Beige Book Report: Boston
July 12, 2017
Summary of Economic Activity
Business activity in the First District expanded at a modest pace on average, but reports were mixed across firms and industries. Revenues are up by moderate margins on average among manufacturing and retail contacts, with year-over-year gains that varied from slight to robust. Software and information services firms reported year-over-year growth figures that ranged from a modest decline in one case to double-digit gains. Commercial real estate activity was flat or up slightly across the District, while residential real estate sales were held back by declining inventories despite robust demand. Some firms planned to increase headcounts by moderate or even large margins, while others expect to hold employment fixed. Planned wage increases remained moderate, and price increases were small to moderate, with some exceptions. Contacts expect either flat activity moving forward or further growth consistent with their own recent results.
Employment and Wages
Hiring plans among First District contacts ranged from flat to robust, and planned wage increases were stable at a slow-to-moderate pace. Some retail contacts found it slightly harder to hire workers, but were not much concerned by that fact. Employment was flat or increasing at manufacturing firms. A furniture manufacturer reported difficulty in retaining production workers but not salespeople. A manufacturer of cardboard boxes was hiring additional workers without raising wages, but noted that finding qualified workers was difficult because production jobs increasingly involve using computers. Manufacturing firms reported year-over-year wage growth in the vicinity of 3 percent. A data storage firm plans to make double-digit percentage increases in its net headcount in 2017, while a healthcare IT firm expects a more modest 2 percent personnel increase. One enterprise software firm is keeping its headcount flat, but shifting its hiring focus to growth areas such as the internet of things. Another software firm is hiring at a moderate pace and has had to increase starting salaries for engineers and sales positions. Firms are struggling to hire engineers and fill technical positions in greater Boston. On average, software and IT firms are budgeting for moderate wage increases.
Prices
Reports on price movements were mixed. Most manufacturing contacts reported stable prices. However, a cardboard box manufacturer increased its prices by 10 percent in response to a 10 percent increase in the price of linerboard, a key input, and a frozen fish manufacturer expects pollock prices to fall in the coming year. Retail output prices saw very little movement, although some retailers plan to post moderate price increases for premium fall merchandise and small price increases for basic goods.
Retail and Tourism
Retail contacts reported that recent sales numbers reflect increases over one year ago ranging from roughly 2 percent to almost 10 percent, results that helped balance lackluster sales in early 2017. All retail contacts feel that the outlook rests on positive consumer sentiment translating into actual sales. One noted that the movement of consumers away from in-store shopping and towards online shopping is accelerating faster than anticipated. For the first four months of 2017, the hotel occupancy rate for the Boston area was up 0.9 percent from the same period a year earlier, and the average room rate was up 1 percent. However, not including activity at new hotel rooms, the hotel occupancy rate for Boston was effectively flat year-over-year, a marked contrast to the robust annual increases seen over the last six years. At the same time, contacts perceive that, between mid-May and late June, Boston experienced strong tourism activity. The recently concluded Sail Boston event boosted area restaurants in particular. The midyear outlook is that hotels will end 2017 with a net increase in annual revenues, but may not achieve the 5 percent increase in average room rates initially predicted for 2017.
Manufacturing and Related Services
Of the 7 firms contacted, all but one reported higher sales. The exception was a drug company, which attributed flat sales to increased competition. A cardboard box manufacturer reported 10 percent year-over-year growth resulting from increased e-commerce. A manufacturer of sensors reported strong sales growth largely due to demand from the auto industry. A manufacturer of power supply devices reported a major revision to capital spending plans. After many years of reconfiguring existing plants to meet demand, the firm will build a new, highly automated plant in New England, in order to save on labor costs and bring engineers in close proximity to production. The outlook among contacts remains positive but cautious. The drug manufacturer remained uncertain about the prospects for the health care industry, and the sensor manufacturer expressed concerns about slower growth moving forward in the auto industry.
Software and Information Technology Services
Software and IT firms reported year-over-year revenue growth ranging from -2 percent to 10 percent. A data storage and security firm experienced strong revenue growth, spurred by the high cyber-threat environment. A healthcare software provider also had strong year-over-year revenue growth. A manufacturing enterprise software provider had flat revenue, but anticipates increased demand moving forward. Data backup and healthcare IT contacts were optimistic about future growth. Contacts expressed concerns and doubts about the impact of proposed national policy changes on business, and uncertainty related to health care policy was seen as putting a damper on business for health care IT firms.
Commercial Real Estate
Conditions in the First District's commercial real estate markets were mostly unchanged in recent weeks. Office leasing activity remained very light in Hartford and light-to-moderate elsewhere in the District. In Boston, leasing demand remains uneven across submarkets within the city. Investment sales demand held steady across the District, and Boston's premier properties remain in favor among foreign investors. In both Portland and Providence, demand for industrial space exceeds the very limited supply, but the impetus for new construction remains low in light of high construction costs relative to rents. In Connecticut, however, plans were announced for construction of significant new warehouse space. Also, a modestly-sized user-built office building is slated for downtown Portland, and in and around Portland three hotel projects are underway. Contacts expect stable (if slow) leasing demand going forward, as well as ongoing changes in the retail landscape favoring entertainment and services over goods-selling businesses.
Residential Real Estate
Residential real estate markets in the First District headed into the summer with continued upward pressure on prices and depleted inventories. Four of the six First District states reported year-over-year changes to May 2017, while Vermont and the Boston area reported year-over-year changes to April 2017. For single family homes, closed sales were down by moderate margins on average in four of the six states and in the Greater Boston area, but increased by moderate-to-robust margins in Rhode Island and Connecticut. The lower sales numbers were attributed to declines in inventories over the same period rather than weak demand--inventories declined year-over-year in all six states while median sale prices increased by modest-to-robust margins in all states except Vermont, which reported a moderate decline in prices. Pending sales increased in every reporting state but Rhode Island and the Greater Boston area. In Rhode Island, single family home sales posted an all-time high since the association began keeping records in 1998. For condos, closed sales increased in every state but Massachusetts and Maine. In a promising sign for inventories, Massachusetts experienced an increase in new listings for the first time in over a year.
Most contacts seemed optimistic about market activity and continued strong buyer demand, despite the low inventories. Many noted that low unemployment has helped spur consumer confidence, which contributes to demand for residential real estate. Despite the fact that interest rates have increased, contacts noted that rates are still relatively low and that prospective homeowners are eager to buy now before they increase more. Some expressed concern that continued upward pressure on prices will price out first-time home buyers.
For more information about District economic conditions visit: www.bostonfed.org/regional-economy