December 3, 2014
Business contacts in the First District indicate that activity is generally increasing. With a few exceptions, retailers and manufacturers report year-over-year increases in sales or revenue. Firms in both staffing and software and IT services cite solid or strong demand as they did when contacted three months ago. Most commercial real estate markets in the region continue to expand modestly, while residential real estate markets remain unsettled, with most of the New England states seeing increases in the number of homes sold and declines in median sales prices from a year earlier. Net hiring is occurring in the sectors with more robust demand; pay levels are rising somewhat for temps but are generally flat in software and IT services. Some manufacturers and retailers cite modest price increases, while software and IT services firms are holding prices steady.
Retail
Retail firms contacted this round report year-over-year increases in total sales ranging from zero (flat) to 6.5 percent. Their year-over-year comparable-store sales results are more varied, ranging from down 4 percent to up 7.5 percent. Inventories are well-managed. Some contacts report that their prices remain steady, while others indicate prices of some items are going up a bit. The reasons given for these modest price increases include passing on higher vendor prices and paying for increases in the minimum wage. Retailers are continuing to invest in software and support for online selling channels.
All respondents say that they have seen continuing improvement in sales over the course of the year, that consumers appear to be more confident, and that the U.S. economy seems to be experiencing a real, albeit modest, rise. Contacts expect the holiday sales season to continue this positive momentum.
Manufacturing and Related Services
Of ten manufacturers responding this cycle, eight firms report stronger sales than a year earlier. The two citing weaker sales are both in semiconductor-related industries. One, a maker of testing equipment, is actually very positive about sales, saying that as long as people want smart phones, there will be strong demand for semiconductor testing equipment. The other is in the semiconductor manufacturing equipment business and is also quite optimistic overall. Manufacturing contacts generally say North America is an area of strength and Europe and Latin American are relatively weaker. A manufacturer of construction tools says the strengthening dollar is a "headwind" and has revised sales growth down slightly as a result. Firms report no significant movements in inventories. Capital spending is up, but more or less in line with plans at all contacted firms.
The pricing environment is reportedly benign. Raising prices is not easy, but firms do not report tremendous pressure to cut prices. Costs are said to be under control as well. One firm in the chemical industry cites falling oil prices as a problem because chemicals are produced in the United States using natural gas whereas in the rest of the world, they are produced using oil. As a result, the fall in oil prices over the last few months has made foreign rivals more competitive, partly reversing U.S. chemical firms' prior advantage resulting from declines in the price of natural gas relative to oil in recent years.
None of our contacts reports large increases or decreases in employment. A manufacturer of health and fitness equipment successfully hired technically skilled workers but only with great difficulty. A defense contractor says uncertainty about the federal budget makes workers reluctant to accept offers from them. A maker of medical equipment indicates that recent wage increases are at the higher end of their normal range. In general, responding manufacturers have a positive outlook on business conditions.
Software and Information Technology Services
First District software and information technology services contacts generally report strong demand in recent months, with most citing revenue increases of 7 percent to 20 percent year-over-year. This sustained business growth is attributed to the improving macroeconomy, strength in the manufacturing sector, and high consumer demand for software products currently on the market. Only one contact--in the healthcare sector--reports a decrease in year-over-year nominal revenue, reflecting the expiration of federal stimulus related to health records software. Selling prices have generally remained stable. Most firms are adding to their headcounts through acquisition, increased utilization of contractors, or overall business expansion. Wages have largely remained constant in recent months. One contact notes upward wage pressure for higher-level R&D and sales positions for which demand exceeds supply. Most firms are holding capital and technology spending steady, with one firm increasing spending to introduce a new software platform. Looking forward, most contacts are optimistic about current trends continuing; they expect flat to high-single-digit year-over-year revenue growth. Some respondents express concerns about continued weakness in Europe and Asia, stock market volatility, and the overall macroeconomy.
