Federal Reserve Bank of San Francisco
Summary of Economic Activity
Economic activity in the Twelfth District was broadly steady during the mid-August through September reporting period. Employers generally maintained employment levels and increased wages slightly. Prices rose moderately, and elevated diesel and fuel prices pushed up business operating costs across the District. Retail sales softened slightly, and consumer spending on leisure and hospitality services varied by region and income group. Conditions were mixed in manufacturing and stable in commercial real estate, while conditions softened slightly in residential real estate, agriculture, and financial services. Community-serving organizations struggled to meet elevated demand for their services as funding remained constrained. Contacts maintained a generally soft economic outlook, with similar sentiment to the prior period.
Labor Markets
Employment levels held steady over the reporting period. Employers across most sectors and geographies backfilled job vacancies but refrained from expanding their teams. While some businesses hired new staff to support expansion projects, including new bank branch locations, others implemented hiring freezes in anticipation of slower business growth. There were reported staff reductions in agriculture, janitorial services, and commercial real estate, with contacts citing cost savings, lost contracts, and firm mergers as the driving factors. Several nonprofit organizations adjusted staffing levels in response to funding challenges, and a large Northern California nonprofit implemented furloughs after a new grant allowed it to avoid further layoffs. Turnover remained low, and employers generally found it easy to fill most openings. However, experienced workers in technology and financial services were hard to recruit. A Northern California contact observed consultants leaving large and legacy firms to start their own AI-enabled businesses.
Wages increased slightly on net and were in line with prior reporting periods. Most reports indicated little to no change in wages and salaries. Several contacts mentioned employees requesting, and some receiving, cost-of-living pay adjustments to offset higher fuel and food prices. Contacts reported wage pressures across the District in manufacturing, including a large contractor in the Mountain West highlighting that competition from data center projects drove up pay for electricians and other skilled trades workers in the region. Contractual and statutory obligations pushed pay upward in specific sectors and areas, including hospitality workers in San Diego, teachers in Seattle, and entertainment workers in Southern California.
Prices
Prices rose moderately and at a faster pace than in the prior reporting period. Elevated prices for diesel and other fuels pushed up transportation and freight costs for businesses across the District. Contacts in several sectors, including manufacturing, passed the increased costs on to their customers. One manufacturer reported that every material purchased in recent weeks carried a freight surcharge. Tariffs continued to put upward pressure on prices for imported textiles, metals, and some retail products. Businesses also reported higher costs for health insurance, cybersecurity, software, utilities, seafood, and beef. Prices fell for lumber and other wood products, and a construction firm in the Mountain West lowered prices for the first time in several years in order to retain customers.
Community Conditions
Conditions in the community support and services sector weakened somewhat. Nonprofit organizations continued to find it challenging to meet elevated demand for their services as operating costs rose and funding remained constrained. Contacts noted that households facing higher food and energy prices increasingly relied on community assistance programs. Housing affordability also remained a salient concern for renters and first-time home buyers. Several nonprofits continued to highlight declining or uncertain federal funding.
Retail Trade and Services
Retail sales softened slightly. Economic uncertainty and high prices pushed consumers to spend less on discretionary items, like apparel and footwear, and focus more on essential and value-oriented goods, such as groceries and back-to-school products. Contacts continued to describe economic conditions as bifurcated or K-shaped, with one contact observing that mounting financial pressures on lower-income families have spread to impact middle-income households. In Northern California, sales at luxury and specialty retailers outperformed those at large department stores, while a national value retailer reported attracting customers that typically shopped at more expensive competitors. Weak conditions in agriculture reportedly strained retail spending by consumers in rural areas in the Mountain West.
Demand for consumer and business services changed little on net. Tourism activity varied by region and market segment. Hotel occupancy exceeded expectations in San Diego, with contacts reporting a pickup in local reservations and last-minute bookings. Tourist volumes in Hawaii declined due to weaker demand from Canadian and Asian visitors. In Las Vegas, spending related to convention visitors and those making high-end purchases offset the effects from the decline in the number of international and value-oriented travelers. Reports indicated that restaurant sales softened slightly overall as consumers dined out less often and ordered less alcohol, although demand at upscale dining establishments remained strong. Demand was steady for laboratory testing and fell slightly for janitorial services.
Manufacturing
Manufacturing activity was mixed. Demand for capital equipment and industrial automation machinery rose, and semiconductor manufacturing in the Mountain West expanded. Demand for office furniture softened somewhat. Export volumes to Canada, Mexico, and the European Union reportedly fell in recent weeks. Manufacturers remained challenged by higher transportation and materials costs.
Agriculture and Resource-Related Industries
Conditions in agriculture and resource-related sectors weakened somewhat. Prices that producers received for grain, forage, and row crops improved of late, and cattle prices remained near record levels. Still, elevated diesel prices raised production costs, and higher interest rates weighed heavily on capital-intensive producers. Weak demand for wood products held down log prices. The conflict in the Middle East pushed up sulfur prices sharply, forcing some phosphate producers to curtail output. Harvest quality was reportedly good in California, while yields in Idaho were somewhat below average. A Pacific Northwest contact noted that a sizable share of West Coast vineyards had been idled due to weakening demand for wine grapes. Some contacts highlighted concerns about the developing El Niño pattern and its impact on food supply.
Real Estate and Construction
Residential real estate conditions softened modestly. Rising mortgage rates, elevated asking prices, and limited supply curtailed single-family home sales across the District. Supply continued to outpace demand in multifamily markets, though a large developer in the Mountain West observed vacancies slowly being absorbed and leasing concessions easing. Construction activity was reportedly stable, and project timelines shortened as fewer delays occurred.
Commercial real estate conditions were steady on net. Demand for industrial space was solid across much of the District and improved in Southern California, with rental rates flat to slightly higher. Demand for office space was sluggish, and leasing of retail space varied by region. Construction activity was stable overall, with activity concentrated for data centers, governmental and infrastructure projects, and semiconductor factories and warehouses.
Financial Institutions
Overall lending activity weakened slightly on net in recent weeks. Higher borrowing costs dampened demand for mortgages and auto loans. Reports on credit card usage were mixed but generally indicated stable to softer demand for new accounts. Business lending held steady over the reporting period primarily for commercial and industrial loans for medium-sized firms. Some lenders reportedly tightened terms for small businesses and certain commercial real estate projects. Credit quality remained generally sound, though a few contacts noted a slight uptick in early-stage mortgage and auto delinquencies.
For more information about District economic conditions visit: https://www.frbsf.org/research-and-insights/publications/san-francisco-fed-twelfth-district-beige-book/.