Federal Reserve Bank of San Francisco
Summary of Economic Activity
Economic activity in the Twelfth District remained stable on net during the July through mid-August reporting period. Labor availability continued to improve, and employment levels rose slightly. Wages grew modestly, and prices continued to increase at a slight pace on net. Retail sales and demand for business services were generally steady. Activity in consumer services and manufacturing ticked down a bit. Conditions in the agriculture and resource-related sectors continued to soften slightly, as did activity in residential and commercial real estate markets. Activity in the financial services sector remained muted. Communities across the District faced affordable housing shortages, and demand for community services generally remained high. Looking ahead, contacts expected the economy to be somewhat weaker, and some have curtailed their capital spending citing economic uncertainty and elevated credit costs.
Labor Markets
Employment rose slightly over the reporting period overall. Most contacts across the District cited steady to slightly higher employment levels and improved retention rates, while others, including those in banking and professional services, expanded their payrolls moderately. Nonprofit organizations reported increased hiring to meet the growing demand for community and support services. In contrast, companies in the entertainment and aerospace sectors lowered their headcounts through layoffs. Many contacts continued to note an increase in job applicants, although some cited skills mismatch and difficulty filling specialized positions. Employers continued to see labor turnover slowing, in part due to engaging in more selective hiring and offering enhanced professional development.
Wages grew at a modest pace on net, up relative to the prior reporting period's pace. Contacts noted wage growth outpaced recent averages in agriculture, banking, business services, community services, and leisure and hospitality. The main drivers behind the increased compensation pressures were competition for specific types of highly skilled labor, union contract renegotiations, and higher minimum wage requirements. Wage growth was relatively tamer in real estate and construction, with a few contacts reporting offers for longer contracts at a lower wage level and others expecting to give lower end-of-year bonuses.
Prices
Prices rose slightly overall, at a rate similar to the previous reporting period. Many contacts reported stable prices, including those from the finance, healthcare, manufacturing, and retail sectors. Other businesses, such as those in leisure and hospitality and food services, increased their prices due to higher labor and overhead costs. A few contacts from the agricultural sector noted a drop in prices for some products, including commodity crops, fish, and some produce. Businesses across the District noted higher costs for utilities, energy, insurance, professional services, and shipping.
Community Conditions
Demand for community and support services rose somewhat as individuals and households continued to seek housing, medical, and food assistance. Closures of childcare facilities and recent heat waves in some regions led to higher demand for related support services. Nonprofit organizations faced more difficulties securing funds despite a slight increase in contributions from government sources. Small businesses continued to face challenges with access to credit and sluggish demand in urban cores, forcing some of them to close. One Washington contact noted a rise in demand for educational and training services such as credential and certificate programs.
Retail Trade and Services
Retail sales remained generally steady on net in recent weeks. Some contacts highlighted slightly increasing demand for retail goods relative to the previous reporting period, especially in the Mountain West. Demand was stable for groceries and fresh produce, while sales of nonessential goods weakened further. In particular, sales at home centers fell in recent weeks as households seemingly engaged in fewer do-it-yourself projects. Contacts continued to characterize consumers as more cautious with spending decisions and reluctant to pay full price. One large online retailer noted that many visitors mostly sought products with markdowns and those with promotional prices.
Activity in the consumer services sectors decreased somewhat, while demand for business services was unchanged relative to the previous reporting period. Reports indicated that consumers continued to pull back their spending at restaurants and for other leisure and hospitality services. Demand for air travel weakened further overall, and convention attendance in Southern Nevada was reportedly down. Demand for legal services and business consulting was unchanged at low levels, while demand for janitorial services and medical laboratory services remained solid.
Manufacturing
Manufacturing activity ticked down a bit in recent weeks. Demand for manufactured goods, capital equipment, and fabricated metal generally weakened, although some contacts reported a recent pickup in inquiries and order pipelines. Sales of manufactured wood products remained modest, largely due to slower construction activity and weaker sales at home improvement centers. Labor availability in manufacturing returned to normal levels recently as contacts reported more applicants and less turnover.
Agriculture and Resource-Related Industries
Conditions in the agriculture and resource-related sectors softened slightly, as in the prior reporting period. Demand from the food services sector was unchanged, while demand from the retail sector fell slightly in response to higher prices. A strong dollar curtailed overall exports somewhat. The supply of produce crops and seafood remained high due to elevated yields from the current season and stored inventory from the past season for some products such as salmon. Agricultural producers across the District reported higher financing costs and difficulties accessing credit, leading some to cut back on investment.
Real Estate and Construction
Residential real estate activity decreased somewhat, similar to the prior reporting period. Demand was down in both single-family and multifamily markets. New residential construction remained slow overall, though demand and construction activity increased in some areas in Hawaii and the Mountain West. Developers reported delaying plans and refraining from starting new projects because of high financing costs. Landlords of multi-family properties lowered rents and gave more concessions amid a general rise in vacancy rates. A Southern California contact noted that vacancies and completion of construction projects were up in the high-end rental market but that vacancies were notably lower in the market for affordable housing.
Conditions in commercial real estate weakened slightly overall. Leasing activity fell for industrial and office space, but a contact in Utah noted that demand for retail space had ticked up. Construction of new commercial properties was down in most sectors as projects shifted towards less costly renovations. However, new construction was stable in the medical sector and up for government and military projects. Building materials and inputs were readily available with little change to costs, though backlogs remained for some products such as electrical components.
Financial Institutions
Activity in the financial services sector remained muted. Reports indicated that businesses and households had increased appetites for new loans but were discouraged by elevated interest rate levels. Credit quality remained high, and credit card delinquencies were unchanged after ticking up over several past reporting periods. Competition for deposits was strong, and several contacts noted that many customers looked to lock in their current rates for longer than normal terms as they anticipated reductions in deposit rates going forward.