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Beige Book Report: Boston

April 19, 2017

Summary of Economic Activity
Business activity continued to expand in the First District in recent months, with the year-over-year pace of increase said to be modest to moderate. Most responding retailers and all contacted manufacturers and software and information technology services firms reported increases in revenue from a year earlier when contacted in early April. Commercial real estate markets were somewhat mixed in the region. Residential real estate markets across the region saw price increases and sales declines in February compared with a year earlier, which contacts attributed to low inventories. Across sectors, hiring was reportedly modest as were wage increases, while many respondents cited difficulty filling a range of positions. Retailers and manufacturers said some selling prices were up modestly. Most responding firms cited a positive outlook amid some ongoing policy uncertainty.

Employment and Wages
Labor markets in the First District continued to tighten somewhat. Many employers sought to add modestly to head counts (although one manufacturer laid off about 4 percent of staff over the last year), while wage increases were modest. Some smaller retailers noted increasing labor costs, in part driven by increases in state minimum wages being implemented over a multi-year period. Restaurant contacts, particularly in heavy tourism regions, expressed concern about possible labor shortages this summer, exacerbated by an expected slowdown in granting H-2B visas. Half of contacted manufacturers were hiring, though none in large numbers; several firms said it was hard to find workers. One respondent said that during a recent six-month attempt to add to staff for a new product, two-thirds of applicants for assembly line jobs were screened out before hiring via math tests and drug tests; of 400 workers hired, only 180 worked out. All software and IT services respondents said they expect to grant wage increases in the low single digits and plan net increases in headcount between zero and 3 percent through the end of the year. They reported that high-skill positions such as engineers and data scientists were increasingly hard to fill, and covering attrition remained a challenge in both technical and unskilled areas; for example, one contact noted difficulty covering very high attrition in a Maine call center.

Prices
Business contacts reported modest price increases, if any. Retailers said prices remained steady or were up by only small amounts. Restaurant respondents said their ability to raise menu prices to offset higher labor costs was limited by declines in grocery store prices. Pricing reports from manufacturers were mixed: six of ten contacts said that input prices had not changed; the others generally cited idiosyncratic factors causing price increases. Most manufacturers reported increases in the price of the goods they sell but such increases were not large.

Retail and Tourism
Retail contacts consulted for this round reported that comparable-store sales between mid-February and the end of March ranged from slightly down to mid-single digit increases from a year earlier. Some brick and mortar stores have seen a drop in customer traffic, but this was balanced by increases in the average sale amount. The outlook for 2017 is generally optimistic.

A contact in the restaurant industry reported that Q1 sales, when tallied, should be up 1 percent to 2 percent over last year, helped by the relatively mild winter. Respondents said expected visa reductions and limited ability to raise prices augmented uncertainty about the outlook, acting as a check on their plans for expansion.

Manufacturing and Related Services
All ten contacted manufacturers said sales were higher in recent periods versus the comparable period a year ago. Reports ranged from growth that was slow and below expectations for a data and publishing firm to "tremendous growth" for a packaging firm. The latter firm said that increased e-commerce was driving increases in demand for boxes for mailing. Otherwise, firms reported sales growth that was in line with expectations.

Most contacts reported that capital expenditures were confined to maintenance of existing equipment. Two exceptions were a chemical manufacturer looking for a site for a new plant, having exhausted the avenues of acquisition and more intensive use of existing facilities they used during the great recession, and a manufacturer of jet engines which continued to invest large amounts in a new product line.

Several contacts expressed concerns about policy uncertainty. A manufacturer of test equipment which exports a significant portion of its production worried about trade deals. Firms said that a Border Adjustment Tax would have mixed effects but hoped for some resolution.

Software and Information Technology Services
Firms experienced revenue growth in the range of 1 percent to 20 percent year-over-year, and even the 1-percent-growth firm saw "incredible" new orders in the first quarter. While health care and health services are generally strong in New England, multiple contacts indicated that business sentiment turned positive lately, bolstering firms that serve more cyclical industries, such as manufacturing and industrial IT.

All contacts were optimistic. One contact expressed concern that continued legislative struggles could put a damper on business confidence in the future, and another noted that hostile immigration policy could further tighten labor markets for skilled and unskilled labor.

Commercial Real Estate
Reports on commercial real estate activity in the First District were mixed. Contacts in Boston and Hartford reported a modest softening of commercial leasing activity in recent weeks, while activity was reportedly stable in Portland and somewhat stronger in Providence. In Connecticut the weaker activity extended to both the industrial and office sectors. In Boston reports of slower demand pertained to the urban office sector, which still enjoyed a single-digit vacancy rate. Investor demand for prime Boston properties remained strong but price appreciation slowed further.

Office construction activity continued to be restrained across the District. Apartment construction activity remained significant but the pace of new deliveries slowed and the pipeline of planned projects contracted somewhat amid evidence of slowing rent growth. Respondents noted that borrowing rates for commercial property loans were flat despite recent increases in short-term rates. Most contacts expect further improvements in their respective commercial real estate markets moving forward, but likely at a slower pace. A Hartford contact was somewhat less optimistic, citing drags on growth related to severe fiscal strain in his state, while a Providence contact was more upbeat, based on signs that business confidence in Rhode Island had improved recently.

Residential Real Estate
Residential real estate markets in the First District continued to struggle with a shortage of inventory. All six First District states as well as the Greater Boston area reported large declines in inventory for both single-family homes and condos from February 2016 to February 2017. Closed sales also declined in every state and Boston for single-family homes. Results for condos were mixed, with closed sales increasing in New Hampshire and Vermont but decreasing elsewhere. Respondents ubiquitously reported strong buyer demand. A contact in Boston said: "Sales could have been much stronger had the inventory been up. Unfortunately, we've noticed that potential sellers have become more reluctant to list their homes because they are apprehensive that they may not be able to find another home themselves."

Given the robust demand and low inventory, contacts were not surprised that prices generally rose year-over-year. For single family homes, median sales price rose in each state except Connecticut. For condos, prices rose in all reporting regions. A New Hampshire contact said the low inventory situation and rising prices were "particularly hard on first-time buyers struggling to get into the market." In general, contacts saw no remedy for ongoing declines in inventories. Most were confident, though, that buyer demand would stay strong, even in the face of increasing interest rates.