Beige Book Report: Boston
May 30, 2018
Summary of Economic Activity
First District economic activity continued to expand at a moderate pace, with all responding retailers and manufacturers citing year-over-year increases in sales and revenues in recent periods; nearly all staffing firms also reported revenue growth. Residential real estate markets saw price increases and mixed sales results, still largely attributed to very limited inventories of homes. Commercial real estate markets were mostly improved since the last report, or at least steady. Some firms, including staffing firms, cited pick-ups in wages; most noted ongoing difficulty finding workers. One retailer cited vendor-price increases of about 3 percent, which they intended to pass along to customers; manufacturers noted no unusual price pressures although some were concerned about future effects on prices of tariffs or other changes in trade policy. Outlooks continued to be positive.
Employment and Wages
Many responding firms have done some hiring; most reported tight labor markets and modest increases in pay. Retail contacts reported that labor supply is tight for some skills, like IT, and in some regions. All contacted manufacturers were hiring or maintaining current levels of employment; they said hiring was not unusually difficult. A contact in the semiconductor industry said the firm was giving 6 percent raises to engineers and 3 percent to the rest of the staff. A contact in industrial distribution said that finding salespeople was hard, while a milk producer said truckers were in short supply. All staffing-firm respondents reported increased labor demand across industries and occupations stemming from both new job creation and increased vacancies from job switchers. Labor supply continued to present a challenge to most staffing firms, increasing search costs and leaving many unfilled jobs. All staffing contacts said that both bill rates and pay rates were rising significantly.
Most respondents reported modest upward movements in prices. One retail firm, which noted that prices were largely flat in 2017, reported recently seeing higher prices from manufacturers and wholesalers that it is passing through as higher retail prices; the increases averaged 3¼ percent. Most of these vendor price increases were attributed to higher steel prices and to high oil prices. Two retail contacts specifically noted that higher fuel prices and a shortage of truck drivers were contributing to higher shipping costs. Manufacturing contacts did not report any unusual pricing pressure. Even a contact who said that his firm was having trouble finding components said that although prices were up, there was no gouging. Contacts expressed concern about tariffs, with one manufacturer saying he expected prices of certain inputs to rise 15 percent to 20 percent.
Retail and Tourism
Retail contacts consulted for this round all reported year-over-year gains in their most recent comparable-store sales, with growth ranging from mid-single-digit to double-digit increases. Some contacts reported that in-store customer traffic continued to decline, while online and e-commerce sales were up. Nonetheless, the retail outlook was positive, with firms reporting that they plan to continue to make multiyear investments in their businesses.
A contact in the travel industry reported that Boston's Logan International Airport continued to see robust increases in passenger counts. Scheduled airline seats increased year-over-year in recent months and total passenger traffic was up 4.1 percent in 2018:Q1 compared with 2017:Q1, with domestic passengers increasing 4.6 percent and international traffic up 1.5 percent. Cruise traffic in Boston has also increased significantly, both as a home port and as a port-of-call. The outlook for tourism to Boston and New England was reported to be bullish.
Manufacturing and Related Services
All eight responding manufacturing firms reported higher sales, with strength across many sectors. A contact in the industrial distribution business said that activity had finally recovered from the 2014 fall in oil prices, reporting that increased demand was broad-based but energy was playing a large role either directly or indirectly. Technology firms also reported strong sales. A manufacturer of transformers for big-ticket electronic devices described enormous difficulty finding components and said they were keeping inventories at twice normal levels to ensure that they could keep their lines running.
No manufacturing contacts cited revisions to their capital expenditure plans. Two reported major share repurchase programs. The outlook was positive for all respondents this cycle. The major concern manufacturers expressed was trade policy. Some worried about the effects of tariffs on their costs, while a maker of testing equipment said they might move some production to Europe to avoid Chinese retaliation against the United States.
New England staffing firms have experienced an upsurge in business during the second quarter to date, with nearly all reporting revenue growth, both year-over-year and quarter-over-quarter. Reports were mixed on whether labor shortages were greater in skilled or unskilled occupations, but most said that temporary positions had been difficult to fill without the possibility of permanent hire at the end of the assignment; at the same time, clients were reportedly becoming more likely to retain temporary hires for permanent positions to avoid search costs later on. Respondents said they were increasing referral bonuses and professional development opportunities in order to build networks and long-term relationships with workers. Looking forward, contacts expressed optimism: Many expected a short-term boost from a seasonal influx of college graduates and students looking for temporary summer work; on a longer horizon, most expected current labor market conditions to continue, bringing both the great opportunity of strong demand and the difficulty of sparse labor supply.
Commercial Real Estate
Commercial real estate markets held steady or improved modestly in the First District. Office leasing activity was described as decent in Providence and Portland, robust in greater Boston, and light in Hartford. Effective office rents were up 2 percent to 3 percent in Providence over the past six months, and office rents continued to rise modestly in Boston. Office vacancy rates were down from a year ago in Boston, Providence, and Portland, and flat in Hartford. With the exception of Connecticut, industrial leasing and sales demand remained strong. Boston contacts noted that office construction--including speculative construction-- is set to increase but the extent of the increase was uncertain because most projects were still in the planning stages. Other new construction included hotel projects in Portland and Providence, student housing in Providence, offices in downtown Portland, apartments in suburban Portland, and numerous small condominium developments around the region. Investment sales demand was seen as stable in Boston and strengthening in Providence. Although the outlook for Connecticut remained weak, most contacts were optimistic that commercial real estate market conditions would remain favorable.
Residential Real Estate
Residential real estate markets in the First District saw mixed sales results. (Rhode Island, Massachusetts, Maine, and Vermont reported year-over-year changes from March 2017 to March 2018, while Greater Boston and New Hampshire reported changes through April 2018. An ongoing technical issue made recent data for Connecticut unavailable.) For single-family homes, closed sales increased in Boston and New Hampshire but decreased in Rhode Island, Massachusetts as a whole, and Maine. For condos, closed sales increased in Rhode Island, Boston, and New Hampshire, while Massachusetts as a whole saw a decrease. Vermont reported that closed sales declined for single-family homes and condos combined. Inventory decreased in all areas.
Median sales prices increased in all reporting areas. Although rising prices are favorable for construction, contacts noted that homebuilders in New England faced many obstacles. A Massachusetts contact mentioned high costs, legislative hurdles, difficulties in acquiring land, and the need for approval from local governments, which made it very hard for homebuilders to enter new markets. Contacts expressed a generally positive outlook for activity in the coming months.
For more information about District economic conditions visit: www.bostonfed.org/regional-economy