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Beige Book Report: Boston

March 6, 2019

Summary of Economic Activity
Reports from business contacts in the First District indicate that activity was somewhat mixed since the last report. Retailers reported moderate increases in sales, and restaurant sales were also up. Manufacturers’ results, by contrast, were varied, with half of this round’s respondents citing declines in sales or revenue or a marked slowdown in the pace of growth. Staffing firms also reported revenue declines, largely attributable to a shortfall of candidates in the current tight labor market. Commercial real estate markets were similar or slightly improved since the last report. Residential real estate markets in most areas saw declines in closed sales and increases in median sales prices. Manufacturers said they were cautious about 2019; other contacts’ outlooks remained mostly positive.

Employment and Wages
Business contacts said that labor markets remained tight but wage pressures continued to be moderate. Beyond a shortage of workers in certain skill categories, such as information technology, retail respondents reported no real problems filling job openings. Depending on local labor market conditions, some retailers reported seeing higher wage costs. The restaurant industry complained of severe labor shortages. Hiring by manufacturers was mixed. A furniture maker laid off 10 workers in January. A semiconductor manufacturer facing big declines in demand from China put a hiring freeze in place, but they were reluctant to institute layoffs since it takes three to six months to train new workers. Three-quarters of manufacturing contacts reported continuing to hire at their normal pace; none cited unusual wage pressure. Staffing firms reported tight labor markets and some increases in bill and pay rates (that is, wages).

Prices
Pricing reports were mixed. Retailers said price declines for certain food categories have slowed down and some grocery categories saw price increases. A prominent big-box retailer reported that some consumer goods manufacturers announced plans to raise prices by 7 percent to 10 percent, though when these cost increases pass through to retail prices depends on when contracts with individual retail chains are renewed. Manufacturing contacts reported no unusual pricing pressures.

Retail and Tourism
Retailers contacted for this round reported that on a year-over-year basis, comparable-store sales were up by mid-single-digit percentages. Capital spending plans for 2019 are a bit higher than 2018. One contact observed that consumers seem willing to spend on all categories of goods, “whether a $10 T-shirt or a $2,000 television set.” Moderate but positive growth is expected for the rest of this year, though there is some lingering worry that higher tariffs, if implemented, could put a damper on sales of affected products.

A contact in the Massachusetts restaurant industry reported that based on meal tax receipts, restaurant sales were up 5.4 percent year-over-year in January. However, these overall results were largely driven by new entrants, as established locations reported sales ranging from flat to down or up 1 percent. Such lackluster performance, higher operating costs, acute labor shortages, and higher labor costs (in part attributable to scheduled increases in the minimum wage for tipped workers) have prompted recent restaurant closings by some experienced and high-profile operators. Given the greater competition from the proliferation of restaurants, operators are reluctant to raise menu prices to cover their higher costs. Despite the threat of more closings, aggregate expectations for the Massachusetts restaurant industry in 2019 are positive.

Manufacturing and Related Services
The news from manufacturers was mixed. Of eight responding firms, two reported substantial drops in sales and two reported significant weakness. The two firms that reported serious issues were a semiconductor manufacturer and a furniture builder. The furniture firm makes its products in factories in New England; they reported sales in January were down 30 percent versus the same period a year earlier; but better results over President’s Day weekend reduced concern. The semiconductor firm sells mostly to the auto industry and said that a 40 percent drop in new orders from China was the biggest fall in sales since the collapse of Lehman in 2008. Two other firms, both with heavy exposure to semiconductors, said that the market had slowed significantly since earlier in 2018. Four other contacts reported good overall sales.

Capital expenditures were down for several contacts and unchanged for others. One said that they had “mothballed” plans for a major expansion of a semiconductor wafer plant; another said they might delay construction of a new plant due to start this summer.

Most manufacturing contacts expressed caution about 2019. The ones facing the most severe declines were waiting to see if the weakness was transitory, while others said they were very uncertain. The slowdown in China, whether or not the result of trade issues, cast a shadow over the manufacturing sector.

Staffing Services
New England staffing firms reported negative single-digit revenue growth for the year 2018. Regardless of industry and placement type, all respondents cited low unemployment rates and limited applicant supply as challenges to their business, and remarked on the healthy number of job requests from clients. A few staffing firms said the tight labor market made it possible to raise rates, with no push-back from clients. Most firms reported ongoing work to strengthen relationships with community groups and advertise for candidates on social media channels. The partial government shutdown reportedly created uncertainty among client organizations, who were less willing to make hiring decisions near the end of 2018. Under tight labor market conditions and with a limited talent pool, respondents expressed mixed views on the outlook, but a majority were optimistic.

Commercial Real Estate
Commercial real estate fundamentals in the First District were either flat or up slightly in recent weeks, depending on the location and property type. Office leasing activity remained strong in both Boston and Portland, with asking rents continuing to rise in the former and holding steady in the latter. Office leasing was described as stable at a modest pace in Providence and slow (but also stable) in Hartford. In Providence, office rents were up 2 percent to 4 percent from one year ago; in Hartford, rents have been flat for an extended period. Industrial leasing demand was robust in most of the First District, although low inventories held back activity in Rhode Island. Contacts in Providence and Hartford perceived that investors were increasingly seeking to purchase properties in smaller cities in order to obtain higher yields than in Boston, but hard numbers on transactions volume were not available.

Planned construction of speculative office space tailored to the life sciences industry increased in the Boston area. Commercial real estate lenders were reported to be offering increasingly narrow interest rate spreads and generous loan terms. Construction costs continued to rise on average, and one Boston contact saw steep increases in subcontracting costs from a year ago that were attributed to scarce labor in the skilled trades.

Most contacts maintained a positive outlook. However, some expect economic growth--and hence demand for commercial real estate--to slow in 2019.

Residential Real Estate
Heading into 2019, residential real estate markets in the First District experienced a slowdown in sales. Sales decreased or stayed flat in all reporting areas for both single family homes and condos. (Most areas reported year-over-year changes from December 2017 to December 2018, while New Hampshire reported statistics through January 2019.) Contacts cited interest rate hikes, appreciating prices, and the recent partial government shut down as possible reasons for lower sales.

For single family homes, median sales prices increased in all reporting areas but Massachusetts. Inventory dropped in all areas except Rhode Island. For condos, prices declined in Rhode Island, Massachusetts, and New Hampshire, stayed flat in Boston, and increased slightly in Maine. Condo inventory increased in most areas, while New Hampshire saw a moderate drop. Vermont data refer to single family homes and condos combined; the median sales price increased, while inventories declined.

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