Beige Book Report: Boston
April 18, 2018
Summary of Economic Activity
Economic activity continued to expand at a moderate pace in the First District, with almost all retail, manufacturing, and software and information technology services respondents citing year-over-year increases in sales and revenues since the last Beige Book. Commercial real estate contacts reported mostly positive results while residential real estate markets again saw sales declines in some areas accompanied by price increases, a combination contacts attributed to very low inventories. With some exceptions, headcounts, wages, and prices were said to be rising modestly. Notwithstanding a few manufacturers' concerns about tariffs, outlooks remained generally positive.
Employment and Wages
Selective net hiring continued; contacts said wages were rising, but not steeply. With one exception, responding retailers are hiring or planning to hire new workers, mainly due to business expansion. Some restaurants and regional chambers of commerce have been proactive in trying to attract foreign workers to fill positions during the summer tourist season. All but two manufacturing contacts reported flat employment; firms were hiring, but largely for replacement. Nonetheless, several respondents reported the labor market was extremely tight; skilled workers continued to be in short supply and one contact said that they were having trouble finding "moderately skilled labor needed to manage the mostly automated production equipment." Software and IT services contacts were planning on zero to 5 percent increases in headcount during 2018 and expressed concern with the tight labor market for technically skilled workers such as engineers. Regarding wages, one retailer said it had to pay higher starting wages in New Hampshire, which has the region's lowest unemployment rate, than elsewhere in New England. Wages in the region's software sector increased 3 percent to 5 percent across the board.
Prices
Many respondents cited modest to moderate price increases; a few noted steeper jumps. While other vendor prices were reportedly steady, two retail contacts indicated that food prices were starting to increase. A Massachusetts restaurant-industry contact reported that menu prices were up about 2.6 percent over the year because of higher labor and food costs. Manufacturing contacts reported flat or slightly increasing prices for both the goods they buy and the goods they sell. One manufacturer and one retailer said that shipping costs were rising rapidly, which both attributed to a shortage of truck drivers. Two software and IT services firms were able to pass through price increases without any backlash; an online backup company increased prices on individuals by as much as 20 percent.
Retail and Tourism
Retailers consulted for this round reported that between late February and early April, year-over-year comparable-store sales results were positive, with gains ranging from 1 percent to 5 percent. Most noted that multiple severe winter storms in the northeast dampened sales--one contact calculated that in the absence of weather disruptions, this period's results would have been 1.5 percentage points higher than the 2.5 percent reported. A Massachusetts restaurant-industry contact reported that business was up about 2.5 percent year-over-year. Retail contacts regarded the outlook for 2018 as positive based on currently high levels of consumer sentiment.
A contact in the Connecticut auto industry reported that vehicle sales in the state were softer than the nation's, possibly because the state's employment and population growth have been weak. Nonetheless, given Connecticut's generous incentives, electric vehicle sales have continued to rise.
Manufacturing and Related Services
Of seven firms contacted this cycle, only one reported a year-over-year decline in sales and four reported higher sales versus the same period a year ago. A furniture maker said that sales were up 25 percent versus the same period a year earlier, a major turnaround from years of weak sales growth which they attribute to "an improved emphasis on marketing." One of the other firms reporting higher sales, a textile and chemical manufacturer, indicated sales had fallen over the last twelve weeks but were still up versus the period one year earlier. Two contacts reported flat sales versus a year earlier, both for idiosyncratic reasons; for example, a producer of frozen fish attributed their flat sales to Lent occurring earlier than usual. A toy and game manufacturer reported lower sales due to the liquidation of a major toy retailer, which they see as a temporary setback. No contacts revised their capital expenditure plans recently.
In general, respondents were optimistic in their outlook. However, two contacts brought up the proposed China tariffs and said they represent a major risk. One was a toy manufacturer who sources 75 percent of their production from China. The second said that punitive tariffs on Chinese aluminum had already had a big effect: "Thin gauge foil" is produced only in China and tariffs raised the price three-fold; the contact argued that "these tariffs are now killing high-paying American manufacturing jobs and businesses."
Software and Information Technology Services
The software and IT services sector continued to be healthy in the first quarter. Revenues at contacted firms grew 1 percent to 10 percent year-over-year in the first quarter. Demand was strong for cloud-based solutions, healthcare and industrial IT software, and enterprise software for building apps. Contacts did not note significant changes in the costs they were facing aside from labor. The overall outlook was positive.
Commercial Real Estate
Reports from First District commercial real estate contacts were mixed, but positive on balance. Office leasing demand remained strong in Boston, especially in the urban core, leading to further increases in rents. Providence saw stable, healthy office leasing activity and modest upward pressure on rents. Office leasing remained slow in the Portland area and weakened further in Hartford. Industrial and warehouse space enjoyed robust demand in most of the First District, with the exception of Connecticut. A Portland contact reported that industrial rents in that city increased 20 percent from a year ago in response to demand from diverse users including small manufacturers, while a Boston contact said that demand for retail fulfillment centers had driven up industrial rents in the Boston metro area.
Nonetheless, contacts say that both industrial and office construction have been restrained by the fact that building costs remain high relative to rents. Multifamily apartment construction was expected to slow moving forward amid slower or flat rent growth in most areas. By contrast, condominium development activity increased in both Boston and Portland. Investment sales activity was stable at a slow to modest pace depending on location. Two Boston contacts perceived small increases in capitalization rates for office properties that were seen as consistent with increases in interest rates. Commercial real estate contacts were optimistic on balance.
Residential Real Estate
Heading into spring, residential real estate results in the First District continued to reflect sellers' markets. Closed sales for single family homes and for condos were up in Maine, Vermont, and Rhode Island, while other areas experienced moderate decreases. (Vermont reported combined results for single family homes and condos. All First District areas but Connecticut reported changes from February 2017 to February 2018; a technical issue caused December 2017 to be the most recent data from Connecticut.)
Because of ongoing inventory shortages, all reporting areas but Vermont reported increases in median sale prices for both single family homes and condos. A contact from Maine pointed out that negotiations over multiple offers may be fueling higher median sale prices: "multiple-offer situations [are] happening on a regular basis, especially on properties at $250,000 or less." Inventory dropped by double-digit percentages year-over-year across all area markets. A contact in Massachusetts noted that "inventory is so low and demand so high that many low- and moderate-income home buyers are being left on the outside looking in."
Notwithstanding the prospect of rising interest rates, contacts cited eager buyer populations and were optimistic about activity levels in coming months.
For more information about District economic conditions visit: www.bostonfed.org/regional-economy