Staffing Services
New England staffing contacts generally report increased business activity through November, with all but one contact citing a year-over-year increase in revenue. This uptick in demand reportedly reflects growth in the healthcare sector and improved business confidence. Furthermore, several contacts note increases in both direct hiring and the temporary-to-permanent conversion rate. Labor demand is strong, with increases for a variety of positions across the healthcare, commercial real estate, legal, customer service, manufacturing, and warehousing sectors. Contacts say labor supply continues to be tight, particularly for IT, legal, and nursing occupations. Their strategies to attract top candidates include networking, social media outreach, online recruiting, and offering modest wage premiums. Both bill and pay rates have trended upward in recent months. Most contacts are more optimistic than three months ago about the rest of the year, with year-end revenue growth forecasted to be in the low-to-high single-digit range. The main factors expected to affect business in upcoming months are winter and holiday seasonal effects, availability of workers, and health insurance costs from the Affordable Care Act.
Commercial Real Estate
Commercial real estate market trends in the First District are mostly unchanged since the last report. According to contacts, Boston's office market continues to see declining vacancy rates and modest rent increases. Investor demand for office and multifamily properties in Greater Boston remains very robust. A Rhode Island contact says business sentiment is improving based on beliefs that the newly elected governor will focus on job creation. Office leasing activity in Providence saw a modest rebound following a dip late in the third quarter, with robust demand in the Class B sector; there are, however, some concerns about plans among Class A office tenants to reduce space needs in 2015. Construction activity remains limited in the state, but includes a growing amount of build-to-suit activity in the industrial sector. In Hartford, market fundamentals are unchanged amid flat leasing demand, and there is no new construction activity. In Portland, investment sales increased across diverse property types and industrial leasing activity picked up since the last report, while office market fundamentals--including vacancy rates and rents--are roughly unchanged since one year ago and office leasing activity held steady in recent weeks. A few new infrastructure projects and some industrial construction activity are underway, and set to increase, along Portland's waterfront. A regional banking contact saw a modest increase in commercial real estate loan inquiries, including an uptick in loan demand for industrial properties in the Boston area; at the same time, he reports that the flow of lending activity at his bank is below its year-ago level.
The outlook remains largely optimistic for the Boston and Portland commercial real estate markets. For Rhode Island, a modestly optimistic outlook for commercial real estate demand was qualified by contacts citing risks to the state's overall economic fortunes, including a looming state budget deficit. In Hartford, a contact foresees slow-to-negligible growth in economic activity and accordingly slow improvement in commercial real estate fundamentals.
Residential Real Estate
In September, closed sales of single-family homes increased from a year earlier in four of the six New England states. Massachusetts experienced declining year-over-year sales for an eighth consecutive month; contacts in New Hampshire were unavailable to provide data. The median sales price for single-family homes decreased in three of the four states with sales increases; Maine was the exception, with a year-over-year increase in median sales price. Prices in Massachusetts remained flat, ending 23 consecutive months of year-over-year price rises. Massachusetts contacts say buyers are not willing to overextend themselves financially as home prices move higher, but some expect prices to remain flat, some say they will decline, and others expect an increase in the coming months; among the latter, one contact notes that preliminary October data show a modest increase in price compared to October 2013. Scarcity of inventory remains a concern in Massachusetts, with another consecutive month of year-over-year declines in inventory. Contacts in Massachusetts say new listings are insufficient to meet demand; they emphasize a need for new construction and for more sellers to list properties. By contrast, inventories are plentiful in Vermont, where there is more than 20 months of supply; realtors typically say a market is balanced when there is six months of supply--the current level in Rhode Island. Contacts across the First District believe recent market trends will continue in coming months.
In the condominium market, September sales were mixed across the region, decreasing in Rhode Island, Massachusetts, and Maine, while increasing in Connecticut and Vermont compared with a year earlier. The change in median sales prices of condos also varied across the region, with year-over-year increases in Rhode Island, Maine, and Vermont, but decreases in Connecticut and Massachusetts; this represents the first price decrease for condos in Massachusetts after 15 months of increases. As with single-family homes, condo inventory remains a concern in Massachusetts, where year-over-year inventory decreases have continued for almost four years.
Residential real estate contacts say they are generally content. Many contacts are optimistic about the new Qualified Residential Mortgage rule, expecting it to ease down payment and credit score requirements and thereby help qualified consumers afford and purchase a house.