Beige Book Report: Boston
July 14, 2021
Summary of Economic Activity
First District contacts reported solid increases in demand and modest gains in employment. Retail sales remained elevated, about on par with first quarter results. Air travel through Boston improved steadily in recent months and Cape Cod tourism contacts saw further gains. Manufacturing sales improved moderately in recent weeks despite ongoing supply disruptions. Software and information services firms reported strong gains from the first quarter, although sales at one firm remained down from one year earlier. Commercial real estate markets improved further, led by robust industrial leasing and sales activity and impressive gains in retail leasing. Residential real estate markets remained strong as over-the-year results were little changed. Employment rose modestly and wage increases were mixed. Reports of robust price increases became more common. The outlook remained cautiously optimistic and prospects for office leasing appeared less bleak.
Employment and Wages
Labor demand strengthened moderately, and wage pressures increased, while employment increased modestly. A few manufacturing contacts described the labor market as tight for all skill levels, and one perceived that unemployment insurance held back the participation of unskilled workers. Nonetheless, a life sciences manufacturer resumed a plan to add hundreds more workers in 2021 following the resolution of regulatory uncertainty, and a food producer is adding a new production line and said that hiring difficulties and wage pressures had eased. Retail contacts experienced difficulty finding workers despite having implemented wage increases of $1 to $2 per hour. Software employment remained steady over the quarter, with turnover at average or below-average levels. One software contact engaged exclusively in replacement hiring while awaiting further information on demand, while two others described substantial hiring plans. Wages at software firms increased at their usual annual pace, but one firm felt that larger wage increases would be necessary moving forward in order to meet hiring goals.
Prices
Price increases were robust on balance despite flat prices at software and IT firms. Three manufacturing firms planned to raise prices in 2021 and one raised prices in 2021Q2, by margins of 8 to 10 percent; another said that moderate price increases were possible in 2021 but uncertain. The price increases reflect a response to large ongoing cost pressures and the perception that consumers will tolerate them. A food manufacturer reported a 12 percent increase in input prices over the year and a packaging manufacturer saw an 8 percent increase in paper pulp just since the first quarter. One contact said that ocean container prices were back up to the extreme heights seen in the winter after having fallen in the spring. Increased freight costs were noted by manufacturers as well as retailers. A furniture retailer raised prices nearly 10 percent in recent months and a total of 20 percent over the year. Software contacts reported flat prices, consistent with their business models which allow only infrequent price changes.
Retail and Tourism
Retail sales at First District contacts stayed at high levels through the second quarter but were roughly even with first quarter results. At a furniture retailer, sales volume was up roughly 25 percent from 2019, which nonetheless fell slightly short of the pace of first quarter sales. The same retailer faced delays in receiving goods and difficulties hiring sales associates and warehouse workers. A clothing retailer said that sales in recent months remained up 30 percent over pre-pandemic levels, owing to continued strength in online sales, representing stable results since their last report.
Travel industry respondents reported that air travel through Boston increased substantially in recent months. Compared with the comparable months from 2019, passengers were at 40 percent as of April 2021, at 45 percent as of May, and are expected to surpass 50 percent in June and July. The recovery in international and business travel was comparatively weak, however. Hotel bookings, occupancy rates, and room rates on Cape Cod held steady or improved further in a record-breaking spring season. Restaurants and small retail shops on the Cape also reported surging sales. Aside from potential problems related to ongoing labor shortages, retail and hospitality contacts remained optimistic that the summer would continue to yield very strong results.
Manufacturing and Related Services
Manufacturing contacts saw moderate growth amid ongoing supply disruptions. Three contacts—a food producer, a manufacturer of industrial membranes, and a semiconductor manufacturer—said that second quarter sales exceeded their expectations. The semiconductor contact said that the enormous increase in demand for their products from a year earlier derives from end users and not from either hoarding or depressed sales during the pandemic—the example cited was increased demand for car safety features which require semiconductors. Firms did not report any major revisions to capital expenditures. Contacts experienced further moderate-to-steep cost increases that were mostly attributed to supply chain disruptions. Firms continued to be optimistic but made no major revisions to their outlooks, and they did not expect supply disruptions to ease before the end of 2021 and maybe even later.
Software and Information Technology Services
Software and IT contacts in the First District reported moderate-to-robust improvements in sales. One contact said that customers saw value in their company's cloud-based products after witnessing their usefulness during the pandemic. Revenues at one firm remained lower on a year-over-year basis, but that performance nonetheless reflected a moderate improvement over the previous quarter, and others reported robust acceleration in year-over-year performance. Most contacts were cautiously optimistic for stable or improving sales moving forward, but one maintained an uncertain outlook given the possibility of a resurgence in COVID-19 cases later in 2021.
Commercial Real Estate
Commercial real estate markets in the First District remained mixed but showed modest improvements on balance. The industrial market still had very strong leasing demand and industrial rents posted further modest increases amid very low vacancy rates. Industrial sales continued to grow, and capitalization rates fell to new lows. In the greater Boston area vacancies for life sciences space edged close to zero amid substantial ongoing construction activity. Industrial and multifamily construction gained strength, but contacts perceive that construction activity in those sectors would be more robust if not for surging construction costs and tight labor markets. A contact from Maine reported a robust increase in office leasing demand, but elsewhere office demand was roughly flat and effective rents softened slightly. Office vacancies were stable in Connecticut and Maine, up in Rhode Island, and down somewhat in the Boston area. Retail leasing improved sharply in Maine and Rhode Island, in part for seasonal reasons, although rents were seen as flat or down slightly. Loan rates for industrial and multifamily properties fell a further 25 basis points as banks sought to shed cash. The outlook improved somewhat, as contacts expected further growth in retail leasing and forecasted smaller declines in office footprints through early 2022 than they had in previous reports.
Residential Real Estate
New England's residential real estate markets were mostly stable amid a high-demand, low-inventory environment that has persisted for some time. Connecticut data were unavailable. Closed sales increased substantially over the year to May in all reporting areas, but the numbers largely reflect the pause in market activity in May 2020 due to COVID-19. For the condo markets in Rhode Island, New Hampshire, and Maine, May's results indicate a deceleration in sales activity from April, but condo sales in Massachusetts and Boston increased substantially from the last report. Single-family home inventories did not improve but Boston condos again saw a slight year-over-year increase in supply. Median sales prices increased over-the-year by double-digit percentages, representing little change from the previous report for single family homes and a slight acceleration for condos. The Massachusetts and New Hampshire contacts perceived that low mortgage rates fueled demand. Three contacts mentioned the need for new construction to satisfy demand, but they acknowledged that high construction costs could add further upward pressure to prices. The Massachusetts contact is hopeful that, as pandemic restrictions ease, supply chain challenges will be resolved, and construction costs will fall.
For more information about District economic conditions visit: www.bostonfed.org/regional-economy