Beige Book Report: Boston
June 3, 2015
Business contacts report mixed conditions in the First District. Retailers and manufacturers cite moderate revenue or sales increases from a year ago. Staffing firms' results range from "strong" low double-digit percentage increases to flat or down slightly, while software and information technology (IT) services firms' reports are less positive, including some revenue declines. Residential and commercial real estate market contacts cite little change since the last report. Product prices and input prices are reported to be generally steady. Contacts in software and IT services, staffing, and one in construction, say wage levels are increasing; most other employers say they are raising wages only selectively if at all. Hiring plans of responding firms remain subdued.
Retail and Tourism
First District retailers contacted for this round report year-over-year comparable-store sales increases between 1 percent and 5 percent, which some contacts say indicate better consumer sentiment. However, other contacts report seeing softer sales in specific regions or categories, such as men's and women's casual apparel. While they admit that these spotty softer sales may be transitory, a few respondents express less confidence than most contacts did in the last round, and one notes that the Conference Board's Consumer Confidence Index showed a substantial year-over-year drop in New England in April. Respondents say inventories are well managed and prices remain steady. Most contacts are still planning for additional hiring and capital spending, as they continue to expect improvement in the U.S. economy.
Boston-area hotel occupancy rates were up 3.5 percent year-over-year in the first quarter. While April figures are not yet available, analysts expect strong hotel revenues based on the Boston Marathon and continued strength in business and leisure travel; forecasts for Memorial Day business and the high summer travel season are very strong. Attendance at museums and other attractions was down 12 percent year-over-year in 2015:Q1, but a good portion of this drop is attributed to the severe winter weather. Notwithstanding the extreme weather in the first quarter, international visitors were up about 8 percent year-over-year, and restaurant business was up 1.35 percent year-over-year.
Manufacturing and Related Services
Eleven of twelve responding manufacturers report stronger sales versus the same period a year earlier. The only firm to report weaker sales is a manufacturer of health and fitness equipment which attributed part, but not all, of the decline to strengthening dollar, discussed further below. A firm that owns an industrial distribution business indicates that sales in the energy sector and to customers dependent on energy like specialty steel have been slow. Our contact comments that the slowdown in oil and gas investment has been much bigger and faster than anyone anticipated. Our contacts do not report Europe as weighing as much on their sales as in previous rounds, but it is not yet a source of strength.
Half of respondents comment on the strength of the dollar and its negative impact on their sales overseas. A manufacturer of laboratory equipment says their sales would have been up 15 percent, not up only 7 percent, if not for currency changes. A tool manufacturer says that customers are delaying purchases to see if currency changes are permanent or temporary.
Contacts report the usual competitive pressures on their selling prices. On the input side, four manufacturing contacts report softness in pricing. Two contacts, a manufacturer of aerospace and defense equipment and a tool maker, used the word "deflation" to describe the market for their supplies.
Inventories appear to be stable with changes largely due to idiosyncratic issues. None of our contacts have revised their capital spending plans. The manufacturer of fitness equipment reporting slower sales says it may revise its capital spending plans if the weakness continues.
Employment is stable or higher for most firms. An exception is the manufacturer of fitness equipment who reports reducing its temporary workforce. The tool manufacturer says employment is up substantially because it has been "on-shoring"--moving production back to the United States from overseas. The company also says that the use of U.S. labor has "resonated with consumers," leading to substantial market share gains and sales increases.
The outlook is positive for all of our contacts; they expect continued growth in the next few quarters. That said, no one views the current economic situation as a "boom."
Software and Information Technology Services
First District software and information technology services contacts report "mixed" business activity in recent months, with total revenue ranging from down 4 percent to up 9 percent year-over-year. Contacts attribute softer business performance to overall uncertainty in the global economy, foreign currency depreciation in Europe and Asia, and a weaker-than-expected manufacturing sector. Two contacts note that an increased number of clients delayed project start times or downsized deals in recent months. Most firms are holding selling prices steady; one firm raised prices slightly. Capital and technology spending has largely remained flat. Two contacts report reductions in headcount in order to increase efficiency, while one firm added to headcount. Most firms are increasing wages by 3 percent to 5 percent, with increases concentrated in specialized, technical roles. Looking forward, contacts either maintain the same level of optimism or are slightly less optimistic than three months ago, expressing concern about the continued strong dollar and volatility in the overall macroeconomy.
