining workers.
Retail Trade and Services
Retail sales fell slightly in recent weeks after slight growth in the preceding period. Reports suggested that households pulled back on their spending at a faster pace than retailers had expected. While demand was stable for groceries and produce, sales of luxury goods and other large purchases weakened as consumers continued to reduce spending on nonessential goods. Consumers were characterized as more cautious with spending decisions and reluctant to pay full price.
Activity in the consumer services sectors decreased somewhat, while demand for business services was unchanged relative to the previous reporting period. Demand for leisure and hospitality fell, and restaurants across the District reported lower consumer spending overall, driven in part by less spending per visit. The health-care services sector continued to experience strong demand and remained at or near operational capacity. Demand for legal services ticked up slightly, while demand for business consulting and staffing services ticked down. Medical laboratory service providers continued to report solid activity levels.
Manufacturing
Manufacturing activity was mixed. Demand for manufactured goods generally weakened over the reporting period. Input costs also remained elevated, capacity utilization fell, and inventory levels rose. Demand for manufactured wood products declined noticeably with slower construction activity and lower sales at home improvement centers. Nonetheless, other contacts in manufacturing reported steady demand growth from local governments and increased orders for goods, such as those for packaging machinery. Contacts also mentioned ongoing investment in automation to help alleviate elevated labor costs. A metal fabricator in the Pacific Northwest observed an increase in custom orders and readily available raw materials.
Agriculture and Resource-Related Industries
Activity in the agriculture and resource-related sectors decreased slightly. Crop yields and past harvest inventories of tree fruit, tree nuts, and seafood remained high, reducing prices to below the cost of production for apples, grapes, raisins, walnuts, almonds, and frozen salmon. Domestic demand from food services and the retail sector was stable but generally soft, and demand from abroad remained solid. Packaging and transportation costs reportedly decreased somewhat, and water availability was largely stable. Weaker domestic and foreign demand for harvested timber led landowners to reduce production in recent weeks.
Real Estate and Construction
Activity in residential real estate slowed further, in line with the prior reporting period. The supply of new and existing single-family homes failed to meet ongoing demand due to low inventories. Construction of single-family homes was subdued because builders faced high interest rates, rising insurance costs, and limited availability of skilled labor. However, one contact in California mentioned that single-family housing starts appeared to be increasing in their local area. Multifamily completions continued, raising availability and vacancy rates, especially in high-end markets. This increased availability dampened rents and expanded concessions to renters. Contacts reported that new multifamily housing starts generally decreased across the District.
Commercial real estate activity remained mixed on net. Demand for office space continued to decrease, while demand for industrial space was solid. High financing and material costs as well as downward pressure on valuations and some lingering supply chain issues hampered construction in the commercial sector, putting some projects on hold. One contact in the retail sector mentioned lower investments in new developments, focusing instead on existing commitments and remodeling projects.
Financial Institutions
Conditions in the financial services sector were largely unchanged. Business lending activity remained muted for the most part, especially for commercial real estate. Demand for auto loans and other consumer credit products remained steady, though one contact in financial services reported a slight uptick in demand for residential mortgages. Consumer loan delinquencies rose somewhat in recent weeks, but credit quality overall remained high. Competition for deposits was strong, and demand for high-yield time deposits reportedly increased in recent weeks. Several contacts highlighted ongoing weakness in the mergers and acquisitions market and a notable pullback in investments by private equity firms.