Beige Book Report: Boston
January 17, 2018
Summary of Economic Activity
Business activity expanded modestly in the First District as 2017 came to a close. Most contacted retailers, manufacturers, and software and information technology (IT) services firms saw revenues increase, although a minority reported flat to slight declines in revenues or sales from a year earlier. Among responding retailers, online sales performed better than in-store sales. Revenue increases among software and IT services firms were strong, ranging from 10 percent to 20 percent year over year. Commercial and residential real estate markets continued much as in the last report, with commercial rents and residential prices increasing in general, while sales were mixed. Labor markets continued to be tight and difficulty in hiring workers has constrained expansion for some firms. Few contacts mentioned price changes. Most responding firms in the region retained a positive outlook for their business.
Employment and Wages
Contacts in many sectors cited tight labor markets, but only modest wage increases, if any. A local retailer said 2018 merit raises would be on the order of 2.5 to 3.0 percent. A restaurant contact said labor shortages continued to constrain the industry. Only one manufacturing contact reported significant increases in employment and many said labor markets were very tight. One manufacturer was three months behind schedule in trying to hire workers for a new plant. Another industrial firm had 20 unfilled openings in a plant with 100 employees and said they were making up for it with significant overtime. When asked why they didn't increase wages to fill the openings, the contact said they would have to pay all the existing workers more which would be uneconomic. Another industrial-firm contact said that when a worker leaves, they typically end up paying the replacement 10 percent more than the departing worker. Software and IT services contacts have kept headcount close to flat in recent months, though they plan to increase staff by up to 10 percent during 2018. These contacts noted that shortages for technical roles such as engineers were getting worse.
Prices
Price movements were somewhat mixed. Retailers reported that prices remained steady. Some manufacturers noted input price increases, but most appeared to be idiosyncratic (new environmental regulations in China limiting supply, for example). Manufacturing firms said they had some ability to pass through cost increases to their customers.
Retail and Tourism
Retail respondents for this round reported that from mid-November through early January, year-over-year comparable-store sales remained flat or posted low-to-middle single-digit increases. For contacts concluding their fiscal year, 2017 comparable-store sales increased by about 2.5 percent from 2016, though some firms, due to business expansion, saw overall sales revenue increase by double digits. Sales via online channels have expanded faster, and contacts said they planned to invest in information technology supporting the growth of data analytics and e-commerce channels in 2018; some view an online presence as an increasingly critical complement to their traditional brick-and-mortar stores, even as they continue to plan on opening new store locations. The outlook for 2018 is generally optimistic.
A contact in the Massachusetts restaurant industry reported that year-over-year restaurant sales ranged from flat to up 2 percent. Net margins have narrowed and restaurant contacts said that new business expansion is likely to be very subdued in 2018.
Manufacturing and Related Services
Of nine firms contacted this quarter, five reported higher sales versus the year-earlier period, two reported flat sales and two lower. Of the firms with improved sales, most said it was a continuation of recent trends. A manufacturer of industrial parts said that sales had finally recovered to their 2014 peak; the fall in oil prices that started in 2014 had led to a big slowdown in sales to extractive industries. To date, most of their recent growth comes from replacement parts. A manufacturer of toys said that sales in the holiday period were lackluster. The weakness was partly due to the fact that there was only one blockbuster movie with tie-in potential but, in addition, the contact cited uncertainty among consumers, particularly regarding tax reform. No contacts reported major revisions to capital spending plans.
In general, manufacturing respondents continued to have a broadly positive outlook. No contacts expected the just-passed tax reform package to have a big effect on investment. Two said that tax reform would mainly benefit shareholders. One suggested that the reduced deductibility of state and local taxes would lead them to increase pay in high-tax states to compensate workers. A firm that provides support to financial services firms expected an increase in demand for tax-related services as firms try to manage the changes in the code.
Software and Information Technology Services
Tech contacts in the First District are doing well on the whole, with strong demand across the board and revenue growth between 10 percent and 21 percent year-over-year, excepting one enterprise software firm which has been struggling of late. Even that firm has a healthy outlook. All respondents identified software and technology as a strong space to be in, and anticipate growth from 5 percent to 20 percent over the foreseeable future. Multiple contacts noted particular strength in recent cloud and browser-based offerings, as companies continued to embrace newer technologies. Multiple contacts also indicated that the new tax legislation would help their business, though only as a one-time boost.
Commercial Real Estate
Contacts reported that commercial real estate markets ended the year on a relatively high note. Leasing activity held roughly steady in recent weeks, with deals proceeding mostly as expected. In the Portland area, office and industrial rents increased 10 percent on a year-over-year basis, while retail and apartment rents were roughly unchanged over the same period. Also in Portland, however, transactions volume for both leasing and sales was down in 2017 as a result of low vacancy rates and low sales inventories. In Boston, office rents edged up further in recent weeks and significant absorption of office space was seen in the Seaport and Back Bay neighborhoods. In Providence, office rents started to increase in recent weeks amid an increasingly tight vacancy environment. Contacts in all three of these metro areas expressed uncertainty concerning the impetus for new office and industrial construction in 2018, but nonetheless expect some. On the one hand, vacancy rates in both of these sectors are low by historical standards and rents are on the rise, but on the other hand construction costs are described as very high, a fact attributed in part to a tight market for construction labor. A Boston-area contact noted that some apartment construction projects are taking longer to complete than anticipated because of worker shortages. Contacts were generally cautiously optimistic about 2018.
Residential Real Estate
Heading into the end of the year, residential real estate markets in the First District showed slight to moderate increases in sales and ongoing struggles with inventory. (Data for all six states refer to changes from November 2016 to November 2017, while Boston data were for October-to-October changes.) For single family homes, closed sales increased in all reporting areas except Connecticut. For condos, closed sales increased in all areas. As usual, shortage of inventory prevailed and contacts expressed concern that short supplies will hurt the market in the long run.
Median sales prices increased across the region, with the exceptions of Connecticut for single family homes and Vermont for condos. Despite high prices, contacts expressed confidence about the residential outlook. However, many contacts indicated that new legislation passed by Congress could discourage homeownership, as shrinking the cap on the mortgage interest deduction for primary homes and the loss of most deductions for interest on home equity loans will increase costs for most property owners.
For more information about District economic conditions visit: www.bostonfed.org/regional-economy