Federal Reserve Bank of San Francisco
Summary of Economic Activity
Economic activity in the Twelfth District was somewhat subdued but largely stable during the mid-February through March reporting period. Employment levels remained generally stable, and most employers held their head counts flat and hired only to replace departing workers. Wages continued to rise at a slight pace. Prices rose moderately, driven primarily by sizable increases in energy costs. Retail sales grew slightly on net, while demand for consumer and business services was stable overall. Activity in manufacturing, commercial real estate, and financial services was steady. Conditions in agriculture, resource-related sectors, and residential real estate softened a little. Community needs remained elevated, and rising gas prices strained household budgets. Contacts reported a weaker economic outlook and heightened uncertainty stemming from the impact of the ongoing conflict in the Middle East on energy markets and global supply chains.
Labor Markets
Employment levels remained generally stable over the reporting period. Most employers held their head counts flat and hired only to replace departing workers, though there were isolated reports of employment increases across sectors. However, some sectors saw modest employment declines. Contacts in real estate and financial services both reported reduced head counts through attrition and retirement, while financial services specifically highlighted the elimination of redundant roles following recent acquisitions. In leisure and hospitality, one contact noted employment reductions from early ski resort closures in the West. A few contacts reported using Generative AI tools to reduce costs and pause new hiring. While employers across sectors reported very low staff turnover as well as improved availability and quality of job applicants, some employers faced challenges hiring experienced workers in the skilled trades.
Wages continued to rise at a slight pace. Annual pay adjustments and merit-based bonuses across sectors and geographies were generally in line with typical cost-of-living adjustments. Wage increases were more outsized in some sectors, such as hospitality, due to union contracts and minimum wage increases. In contrast, wage growth slowed for some nonprofit workers whose organizations faced funding constraints. In addition, entertainment workers in Southern California saw weaker wage growth as lower production volumes diminished their bargaining power despite union minimums.
Prices
The pace of price increases overall remained moderate but intensified somewhat in recent weeks as energy costs surged. Higher fuel prices drove up input costs across transportation, utilities, fertilizers, and petroleum-based materials. Some of the cost increases were passed on to customers as fuel surcharges. Business owners continued to report increases in insurance premiums and health-care costs. Some contacts reported that prices fell for a number of categories, including rental properties, agriculture products, and manufacturing equipment.
Community Conditions
Community needs remained elevated, and rising gas prices strained household budgets. Conditions for nonprofit organizations became more strained, as prior federal and local funding was used up and renewals carried lower dollar values. Several organizations reduced workforce levels to address funding shortfalls, even as demand for services remained high. Some contacts reported increased difficulty affording health care, as costs escalated for both employers and individuals.
Retail Trade and Services
Retail sales grew slightly on net over the reporting period. Contacts noted stronger footwear and apparel sales as well as higher demand for home improvement goods driven by the spring building season. Demand for grocery items and pet products remained stable, as consumers continued to focus their spending on necessities and trading down on discretionary items. Several retailers reported that tariffs continued to put pressure on costs for imported goods. While inventories remained generally stable, one retailer reported that energy rationing in parts of Asia caused sporadic supply chain disruptions.
Demand for consumer and business services was generally stable on balance. Air travel demand increased modestly, and hotel bookings trended up of late, partly due to favorable weather conditions. However, the recent spike in fuel prices dampened road travel and local tourism in Southern California. Restaurant activity was mixed during the reporting period, with quick service restaurant demand growing modestly and slowing demand noted for full-service restaurants, particularly in the Pacific Northwest. Demand for janitorial and security services eased slightly. Activity in Southern California's entertainment and media sector contracted as some production relocated to other parts of the United States.
Manufacturing
Manufacturing activity was unchanged over the reporting period. Reports generally indicated softer demand for equipment manufacturing products, although order pipelines for packaging machinery were stable. A manufacturer of specialized automation equipment highlighted a shift in demand from the packaged snack food industry to the apparel industry, which they attributed to changing preferences related to consumers' increased use of GLP-1 medication. Manufacturers reported rising costs stemming from tariffs on steel and aluminum and higher fuel costs driving up shipping expenses.
Agriculture and Resource-Related Industries
Conditions in agriculture and resource-related sectors softened a bit. Domestic demand for crops weakened somewhat as consumers reduced spending on fruit and non-essential produce. Cattle and beef prices remained at historic highs amid record low cattle herd numbers. Prices for grain and some crops such as potatoes, strawberries, and onions were suppressed due to overproduction and lower demand from abroad. Transportation, fertilizer, and chemical costs increased, and growers expressed concerns about fertilizer prices and availability stemming from the ongoing Middle East conflict. Some contacts noted that input costs exceeded the prices producers received for their crops, adding financial pressures to agricultural borrowers.
Real Estate and Construction
Conditions in residential real estate markets cooled a bit relative to the prior reporting period. Demand for single-family homes was stable overall, although some contacts noted that slightly higher mortgage rates and elevated economic uncertainty curtailed demand somewhat. Multifamily housing demand and construction both slowed in recent weeks. Contacts in the Mountain West reported that landlords, facing subdued rental demand, offered more generous leasing concessions.
Activity in commercial real estate was steady on net. Demand for industrial and retail space was generally solid, with rental rate increases in retail tracking inflation. Office leasing activity remained largely stagnant. However, one developer indicated that while office showings increased modestly in the Mountain West, tenants' demands for costly space improvement made it difficult to finalize lease agreements. Construction activity in the industrial sector was steady, particularly for public infrastructure projects and data centers. New office construction was limited.
Financial Institutions
Activity in the financial services sector was largely unchanged on net. Demand for residential mortgages picked up, driven by lower long-term interest rates and stronger refinancing activity. Lending activity in other segments either remained unchanged or slightly declined. Deposit flows were stable, and deposit rates were little changed. Credit quality remained healthy overall. However, some contacts reported that elevated input costs and low selling prices weighed on some farmers, with several borrowers carrying over loans and some growers lacking financing for 2026 crops.
For more information about District economic conditions visit: https://www.frbsf.org/research-and-insights/publications/san-francisco-fed-twelfth-district-beige-book/.