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Beige Book Report: Boston

December 5, 2018

Summary of Economic Activity
First District economic activity in most sectors continued to expand at a moderate pace since the last report. Retailers reported moderate year-over-year sales growth, while Massachusetts restaurant sales rose modestly from a year earlier. Manufacturing firms saw revenues rise from a year ago, but at a somewhat disappointing pace. Most staffing firms reported modest to moderate year-over-year revenue growth, with some signs that the pace of growth slowed recently. Sales of single-family homes and condos declined from a year earlier in most New England reporting areas, while median sales prices continued to rise. Activity in commercial real estate markets remained mixed within the region, at a moderate level on average. Labor markets remained tight and wage increases continued at a moderate pace. Notwithstanding labor-related costs, upward pressure on prices was said to be very modest. Most contacts continued to report a positive outlook, although some cited increased uncertainty or risks.

Employment and Wages
Labor markets continued to be tight, although many firms said they are able to hire as needed. Two-thirds of manufacturing contacts expected flat employment at their firm and one-third expected growth. Manufacturers did not report any unusual difficulty finding qualified employees although an industrial distributor said that it had become increasingly difficult to find technical salespeople. Retailers said they have not had problems filling open positions, except for jobs specializing in information technology. Massachusetts restaurants continued to note acute labor shortages and higher labor costs, citing the Commonwealth's recently implemented Employer Medical Assistance Contribution (EMAC) and scheduled hikes in the minimum wage. Staffing industry respondents reported that continued low unemployment made recruiting very challenging. Most staffing firms reported increases in bill and pay rates, ranging from low single-digit increases to 10 percent; one cited high-level IT jobs as a driving factor in increased bill rates.

Prices
Price increases were said to be modest. Manufacturing firms did not report strong pricing pressure either from customers or suppliers. An industrial distributor said they expected tariffs to contribute 50 to 100 basis points to price increases for their products. Only one manufacturer complained about high transportation costs, in contrast with recent reports when many noted high costs. Two retail contacts noted that wholesale prices have risen only modestly and that food prices were down about 0.4 percent. Looking ahead to 2019, retailers expressed significant uncertainty about the impact that tariff increases will have on prices--beyond some point, they will pass the increases on to consumers. One retailer said they will not be the first mover on raising prices but will watch to see what their competitors do. Massachusetts restaurant menu prices were up 2.6 percent from a year ago.

Retail and Tourism
Retail contacts reported comparable-store year-over-year sales increases ranging from low single-digit to low double-digit percentages. All respondents remarked that consumer sentiment was strong and that they expected the fiscal year to end with low single-digit comparable-store revenue increases. Capital spending plans for 2019 were said to match or exceed investment in 2018.

A contact in the Massachusetts restaurant industry reported that revenues were up about 2 percent year-over-year through September, but cautioned that this result was largely driven by newly opened units, as sales at existing locations ranged from flat to up or down 1 percent year-over-year. Anecdotally, restaurant sales were down year-over-year in October as "people stayed home to watch the World Series." As noted earlier this year, the cost challenges confronting the restaurant industry are expected to thin out the ranks; very recently, two iconic Massachusetts restaurant chains have closed units, as have some high-end Boston-area restaurants.

Manufacturing and Related Services
All manufacturing contacts this cycle reported higher sales year-on-year. However, two-thirds of the six respondents said the pace of growth was a little disappointing. A furniture maker said sales growth had slowed relative to earlier in the year. Two semiconductor-related firms reported year-over-year sales growth had slowed to 12 percent and 10 percent; one attributed the slower growth to smartphones and the other to slowing demand for consumer devices more broadly. A defense contractor said they were having unusual difficulty with permits to sell to foreign customers. No contacts reported significant revisions to their capital expenditure plans.

Contacts were generally optimistic, even the ones with disappointing sales growth. One contact in industrial distribution said that there was industry chatter about a recession in the second half of 2019 but he saw no signs of that. A contact in the semiconductor industry said that people were concerned about the semiconductor industry cycle but continued to expect growth in 2019.

Staffing Services
New England staffing firms reported mostly positive year-over-year revenue growth, notwithstanding low or negative quarter-over-quarter growth rates. All firms noted labor supply shortages, regardless of the job's industry, occupation, or placement type, while commenting on the high and healthy demand from clients. One company stated that they were hesitant to take on new clients because they could not fulfill orders from existing ones. Most respondents devoted additional resources to improve recruitment: hiring more employees, investing in technology and social media, building relationships with local community groups, and increasing advertising. A few firms noted concerns about potential increases in health care costs and local minimum wages. Overall, staffing firms expressed optimism and expected tight labor market conditions to continue into 2019.

Commercial Real Estate
Commercial real estate markets remained mixed across the First District, with moderate activity on average. Leasing activity held steady at a slow pace in Connecticut and picked up to a moderate pace in Rhode Island. In greater Portland, leasing demand remained strong, on average, despite having softened a bit in the industrial and retail markets. Boston-area contacts described office leasing activity as very robust. In both Boston and Providence, demand for industrial space--whether for lease or purchase--strengthened further. Following recent declines, office vacancy rates were described as historically low in Boston and very low in both Portland and Providence.

Construction activity was also mixed, with negligible activity in Connecticut, moderate activity in Rhode Island, and robust activity in the Portland and Boston areas. One Boston contact said that planned construction could yield a large quantity of new office space in the downtown area over the next five years, although rising construction costs--up some 15 percent in the past six months due to increases in both labor and materials costs--may crimp some projects. The outlook dimmed further in Connecticut and remained largely favorable elsewhere for the near term; some contacts cited increasing risks and uncertainty for late 2019.

Residential Real Estate
Most residential real estate markets in New England saw year-over-year sales declines in recent months. For single-family homes, closed sales decreased from September 2017 to September 2018 in Rhode Island, Massachusetts, Boston, and New Hampshire, while increasing slightly from October to October in Maine. Median sales prices increased over the year in all reporting areas. For condos, sales decreased in Massachusetts, Boston, and New Hampshire, stayed flat in Maine, and increased in Rhode Island. Condo prices increased in Boston and Maine but decreased slightly in Rhode Island, Massachusetts, and New Hampshire. Vermont experienced an over-the-year decrease in sales for single-family homes and condos combined.

Contacts cited lack of inventory, rising prices and interest rates, and market normalization as possible reasons behind the declining sales. A contact from Rhode Island noted that the cooling in housing suggested a more balanced and healthy market, "buyers … will likely have more properties to choose from in the year ahead." A Massachusetts representative, by contrast, attributed the dwindling sales mainly to ongoing inventory shortages. Looking forward, residential real estate contacts across the region expressed optimistic views about the closing months of 2018.

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