Federal Reserve Bank of San Francisco
Summary of Economic Activity
Economic activity in the Twelfth District remained stable during the September through early-October reporting period. Labor availability and employee retention improved further, and several employers resumed plans to expand employment after holding their headcounts steady over the past year. Prices were generally stable in recent weeks, while wages grew slightly. Retail sales as well as activity in manufacturing and consumer services softened. Demand for business services improved, while conditions in real estate, financial services, agriculture, and resource-related industries were largely unchanged. Demand for housing and food services remained elevated, and job seekers sought training and workforce development services to get higher-paying jobs in their communities. Looking ahead, contacts’ views on the economic outlook improved notably in recent weeks, with several citing recent reductions in interest rates and their improved sentiments about the labor market.
Labor Markets
Employment levels were generally stable to slightly higher over the reporting period. Several employers began hiring for open positions put on hold over the past year, citing an improved economic outlook. Labor availability improved further in recent weeks. The number of job applications increased, and employers generally found it easier to hire. Additionally, turnover continued to slow across industries, particularly in financial, consulting, and legal services. A few contacts highlighted some challenges attracting workers in construction and nonprofit community support organizations as well as for some management positions in the technology, accounting, and health-care sectors. There were some reports of continued investment in automation solutions and generative artificial intelligence (GenAI) technologies to improve labor productivity. For example, one restaurateur reported successfully using GenAI software at drive-thru stations in some urban and suburban locations.
Wages grew slightly in recent weeks, and at a pace generally in line with historical growth rates. Wage pressures reportedly subsided for entry-level positions in construction, real estate, and business services but remained somewhat elevated for positions in mid-level management, information security, and the skilled trades. Some contacts anticipated a pickup in the pace of wage growth for positions impacted by recent and ongoing labor union negotiations and minimum wage adjustments that go into effect early next year.
Prices
Prices were generally stable in recent weeks after ticking up slightly during the prior reporting period. This was the first reporting period with no net increase in prices in over three years. Contacts largely reported stable operating costs across industries and geographies, with the exception of energy costs, which rose notably since late September. Prices of some raw materials, such as lumber, fell in recent weeks, while insurance and health-care costs remained elevated.
Community Conditions
Demand remained elevated for community support services, particularly for health-care, food, housing, and workforce development. Contacts reported that workers were seeking training to get higher-paying jobs. Some people in the community were focusing on cost over quality when looking for mental health services. Funding availability for nonprofit organizations from government grants, the private sector, and individual donors remained subdued. Contacts reported that some small businesses in Hawaii, such as those in food services and retail, faced continued challenges with lower consumer demand. Some newer small business owners in Utah sought help with obtaining funding and with business operations training. One contact noted that elevated demand for shelters and community services attracted interest in market entry by some for-profit entities.
Retail Trade and Services
Retail sales moderated slightly. Contacts noted that sales for apparel, pet products, and home improvement goods softened somewhat, leading to excess capacity for some. Consumers continued to seek discounts and were reluctant to pay full price for nonessential goods. A few reports highlighted some pullback in spending in the Pacific Northwest from households impacted by recent and ongoing labor disputes in the region.
Activity in the consumer services sectors decreased further, while demand for business services improved relative to the previous reporting period. Demand for leisure travel and hospitality services softened, and sales at restaurants and fast-food establishments were down. Business travel slowed in recent weeks beyond seasonal factors, in part due to increased uncertainty related to the elections. Demand for medical laboratory testing remained strong, and demand for janitorial, security, and food catering services was robust, supported by more businesses expanding their mandates for workers to return to offices. Contacts in legal services reported higher demand, particularly from individuals as opposed to business.
Manufacturing
Manufacturing activity slowed modestly over the reporting period. Sales of wood products were hampered by a softer housing market and slower demand from Asian markets. Activity in the aerospace industry was weaker due to recent and ongoing labor contract negotiations. A few contacts highlighted the negative impact of labor disputes on economic activity in the Pacific Northwest. One manufacturer in the defense industry highlighted continued uncertainty related to government investment.
Agriculture and Resource-Related Industries
Conditions in the agriculture and resource-related industries were largely unchanged. Exports remained subdued, particularly to Asian markets, despite a slightly weaker U.S. dollar relative to the last reporting period. Domestic demand was stable overall, but sales reportedly fell at the retail level for some produce, such as apples. The supply of produce, including tree fruit and nuts, remained solid, largely owing to healthy harvest yields and stored inventory from the prior harvest. Materials and agricultural inputs were readily available. While demand for logs remained low, demand for forested land for investment and conservation purposes was robust.
Real Estate and Construction
Conditions in the residential real estate sector were stable and similar to those in the prior reporting period on net. Single-family home prices were stable to up, while multifamily rents were stable to down as new completions continued to expand supply. A Southern California contact observed that migration out of the area somewhat contributed to higher vacancy rates. Some builders reportedly put new projects on hold in anticipation of lower financing costs over the coming months.
Commercial real estate activity was unchanged on balance. Demand for retail space was solid, and landlords reported being able to fill vacant stores at higher rents. Rents for industrial space were stable, and one contact observed stronger demand for smaller properties. Office vacancies remained elevated as renovation costs reportedly limited landlords’ ability to lower rents further to attract prospective tenants. Commercial construction activity was bolstered by government infrastructure projects, and project backlogs reportedly eased.
Financial Institutions
Activity in the financial services sector was largely unchanged. Demand for most business and consumer loans was muted. Contacts generally anticipated improved liquidity and higher demand for credit given recent declines in interest rates. Lenders reported a recent uptick in inquiries about loan product offerings by businesses due to their expectations of lower interest rates ahead. Credit and asset quality were reportedly high. Contacts in the insurance industry highlighted that increasing costs and premiums pushed some carriers out of business.