Beige Book Report: Boston
July 16, 2014
Reports on recent business performance in the First District display considerable variation both across and within sectors, but point to slow economic growth overall. Contacts in the retail sector report either slight declines in sales or modest increases. Tourism is enjoying very strong growth, while manufacturers report mixed results. Consulting contacts report moderate to strong growth, while commercial real estate reports are mixed across locations and sectors. Relative to a year ago, sales of single-family homes fell in May in four New England states, but contacts also report rising median home prices in two of these states. Output prices are mostly stable in the manufacturing sector, although some firms recently raised their prices, and in the consulting sector some large firms are enacting fee increases to cover rising wage and benefit costs. While manufacturers report no commodity price pressures, some retail contacts note price increases for some inputs. Some firms in the District are engaged in significant hiring and others are doing little to no hiring, largely in line with business performance. Barring pessimism among a few contacts and selected mention of downside risks, most contacts are at least cautiously optimistic about their near-term growth prospects, and respondents in the tourism, biotechnology, and healthcare consulting industries all describe the outlook as highly favorable.
Retail and Tourism
Retail contacts report year-over-year same-store sales growth ranging from small single-digit decreases to low single-digit increases. Some contacts report that consumers are still cautious, while others say that consumers seem more confident. Some indicate that vendor prices and input costs remain steady, while others report cost increases for paper products and for fuel and freight. Depending on the retailer, the outlook for their own business and for the U.S. economy ranges from "challenging" to "steady" to "improving." The already-strong tourism sector continues to see very robust growth. Boston-area hotel revenues were up 13.2 percent in May from a year ago. Attendance at museums and other attractions is up 8.5 percent year-over-year for May. Tourism-related revenues for the 2014 summer season are projected to be 6 percent to 7 percent higher than in 2013, which was itself a record year.
Manufacturing and Related Services
Of the nine manufacturing firms contacted in this cycle, only two report year-over-year declines in revenues. A maker of frozen fish products reports that demand is down because fish is expensive and also because competitors are underpricing them. A magazine publisher that relies heavily on advertising revenues reports that ad revenues have fallen 10 percent per year for a number of years because of the shift to digital media. Of the firms reporting revenue increases from a year ago, two had very slow growth. One of these, in the chemical industry, reports that its net revenue growth figure conceals wide variation across different product lines, including a year-over-year revenue decline of 9 percent for its largest line and an increase of 12 percent for its second-largest line. Across contacts, the first quarter's harsh winter had no lasting effects on inventories, which reportedly stand at moderate levels. Seven contacts report that they are making new hires, with headcounts increasing in line with individual firms' sales growth. A biotech firm plans to hire 1,000 workers this year, while a manufacturer serving the automobile and aerospace industries reports hiring mostly to replace departing staff. Firms report mostly stable pricing. Two contacts, both selling industrial parts, recently succeeded in putting price increases through to customers. Unlike in many previous reports, no contacts report having problems with commodity prices or supplies. All contacts reporting on investment activity indicate that investment is up over last year, although none of these contacts mention having revised their investment plans recently. With the exception of the magazine publisher, contacts have a positive outlook for the remainder of 2014, and the biotech firm contact is more optimistic than are contacts in such industries as bulk chemicals and automotive springs.
Selected Business Services
Demand for analysis, consulting, and advertising is up across the board, as most contacts perceive that the economy is resurgent. Healthcare consulting firms led with 5 percent to 10 percent revenue growth over a year ago. Economic analysis and government consulting firms report year-over-year revenue growth in the range of 1 percent to 4 percent. Advertising firms also report strong demand. According to contacts, wages at business services firms are up 2 percent to 5 percent over last year, while benefits increased at a slightly higher pace. Larger firms report little trouble passing compensation increases on to clients, but smaller firms see margins being squeezed amid fierce competition, coupled with rising wage and energy costs and perceived consumer reluctance to accept higher prices. Healthcare consulting firms and a few large analysis firms plan to increase employment by 5 percent to 10 percent this year. Government consulting and smaller strategy firms report flat headcounts and no plans to hire moving forward. Firms in consulting and advertising report that a tight market for their targeted hires pushed starting salaries up 5 percent to 10 percent over last year. Revenue growth predictions display a broad range, including negative values and a value of 10 percent, although all firms expect growth to improve moving forward. Healthcare consultants are especially optimistic in light of demand stemming from clients' need to comply with the Affordable Care Act. At the same time, government and healthcare consulting firms cite pending U.S. fiscal and regulatory policy decisions as key risk factors for clients.
Commercial Real Estate
Reports from commercial real estate contacts across the First District are mixed. Leasing activity is down in Hartford in recent weeks, a fact attributed in part to usual seasonal patterns and in part to weak fundamentals. Office leasing activity is also down in Providence, while at the same time Rhode Island's industrial leasing market is tightening amid strong demand and limited inventory. According to a Portland contact, the city's tourism industry is booming, and three recently-opened hotels enjoy high occupancy rates. Also in Portland, strong office leasing is driven by growth of existing firms rather than by new firms, and investment demand is strong across industrial, multifamily, and medical properties. In Boston, office rents continue to display a modest upward trend, thanks to a lack of new inventory coming to market. A limited amount of speculative office construction is underway in Boston's Seaport District, but contacts foresee constraints on similar construction in the form of high costs and limited financing. A regional lender to commercial real estate saw a surge in loan volume in recent weeks, a fact the contact attributes to changes in business strategy. According to contacts, hiring in both Portland and Hartford--and hence added office demand--is held back by a scarcity of young, educated workers in these cities. Contacts expect that Boston will continue to see at least modest improvement in commercial real estate fundamentals moving forward, while contacts in Providence and Hartford point to uncertainty surrounding the outcomes of upcoming elections in their respective states as a factor that could restrain economic growth in the near-term. A Portland contact's outlook remains bullish.
Residential Real Estate
Realtors report steady foot traffic at open houses and multiple contacts insist that demand remains strong despite year-over-year declines in sales in May in four of five reporting states: Connecticut, Massachusetts, Rhode Island, and Vermont. In Maine, sales rose over the same period. To help explain the falling sales, realtors cite inventory shortages, perceived lack of job security, and economic uncertainty. Lack of inventory continues to hamper sales in Massachusetts, where listings have fallen on a year-over-year basis for 27 consecutive months. At the same time, contacts in that state report seeing increases in new listings in selected areas. Despite declining sales, the median sales price of single-family homes in May continued to rise on a year-over-year basis in Rhode Island and Massachusetts. For the same period, median sales prices were flat in Connecticut and down in both Maine and Vermont. Condominium sales in May are down relative to a year ago in Connecticut, Massachusetts, and Rhode Island, while Vermont contacts report increased condo sales over the same period. The median sales price for condos in May increased from a year ago in Connecticut, Massachusetts, and Vermont; by contrast, the median condo sales price fell in Rhode Island over the same period. Looking forward, contacts in both Maine and Connecticut note that they are busy with pending deals, while pending sales figures for June are below year-earlier levels in Massachusetts, Vermont, and even Connecticut. Nonetheless, realtors across the region are hopeful that closed sales numbers for June will show improvement from a year ago.