Beige Book Report: Boston
November 29, 2017
Summary of Economic Activity
Business activity in the First District continued to expand at a modest to moderate pace in recent weeks. With a few exceptions, contacted retailers and manufacturers cited positive growth in sales or revenues. Most responding staffing firms also realized revenue gains, even in the face of limited available labor. Commercial real estate markets were said to be largely unchanged, with growth sectors and levels of activity varying across metro areas in the District. Most residential real estate markets in the region continued to be constrained by low inventories of homes for sale; meanwhile, median sales prices rose in five of the six New England states. Retailers and manufacturers retained positive outlooks about the US economy and customer demand.
Employment and Wages
Respondents said hiring has generally been modest, partly because of short supplies of labor, and wage increases were becoming somewhat more widespread. A couple of retail contacts expected to offer 2018 merit raises on the order of 2 percent to 3 percent; retailers were hiring only in connection with new store openings. Only two manufacturing contacts reported significant hiring, both in semiconductor-related markets. A maker of testing equipment said that they were hiring mostly outside the United States; another indicated that salaries were rising significantly only for engineers who remain difficult to hire and retain. At staffing firms, bill rates and pay rates have reportedly begun to rise at a faster pace, and clients were offering more generous signing bonuses, paid leave, and other perks to attract talent.
Prices
Business respondents indicated little change in prices or pricing practices. Retail contacts reported that selling prices mostly remained steady, though some items saw moderate 1 percent to 3 percent increases. None of our manufacturing contacts reported notable pricing strength or weakness.
Retail
Retailers reported that sales in October through mid-November remained even or grew by mid-single-digit percentages compared to a year earlier. These increases principally came from new store openings or new business ventures, as year-over-year comparable-store sales were characterized by low single-digit decreases or growth of less than 1 percent. A couple of retailers said that weather conditions, both the hurricanes in the southeastern United States and warmer-than-usual fall weather in the Northeast, contributed to these modest comparable-store results. However, they also said the results were indicative of larger shifts in the US retail environment, along with changing demographics: Baby Boomers are now at ages when they spend less on consumer goods like clothing and housewares, while younger adults are more apt to shop online rather than in stores. A competitive retail environment has also taught consumers to wait for sales, such as the discounts offered on Black Friday and pre-Black Friday promotions.
The holiday season is expected to help bolster year-end revenues so that final fiscal year results show positive growth in the low single digits. Despite the challenging US retail environment that is prompting at least one contact to take a more conservative stance in 2018, most respondents said the US economy is strong and this factor, combined with high employment and healthy labor markets, will encourage consumer spending.
Manufacturing and Related Services
Of the eight firms we contacted this cycle, six reported year-on-year sales growth in the most recent quarter. The two exceptions were a furniture company which suspected that the weakness was largely seasonal and a paper manufacturer which said that sales were flat and that significant marketing was required to avoid declining sales. Three semiconductor-related firms reported strength. One of our contacts in that industry said that demand growth had previously been confined to the auto industry but that in recent months, other parts of their market expanded. A manufacturer of testing equipment said that most of their demand growth came from Europe, especially Germany, and that US growth was slowed by the hurricanes. A manufacturer of veterinary supplies said that people were willing to spend more and more on their pets. Two firms reported upward revisions to their capital spending plans, but both described them as idiosyncratic to the firm.
All the manufacturing respondents were optimistic about 2018. A maker of semiconductor equipment said that the industry may reach the peak of its cycle relatively soon.
Staffing Services
New England staffing firms reported mixed results in year-over-year revenue growth, with the majority of respondents achieving positive growth. All firms remarked heavily on the sparse supply of labor and increased search cost in locating talent while noting that labor demand remains very strong across the board. Health and tech jobs were reportedly particularly difficult to fill. Several also noted that increasing options for job seekers were resulting in more declined job offers and putting pressure on hiring firms to improve their packages for prospective employees. Most are devoting resources to improving their recruitment, both in technological efficiency and increased advertising, looking for new ways to reach potential hires. Contacts expressed some concern over uncertainty in health insurance markets, local minimum wage increases, and potential changes in the federal tax code, and what these would mean for the labor market.
All respondents expected tight labor market conditions to continue into 2018, and most saw a more challenging market for staffing firms with increased competition for the remaining labor supply.
Commercial Real Estate
According to contacts, commercial real estate fundamentals in the First District were mostly flat in recent weeks amid mixed leasing activity. Office leasing activity stayed light in Hartford and Portland and moderate in Providence, while robust activity was seen in downtown Boston. Class A office space has become quite scarce in Providence, resulting in competition among tenants and upward pressure on rents. Buyer demand for warehouse and industrial space remained strong throughout the region, but (except for one large transaction) sales were restrained by lack of inventory. There were signs of an uptick in condominium development activity in greater Boston, along with further moderation in apartment construction. Investment sales demand in Boston held steady or softened slightly, and prices for prime properties held steady. Office construction remained limited in New England, while construction by medical and educational institutions continued to strengthen, and in the Portland area hotel construction increased further. Most contacts expect either steady or improving fundamentals moving forward, but the outlook remained weaker for Hartford than for other major metro areas in the District.
Residential Real Estate
Residential real estate markets in the First District continued to struggle with dwindling inventory and appreciating home prices (September prices constitute the most recent data in five of the seven areas, while New Hampshire and Vermont reported October-to-October changes). Closed sales for single family homes decreased in all areas but Maine and Vermont. For condos, closed sales were down in Massachusetts, Boston, and Connecticut, and up elsewhere.
As usual, many contacts cited upward pressure on prices as an issue resulting from the shortage of inventory. For single family homes, the median sales prices were up in all areas but Connecticut. Condo prices displayed a similar upward trend, except in Boston and Vermont.
Residential contacts expressed concern about the possible impact of the tax reform bill in Congress, which they feared could increase the cost of buying a home and disrupt the housing market.
For more information about District economic conditions visit: www.bostonfed.org/regional-economy