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Beige Book Report: Boston

October 18, 2017

Summary of Economic Activity
Most business contacts in the First District reported modest to moderate year-over-year revenue increases in recent weeks. Both retailers and manufacturers cited sales and revenue improvements and most software and information technology services firms reported strong results. Commercial real estate conditions in the region were reported to be unchanged from the last report, with office leasing activity steady, albeit at different paces in individual markets. Residential real estate contacts also cited little change, with low inventories and rising home and condo prices. Most firms said they were doing only modest net hiring, although some raised wages. Manufacturing firms mentioned price increases somewhat more often than in the recent past. Firms in the District retained a positive outlook.

Employment and Wages
Most First District business contacts reported little change in regional labor markets. Some retailers reported that they have raised their wage offers somewhat in order to attract new hires. All manufacturing contacts said that employment grew in line with expectations; in most cases, that meant that employment did not grow by much. A tech contact selling online backup solutions was aggressively hiring. Other software and IT services contacts were hiring in the low single-digit percentages; all noted the labor market for technical positions remained tight globally, and particularly in New England.

Contacts reported some price increases this round. Retailers indicated that prices for goods remained steady, though one contact in the hardware industry said that paint prices had recently gone up 5 percent. Several manufacturing contacts reported price increases. A packaging firm recently raised prices 10 percent; they also reported an 8 percent to 10 percent increase in material costs over the year, although they said that materials prices remained well below levels from a few years ago. A chemical manufacturer said customers accepted a price increase more easily than expected. A manufacturer of frozen fish said it had reduced discounts.

Retail and Tourism
All responding retailers reported that sales improved over the last six weeks. Whereas previous reports sometimes cited flat or negative year-over-year results, contacts this round reported year-over-year comparable-store gains in the 2 percent to 4 percent range. Consumers reportedly spent on clothing, furniture, and home improvement items. Contacts were generally optimistic that the recent positive sales trend would continue through the end of the year.

The most recent year-over-year results for the tourist industry run through August: compared to 2016, international air travel to Boston increased 11 percent; in total, domestic and international air travel to Boston rose 6.2 percent. Hotel occupancy rates for August were 1 percent higher in the Boston area than a year earlier, while the average monthly room rate was up almost 3 percent year-over-year. This strong performance alleviated some previous concern that a slower trend in tourism during the first half of the year would continue into the high summer-fall travel season. A tourism contact noted that hotels are facing increasing competition from alternative lodging sources, which may partly account for a slight drop in 2017 year-to-date occupancy rates. However, this contact hypothesized that the options offered by non-traditional lodging services may appeal to leisure travelers who are more sensitive to price, and that a traditionally expensive destination like Boston could see an overall increase in tourism as a result.

Manufacturing and Related Services
Based on an unusually low number of respondents this round, 60 percent of manufacturing firms reported higher sales in line with expectations. One contact reported a decline driven mostly by disruptions in its chemical business due to the hurricanes; specifically, a plant delivering a key input was destroyed by Hurricane Harvey and the firm temporarily shifted its sourcing to costlier South American sources. A toy manufacturer also reported some hurricane-related problems related to plastic supply. Neither firm expected any long-term effects from the Hurricane. A company that produces packaging used by Internet retailers reported strong sales growth although lower than in comparable periods in recent years. None of our contacts reported any revisions to their capital expenditure plans.

All responding firms reported a positive outlook with only small revisions from previous rounds. A toy manufacturing contact said they were less optimistic than when they last spoke to us, but still optimistic.

Software and Information Technology Services
Software and IT services respondents serving the healthcare and health devices industries continued to thrive in New England. A healthcare IT firm converted strong demand for new browser-based offerings into 17 percent revenue growth year-over-year. Firms providing IT for manufacturing and online backup experienced low- to mid-teen revenue growth year-over-year. Demand from manufacturing and business customers continued to firm in this quarter. An enterprise software contact continued to struggle, with revenues down 5 percent year-over-year; however, the contact maintained that their market was healthy and demand was steady--their struggles were largely internal.

All contacts were optimistic about the future. The only potentially negative factor was uncertainty surrounding the health care landscape in Washington.

Commercial Real Estate
Commercial real estate contacts in the First District reported that conditions were mostly unchanged since late August. Office leasing activity was steady across the District, but still at a very slow pace in Hartford and Portland and at a decent pace in Providence and Boston. Medical office leasing and related construction gained momentum in Maine. Demand for industrial space remained strong throughout the District, resulting in increases in sales prices and rental rates compared with last year and a modest amount of new construction activity. Investment sales activity in Greater Boston softened a bit amid a modest decline in foreign capital flows, but prices for premier commercial properties in the area reportedly held steady. Also in Greater Boston, apartment construction slowed amid a perceived oversupply of luxury units. Modest increases in loan defaults were reported for retail centers in Maine and for obsolete office buildings in Connecticut.

Contacts expected that commercial real estate activity would at least hold steady moving forward. Some noted downside risks related to potential further increases in interest rates and to proposed federal tax changes.

Residential Real Estate
Heading into the fall, residential real estate markets in the First District faced continuous upward pressure on prices. (All six states and the Greater Boston area reported changes from August 2016 to August 2017.) For single family homes, five out of the seven reporting areas reported increases in closed sales, while Massachusetts and Boston experienced moderate decreases. For condos, closed sales were up in New Hampshire and Rhode Island; other reporting areas experienced no change or decreases. Rising median sales prices were reported throughout the First District. According to a contact in Rhode Island, "Prices have been consistently on the rise, hitting levels that we haven't seen since 2007."

Most areas are still struggling with inventory shortages. Except for Connecticut, all areas reported decreases in inventory for both single family homes and condos. Contacts expressed different outlooks on inventory, with those in Massachusetts concerned that shortages were likely to continue.

Looking forward, contacts maintained a positive outlook for substantial demand and stable economic indicators. Respondents said they expected especially strong demand for fully renovated houses and for homes on the lower end of the price spectrum.

For more information about District economic conditions visit: www.bostonfed.org/regional-economy