Staffing Services
Reports from First District staffing firms are varied, with some firms citing strong business growth in the low-double-digit range, and others reporting continued softness, despite weather improvements. All respondents indicate that labor demand has strengthened in recent months, with upticks in demand for both permanent and temporary labor. They also say that while overall labor supply has increased, it remains a challenge to identify and attract specialized, technical workers to meet client demand. However, some staffing firms are having more success than others in recruiting these highly-skilled workers. Contacts report that legal, paralegal, executive assistant, software development, engineering, and nursing roles are particularly difficult to fill. In response, firms continue to utilize referrals, LinkedIn, and other social media tools to attract top candidates. Both bill and pay rates have increased by 4 percent to 20 percent in recent months, with the steeper increases reflecting greater supply-demand imbalance. Looking forward, some contacts are optimistic, but others are concerned that growth will continue to be tempered by the mismatch between client demand and available labor supply. Some contacts also express uncertainty about continued growth in the overall economy and about the cost implications of the Massachusetts sick leave law.
Commercial Real Estate
Reports from commercial real estate contacts in the First District are mixed. A Hartford contact had expected leasing activity to improve with the arrival of spring, but he reports that the improvement failed to materialize and leasing activity remains slow in each of the office, retail, and industrial sectors. However, Greater Hartford's investment sales market is experiencing robust demand and steady transaction volume. In Greater Boston, office leasing activity is holding steady at a solid pace and fundamentals are roughly unchanged. Also in Greater Boston, construction activity is steady at a brisk pace and the outlook calls for increased construction activity in the health care sector. Boston's office construction activity consists mostly of build-to-suit projects rather than speculative structures. In Portland, the vacancy rate is declining in the class A office market amid brisk leasing activity, and rents are expected to rise (if slowly) in each of Portland's office, retail, and industrial sectors in the coming year. In Providence, office leasing volume is described as decent and business sentiment is improving. According to one contact, scarcities of skilled construction labor relative to demand for such labor in the region--and associated wage increases--are starting to hinder additional construction activity.
Residential Real Estate
Closed sales of single family homes reported in April (reflecting sales under contract in February and March) were up on an annual basis in every state in the First District with the exception of Massachusetts, where the number of closed sales declined. While closed sales in Massachusetts have been lower than a year earlier in 7 of the last 11 months, the number of pending sales increased year-over-year in 25 of the last 26 months. Contacts attribute this pattern to an inventory shortage and strong consumer demand, stating that "sellers may be more willing to let consumers out of contracted agreements if an inspection fails or financing falls through because they know another buyer will line up." Inventory in Massachusetts continues to decline, while building and zoning laws continue to make new construction difficult. Similar to Massachusetts, inventory decreased in every state in the First District except Connecticut. Pending sales have also increased in all six states, suggesting that closed sales will continue to rise in upcoming months. Median sales price increased in four states; the median price declined in Connecticut and was unchanged in Rhode Island relative to a year ago. Connecticut contacts state that decreases in the median sales price may be due to sales of distressed homes, which continue to work their way through the judicial system. Massachusetts contacts say that consumer demand plus inventory shortages have driven year-over-year increases in the median sales price for 29 out of the last 30 months.
Unlike the single-family home market, the condominium market saw closed sales decrease in five of the New England states; New Hampshire was the exception. The median sales price for condos rose in Massachusetts and New Hampshire, remained unchanged relative to a year ago in Connecticut, and decreased in Maine, Vermont, and Rhode Island. Declining sales and increasing prices for condos in Massachusetts are attributed to inventory shortages, just as in the single-family home market; the Commonwealth currently has only 2.4 months of condo supply available. Condominium inventories decreased year-over-year in every state in the First District.
Contacts describe housing markets across the First District as very active. They say they expect buyer demand to persist through the spring market and into the summer.