Federal Reserve Bank of San Francisco
Summary of Economic Activity
Economic activity in the Twelfth District was somewhat muted but largely stable during the mid-May through June reporting period. Employment levels were largely steady, with employers generally maintaining head counts at current levels and continuing to invest in productivity-enhancing AI technologies. Wages continued to rise at a slight pace. Prices rose moderately, and reports varied on the ability of firms to pass on higher operating costs to final prices. Retail sales and consumer spending on services ticked down slightly. Manufacturing activity rose modestly. The agriculture sector was challenged by elevated production costs and regional drought conditions. Residential and commercial real estate activity was largely similar to prior reporting periods, and overall lending activity was stable. Funding challenges pushed some nonprofit organizations to reduce staffing or cut back on offered services. Contacts reported a weak economic outlook, though sentiment was slightly more optimistic than in prior periods.
Labor Markets
Employment levels were largely unchanged over the reporting period. Employers continued to generally maintain head counts, selectively hiring in response to attrition or specific business needs. There were fewer reports of announced or planned layoffs relative to prior reporting periods. Turnover rates remained low, and reports indicated that most open roles were easy to fill, particularly for entry-level positions. However, recruiting remained difficult for some technical and senior positions, including those in financial services in the Mountain West and Hawaii. Firms continued to invest in AI technologies, seeking to drive productivity improvements, and to assess employees' ability and willingness to integrate AI agents into the workflow.
Wages continued to rise at a slight pace in recent weeks. Contacts generally reported pay adjustments in line with historical averages, with some employers able to hold steady following annual pay increases earlier in the year. Still, wage pressures were noted in engineering and the skilled trades, and some contacts mentioned needing to pay a premium to attract and retain workers for specialized, hard-to-fill roles in financial services and information technology. In the entertainment and hospitality sectors, changes to local minimum wage schedules in San Diego prompted some employers to cut staffing for seasonal and temporary positions, while employers in Las Vegas reduced overtime hours for current employees because of increased labor availability.
Prices
Prices rose at a moderate pace over the reporting period. Elevated energy costs further drove up transportation and freight expenses across sectors, with some contacts noting vendor-imposed fuel surcharges. Cost pressures were reported for tariff-impacted goods such as metals and electronic components and more broadly for animal protein, fertilizer, petrochemicals, apparel, insurance, and technology services. Reports varied across sectors and geographies on firms' ability to pass on elevated costs to higher prices. Several retailers mentioned raising prices in recent weeks to reflect the increased costs, while some contacts in consumer services noted recent customer pushback on higher prices.
Community Conditions
Conditions in the community support and services sector were strained. Demand for essential support services, such as housing and food assistance, remained elevated. Several contacts reported signs of heightened household financial stress, including faster spending of tax refunds and rising credit card balances. Nonprofit organizations continued to face funding issues, pushing some organizations to reduce staffing or cut back on services. Local health services providers and small businesses reported facing elevated operating costs and financial challenges.
Retail Trade and Services
Retail sales ticked down slightly in recent weeks. While demand remained stable for groceries, pet products, and home improvement tools, it weakened somewhat for specialty and big-ticket discretionary items. Price-sensitive consumers continued to trade down to lower-cost alternatives, with a Southern California contact noting that in-person shoppers were not only moving away from higher-priced food options but also ordering fewer items. Inventory levels were solid overall, though some retailers expressed concerns about the impact of ongoing global supply chain disruptions on their ability to source products in the second half of the year.
Demand for consumer and business services varied by sector but slowed somewhat on net. While tourist volumes were reportedly strong at District cities hosting World Cup matches, overall leisure travel and spending by locals on restaurants, hotels, and entertainment slowed modestly in several other markets. One leisure and hospitality contact noted that the recent cessation of operations by a large low-cost carrier negatively impacted the number of last-minute travelers to major tourist hubs. In contrast, business travel remained robust, and contacts expected strong demand for corporate events and conventions throughout the summer. Activity was solid for custodial services and for laboratory testing, security, and health care.
Manufacturing
Manufacturing activity rose modestly in recent weeks, although with widespread challenges related to supply chain disruptions and commodity prices. Order pipelines improved for packaging machinery and remained solid for industrial automation equipment. Demand for building materials was reportedly down due to elevated economic uncertainty. Some manufacturers indicated that recent adjustments to tariffs on steel, aluminum, and copper pushed their clients to reassess planned investment projects.
Agriculture and Resource-Related Industries
Conditions in agriculture and resource-related sectors remained weak and largely unchanged from the prior reporting period. Farmers across the District were challenged by elevated production costs and low commodity crop prices. Acute drought conditions were reported throughout the Mountain West and parts of Oregon. Exports of cherries, apples, hay, and grains to Asian markets reportedly declined. A Mountain West contact described the agricultural sector in the region as undergoing a recession, with many farmers experiencing their second or third consecutive year of operational losses. In contrast, conditions in livestock markets were solid, similar to prior reporting periods.
Real Estate and Construction
Residential real estate activity was largely similar to prior reporting periods. Demand for single-family homes was solid overall, particularly in the Mountain West, but was dampened by recent upward movement in mortgage rates. Home sales were reportedly muted across California due to limited inventory and elevated asking prices. Supply of multifamily rental units in urban markets continued to outpace demand, putting some downward pressure on rental rates and pushing property managers to offer concessions. Construction activity was steady overall; however, reports on financing for new projects were mixed.
Activity in commercial real estate was steady on net but varied by region and segment. Demand for industrial space weakened slightly in Southern California, while demand for retail space was steady at solid levels across the Mountain West. Office space markets remained soft. Construction activity continued for well-capitalized projects, particularly large institutional and infrastructure work, but softened slightly on net. A large real estate developer noted that this slowdown recently pushed many general contractors to submit more competitive bids.
Financial Institutions
Conditions in the financial services sector were stable overall. Demand and inquiries for commercial and industrial loans picked up modestly, with positive activity led by middle-market companies. Borrowing activity among smaller businesses was mixed. Auto lending was weak, and mortgage activity remained muted. Competition for deposits was brisk. Credit quality was generally sound, though contacts reported some emerging concerns for small businesses and an increased level of substandard loans. Credit conditions in the agricultural sector were weak.
For more information about District economic conditions visit: https://www.frbsf.org/research-and-insights/publications/san-francisco-fed-twelfth-district-beige-book/.