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Beige Book Report: Boston

October 24, 2018

Summary of Economic Activity
Economic activity in most sectors expanded at a moderate to strong pace since August, although real estate markets showed mixed activity. Retailers reported robust sales increases, and travel and tourism enjoyed a strong summer season. Manufacturing firms posted moderate growth on balance, and IT firms showed results ranging from flat sales to double-digit growth. Residential real estate prices continued to rise in most First District states despite slower sales in some places. Commercial real estate activity was mixed across metro areas. Labor markets remained tight, and wage increases continued at a moderate pace. Price increases appeared more widespread and, in a few cases, reflected the impact of tariffs. Most contacts retained a positive outlook, although some perceived an increase in downside risks.

Employment and Wages
Most contacts said that labor markets remained tight. On balance, headcounts increased only slightly, and wage increases accelerated somewhat but remained moderate. Retail hiring held steady, although some positions were hard to fill, and the restaurant industry on Cape Cod continued to experience binding labor shortages. All manufacturing contacts reported that they were hiring, but increases in employment were small, as contacts said that hiring and retaining qualified workers remained difficult. As a result, they were paying higher wages and salaries. At IT firms, employee headcounts and the labor turnover rate were stable, but the tight labor market spurred fresh wage increases at one firm. Several other IT firms said that wages had increased 3-4 percent since last year, mainly in order to cover cost-of-living increases. Commercial real estate contacts noted that construction wages continued to rise at a moderate-to-robust pace to attract scarce labor in that market.

Prices
Pricing pressures intensified in response to a variety of factors, resulting in moderate price increases on average. At least one retailer expects tariffs on Chinese-sourced goods to add upward pressure on the prices charged by their suppliers, although the extent of any price increases remains uncertain, and another retailer reported being unaffected by tariffs. New car prices are also expected to increase significantly to cover the burden of recently implemented tariffs. All but one manufacturing contact reported charging higher prices, but a semiconductor firm indicated that increased competition was driving down the prices it could charge. Trucking costs--which increased 5 to 10 percent--continued to present a major problem, contributing to recent price increases by manufacturers. Also, three manufacturing firms faced higher input prices due to tariffs on Chinese goods and services that were not readily substitutable, and the firms expected to pass on (or had already passed on) to consumers at least some of the tariff burdens. Two IT firms imposed moderate price increases recently, while others held prices steady on balance. Hotel room rates on Cape Cod were up almost 5 percent from last summer, but some lowered prices as needed in response to price competition from online home rentals. Construction costs continued to climb at a brisk pace in response to increases in the costs of construction labor, land, and raw materials, and one contact expects the higher costs to get passed on to tenants and buyers.

Retail and Tourism
Retailers reported moderate to very strong year-over-year sales increases to September and expect sales to stay strong through year's end. A state automotive trade association reported that auto sales fell sharply in September compared with the summer months, but whether that decline marks the beginning of a trend remains to be seen. Still, dealers believe that sales might be crimped moving forward in response to rising price tags for new cars and higher consumer financing costs.

Travel industry contacts reported that business remains strong. As of August, airline passenger traffic through Boston had increased 8 percent year-over-year. Port traffic in Boston increased this past summer as retailers accelerated imports to avoid tariffs that were slated for the fall. Hotel occupancy rates on Cape Cod were up about 5 percent from last year. The Cape's restaurant industry suffered ongoing, acute labor shortages, and these are seen as placing a restraint on industry growth moving forward.

Manufacturing and Related Services
Of the five manufacturing firms contacted, four reported sales that were either moderately or strongly higher year-on-year, and one reported slightly lower year-on-year sales despite improved performance more recently. One manufacturer's growth was held back by difficulties in finding qualified workers and by delays obtaining capital equipment. As noted above, three firms faced cost increases associated with tariffs, but so far experienced no major impacts on sales. One firm also was subject to retaliatory tariffs on its exports to China, but thus far has suffered no decline in sales to that country. Capital expenditure plans were unchanged from August. Four contacts retained a positive outlook, while another expects a recession in the second half of 2019.

Information Technology Services
Software and IT firms in the First District experienced further robust growth on balance in recent months, either on par with or somewhat faster than what was reported in August. Year-over-year revenue growth rates ranged from the high single digits to the low double digits, with one exception involving flat revenues. Recent performance was boosted by increasing demand for new, cloud-based products. A contact that recently raised its prices noted that no customer turnover had resulted from that move so far. Overall, contacts were optimistic about the state of the industry and the economy in the coming quarters.

Commercial Real Estate
Commercial real estate activity was mixed across the First District. Leasing activity remained strong in the Boston area, but reportedly slowed somewhat in both the Hartford and Providence areas. A Hartford contact attributed the weaker activity to slow economic growth in Connecticut. Office vacancy rates were described as very low for both Boston and Providence, reflecting positive net absorption that occurred in the past six months in both metro areas. Sales activity was described as stable. Construction activity held steady in the Boston area and was described as very limited in Connecticut. Borrowers for some construction projects in the Boston area have reportedly had to request higher loan amounts in order to cover higher-than-expected construction costs. The outlook dimmed in greater Hartford, but remained cautiously optimistic elsewhere. Contacts continued to see downside risks, however, in the form of rising construction costs and rising long-term interest rates.

Residential Real Estate
Residential real estate markets were somewhat mixed. This report covers year-over-year performance through August 2018 for all areas except Connecticut, which failed to provide data due to an ongoing technical issue. Vermont statistics represent combined performance for single-family homes and condos. For single-family homes, closed sales increased in Boston, Maine and New Hampshire, decreased moderately in Rhode Island, and were down slightly in Massachusetts. Pending single-family sales were up by robust margins in New Hampshire and Massachusetts, down sharply in Rhode Island, and posted either small (Boston) or moderate (Maine) decreases elsewhere. For condos, closed sales increased or stayed roughly flat in all reporting areas, while pending sales were mixed. Vermont saw a moderate decrease in closed sales for the combination of condos and single-family homes, but its pending sales were up sharply. Single-family home prices increased in all areas by slim to robust margins, while condo prices increased in all areas except Rhode Island, which saw a moderate decline on that score. A Rhode Island contact noted that home inventories increased (from a year earlier) for the second straight month, following an extended period of inventory declines. Elsewhere, however, inventories continued to decline. Despite recent fluctuations in sales activity, contacts expressed optimism for the coming months. They cited the holiday season and tax cuts as possible reasons to expect an increase in sales before the end of the year.

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