Federal Reserve Bank of San Francisco
Summary of Economic Activity
Economic activity in the Twelfth District was little changed during the July to mid-August reporting period. Employers largely maintained employment levels. Wages were up slightly. Prices rose modestly, driven by elevated oil prices, tariffs, and higher input costs. Retail sales were stable, while activity in consumer and business services eased slightly. Conditions in the manufacturing and agriculture sectors were little changed. Residential real estate activity declined somewhat, while commercial real estate activity was similar to the prior reporting period. Overall lending activity was stable. Community-serving organizations continued to face heightened demand for support and funding challenges. Contacts maintained a generally soft economic outlook, with similar sentiment to the prior period.
Labor Markets
Employment levels were largely unchanged on net over the reporting period. Most contacts reported no change in staffing levels. A few implemented hiring freezes. Some firms in the retail and industrial sectors increased employment to support business expansion projects, including new location openings. Others reduced head counts through attrition or layoffs, which were prompted by consolidation efforts or reduced customer demand. Employee turnover remained low. Plentiful applicant pools and generally high applicant quality made most roles easy to fill, including those for seasonal agricultural work. A few contacts reported challenges navigating lost institutional knowledge as new hires replaced employees who retired. Productivity increases were attributed in roughly equal measure to new AI tools, particularly for administrative and analytical office work, and to factors unrelated to AI such as process improvements, training, and general technology.
Wages were up slightly overall. Some contacts reported wage increases, and those increases were often close to the pace of inflation, reflecting in part employee pressure to keep pace with the rising cost of living. Other contacts reported keeping wage levels flat. Among businesses that raised wages, some did so across the board, while some others targeted specific roles for retention purposes. One contact in leisure and hospitality implemented a more conservative annual wage increase because of softer labor market conditions and less competition for workers. Employee benefit costs, such as for health insurance, rose.
Prices
Prices rose at a modest pace. Contacts again reported price increases for goods and services affected by elevated oil prices, including shipping and raw materials, though in some cases at a slightly reduced pace. Tariffs also continued to drive price increases for affected goods, particularly in retail and manufacturing. More generally, prices rose for utilities, construction components such as electrical supplies, software, office equipment, and business services such as consulting. Lumber prices declined because of lower demand from the construction sector. One insurance contact suggested that prices for health-care services and private insurance coverage increased to compensate for reductions in federal funding.
Community Conditions
Community-serving organizations continued to face heightened demand for support. Demand for assistance remained high for housing, food, and utilities. The number of uninsured rose, increasing the need for health-care assistance. Obtaining funding, especially from government sources, remained difficult for nonprofit organizations. Contacts noted continued challenges for small businesses, including some declines in credit quality and reduced availability of financial products and services tailored to small businesses.
Retail Trade and Services
Retail sales were stable over the reporting period. Consumer demand was steady overall and continued to shift towards value-oriented retailers. Demand weakened slightly for some household furnishings and specialty recreational gear. Retail grocery demand for proteins rose, attributed in part to increased use of weight-loss drugs, while demand for fresh produce declined over health concerns from recent food safety recalls. Home improvement projects kept demand for wood products at home centers steady.
Activity in consumer and business services eased slightly. Demand overall declined slightly for basic facility services such as custodial, food, and security. However, demand rose for specialized technical services and generally from businesses in high-end office and technology markets. Businesses were more price conscious in their use of fee-based generative AI tools as they weighed the growing costs for these services against the benefits. Several contacts noted that demand to dine out declined across restaurant types, though one contact reported higher sales attributed in part to price-based promotions. Demand for air travel was stable. The tail end of World Cup activity boosted tourism in Washington, while Oregon's wine country saw a decline in tourism. A hospitality contact reported a shift towards delayed event bookings, which created challenges for planning staffing and service levels.
Manufacturing
Conditions in the manufacturing sector were little changed. Across the District, manufacturers' shipping costs for receiving raw materials and sending finished products remained high. Reports noted that uncertainty around tariff policies created challenges for production planning. One contact indicated that orders from the commercial real estate sector remained low. Some contacts in the Pacific Northwest reported increases in capital spending for additional production lines as well as equipment and processes to reduce labor needs.
Agriculture and Resource-Related Industries
Conditions in the agriculture sector were largely similar to those in the prior reporting period. In many cases, prices producers received for commodity crops and beef remained below the cost of production, which remained elevated overall. However, a California contact experienced a decline in fertilizer prices. Smaller producers, in particular, reportedly faced challenges accessing capital and subsequently focused capital expenditure on repairs over upgrades. Drier conditions in the Pacific Northwest and Mountain West curtailed yields somewhat, but contacts expected yields overall to be average. Previously strong demand to purchase forested lands reportedly declined somewhat. A contact in Washington observed a decline in demand for agricultural products stemming from lower demand at local restaurants.
Real Estate and Construction
Activity in residential real estate declined somewhat. Sales of single-family homes decreased slightly in many areas in the District. Higher borrowing and insurance costs and generally high home prices contributed to the slowdown in demand. Demand for multifamily rentals was lower overall. Units took longer to rent out, and leasing concessions persisted. Residential construction activity slowed a bit. Contractor bids were more competitive. Some developers with approved building permits opted to wait for borrowing costs to fall before starting those projects.
Activity in commercial real estate was stable overall. Demand for office space remained low, especially in secondary markets. Several contacts reported elevated vacancies in industrial space, though a Southern California contact experienced a slight increase in industrial leasing demand. Patterns for commercial real estate construction activity were similar to those reported in the prior period, with slow activity other than for institutional and infrastructure projects. Construction costs remained elevated. A Mountain West contact observed that projects received more bids from contractors.
Financial Institutions
Conditions in the financial services sector were little changed. Demand was solid for business and commercial loans. Competition for business customers led to borrower-friendly lending terms and loan pricing for firms. Mortgage activity declined somewhat. Credit quality remained solid overall, but some contacts reported increases in delinquencies. Competition for deposits remained strong, which kept deposit rate offers elevated. Some contacts noted declines in consumer bank account balances and higher levels of credit card debt.
For more information about District economic conditions visit: https://www.frbsf.org/research-and-insights/publications/san-francisco-fed-twelfth-district-beige-book/.