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Beige Book Report: Boston

January 16, 2019

Summary of Economic Activity
Economic activity in the First District expanded at a modest to moderate pace since the last report, amid some signs of slowing growth. Retailers reported moderate increases in sales, and tourist activity was strong. Most manufacturers cited increased revenue from a year ago, but some noted the pace of increase was slower recently than earlier in the year. Software and information technology services firms also reported moderate revenue and demand growth in the closing months of the year. Commercial real estate markets were largely unchanged since the last report. Residential real estate markets saw ongoing price increases and mixed sales results; contacts in a couple of markets cited greater "balance" as local shortages of housing inventory eased somewhat. While retailers (including an auto dealer) and manufacturers said sizable tariff increases would pose significant problems if they occurred and many respondents cited uncertainty, outlooks remained mostly positive.

Employment and Wages 
Many contacts cited selected labor shortages and moderate increases in pay rates at the end of 2018. Retailers noted that their labor costs will continue to go up in 2019, in part because of state minimum wage increases and labor shortages in some markets. On balance, however, they said hiring in the retail sector has not been difficult. By contrast, a tourism contact noted serious concern about ongoing labor shortages on Cape Cod that will be more severe in 2019 if limits on the J-1 and H-2B visa programs are not raised. Manufacturing contacts did not report any significant changes in employment. Some cited difficulties finding workers, especially skilled engineers; however, one contact reported that after a "market adjustment" raised compensation by 10 percent to 15 percent, difficulties in hiring and retention dramatically eased. Software and IT services respondents reported annual wage and compensation increases of 2 percent to 4 percent, with no changes in average headcount or turnover rates.

Contacts cited modest to moderate increases in selling prices. Retail contacts said they expect to raise their selling prices between 1 percent and 4 percent in 2019, depending on the inputs for a particular item. In manufacturing, pricing pressures were mixed. Input costs were generally down due to lower fuel prices. A producer of frozen fish said they were able to put through their first "full price increase" since 2011 – an across-the-board 5-percent rise. Most software and IT services contacts said there have been no real pricing changes throughout the past year, although two contacts mentioned price increases in 2018 and one is looking towards another increase in upcoming quarters.

Retail and Tourism
Retailers contacted for this round reported that comparable store sales increased by 2.8 percent to 4.0 percent year-over-year. All said traffic in their brick-and-mortar stores declined by a few percentage points compared to 2017, but noted that the average in-store purchase was up in 2018 (one retailer said by 5 percent). A contact with a strong online presence said that a significant rise in direct sales made up for the decline in in-store purchases. Retailers expect to see small revenue gains in 2019 over 2018, with consumer confidence high.

A contact in the automotive industry in southern New England reported that sales were steady but not robust.

Passenger traffic to Boston's Logan Airport set a new record in 2018; departing flights in December were up 7.4 percent year-over-year. In 2019 new flight services will be added by domestic and international carriers. Strong tourist activity was seen on Cape Cod through December, as retailers and inns reported having a good holiday season. This respondent said that economic fundamentals in the United States remain strong, so 2019 should be a good year for the tourist industry.

Manufacturing and Related Services
Three-quarters of the manufacturing firms contacted this cycle reported higher sales year-on-year. One firm with lower sales, a chemical company, said that the year-earlier period was exceptionally strong. Another contact attributed the decline to slowing growth in the automotive industry around the world. Some contacts said growth slowed in the fourth quarter relative to earlier in the year. A diversified manufacturer said that customers were taking longer to pay bills. On the plus side, two contacts said that a shortage of trucking capacity that had been a problem in recent years appeared to have eased. Contacts did not report any major revisions to capital expenditure plans.

Respondents generally expected growth to continue in 2019, but they expressed significant reservations. Contacts viewed the trade situation as a significant risk factor. Several contacts noted that the length of the economic expansion made a downturn more likely, but none pointed to any specific issues with their customers or markets.

Software and Information Technology Services
Software and IT services firms reported moderate growth as the fourth quarter drew to a close. The majority of contacts noted revenue growth in the mid-to-high single digits year-over-year, with corresponding positive growth in product demand as well, both quarter-over-quarter and year-over-year. Looking to 2019, all but one contact reported a desire to focus more on investing in sales and marketing. Overall, contacts expressed wariness about the uncertainty they have felt in markets, but noted no specific impacts on their individual firms to date.

Commercial Real Estate
Commercial real estate markets in the First District showed few changes since the last report. Office leasing activity remained muted in the Hartford area, maintained a moderate pace in both the Providence and Portland areas, and stayed strong in the Boston area.

Contacts in each of those metro areas noted that suburban office demand remains weaker than urban office demand. Industrial leasing demand remained very robust in the Boston area but continued to soften in Maine and in Connecticut. In Rhode Island, low inventory of industrial space relative to demand has spurred increased interest in industrial construction, although one contact expected developers to exercise caution.

Investment sales demand in Providence strengthened on balance in 2018 from 2017, while in Hartford and Portland investment sales were described as steady in recent months. Boston's investment market, while still characterized as strong, showed some tentative signs of softening, and contacts in that city expressed concerns that property values could face downward pressure as investors rebalance their portfolios after the recent declines in major stock market indexes. At the same time, commercial real estate financing costs remained relatively low as some banks reportedly reduced their interest-rate spreads on commercial mortgages. The outlook remained largely pessimistic for the commercial real estate market in Connecticut, while elsewhere in the District contacts seemed optimistic for the near term but increasingly uncertain about the outlook for late 2019 and beyond.

Residential Real Estate
Contacts reported that First District residential real estate markets had a strong finish and a good year overall in 2018. For single family homes, closed sales were up year-over-year from November 2017 to November 2018 in Rhode Island, Boston, and Maine, and down in Massachusetts and New Hampshire. (Data are missing for Connecticut because of an ongoing technical issue.) For condos, closed sales decreased in all reporting areas but Rhode Island. Vermont saw a decrease in sales for single family homes and condos combined. Median sales prices increased generally, with the exception of condo markets in Rhode Island and Maine, which reported mild price decreases year-over-year.

Residential markets in Rhode Island and Boston became more balanced in recent months, with growing supplies of homes for sale and moderation in the pace of home price appreciation. Despite a seller's market environment, contacts said real estate was a preferred investment choice, given the volatile U.S. stock market.

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