September 4, 2013
Economic activity in the First District continued to expand at a modest pace. Most contacts reported low-to-moderate single digit year-on-year growth rates. Higher interest rates appear to have different effects on commercial real estate where some contacts reported upward pressure on capitalization rates and residential real estate where contacts report that the prospect of rising rates "nudged" buyers into the market, increasing demand. No firms report major cyclical layoffs but hiring remains subdued except among fast-growing technology firms. Sequestration has yet to have had any direct effect on contacts with major government businesses but contacts anticipate weakness in the future. Contacts did not complain of higher input prices and did not report that they were raising prices significantly either.
Retail and Tourism
Most contacts report year-over-year comparable store sales increases between 4 and 5 percent. Demand remains quite strong for all apparel, home furnishing, and home improvement categories, as well as technology products like tablet computers. Contacts indicate that prices remain steady, and feel that consumer sentiment continues to improve. There is some cautious optimism that this more positive trend will continue but expectations for 2013 sales still center on modest single-digit increases.
Both business and leisure travel remain strong with leisure driven by both domestic and international visitors. Attendance at some museums and other attractions is below expectations. While a contact noted that July and August are not heavy months for government-related travel, there is some concern that U.S. government travel budgets, cut 30 percent because of the sequester, will start to have a negative impact on travel industry revenues later in the year.
Manufacturing and Related Services
Three companies--a semiconductor industry supplier, a medical device maker, and a fitness equipment manufacturer--reported double-digit increases in sales compared to the same period a year earlier, four reported single-digit increases from the previous quarter and three companies reported declines. Some contacts reported that sales in Europe were finally growing again. The majority of contacts report no change in prices from the first quarter, either the input prices they face, or their own sale prices. Employment growth continues to be modest. A rapidly growing medical device manufacturer reports increasing headcount at a 15 percent annualized rate but most firms are hiring only "selectively." One firm did report layoffs due to a repositioning of a formerly bricks and mortar business as e-commerce. Defense industry contacts reported little direct effect of sequestration but continued to worry with one contact mentioning rumors that major cuts would come in the fourth quarter. Contacts reported no major revisions of their investment plans and most expect single-digit year-on-year growth in the next quarter.
Software and Information Technology Services
New England software and information technology services contacts generally report weaker than expected business activity through August, with slow revenue growth. Several attribute this sluggishness to continued macroeconomic uncertainty in the U.S. and Europe. In contrast, a contact which mainly works with health care firms attributes the slowdown to the expiration of federal stimulus funding for health records software; however, business in the post-stimulus slump has been better than expected. A business advisory contact sees early signs of improvement in the overall market, as evidenced by an uptick in Q2 sales activity in terms of customer expenditure. Four out of five contacts continue to be cautious in hiring, and plan to remain close to their current headcounts through 2013. Both selling prices and capital and technology spending have gone largely unchanged in recent months. Looking forward, New England software and IT firms are cautiously optimistic, with most expecting only modest growth through the second half of 2013.
Staffing Services
New England staffing contacts generally report strengthened business conditions through August, characterized by mid-single-digit year-on-year revenue growth. This continued growth reportedly reflects both an increase in overall labor demand and a shift to more aggressive marketing strategies at the firm level. Generally, there is a high demand for skilled IT workers and engineers; contacts also report increased demand for manufacturers and medical assistants. On the supply side, there remains a shortage of skilled technical workers to fill high-end IT and engineering jobs. The general consensus is that despite a large pool of available workers, the skills mismatch prevents staffing firms from fully meeting client demand. The number of temporary-to-permanent placements continues to grow; a healthcare contact reports a 30 percent increase in permanent placements this year. Bill rates and pay rates are largely unchanged, with the exception of one firm reporting a decrease relative to May due to the current client mix. Looking forward, staffing contacts continue to be cautiously optimistic, expecting mid-single-digit year-on-year revenue growth through the remainder of 2013.
Commercial Real Estate
Contacts were mixed in their analysis of the effects of higher interest rates. In Boston and Providence, contacts reported upward pressure on capitalization rates noting that the frequency of renegotiation (or "re-trading") of deals in progress increased in recent weeks. Contacts in Hartford reported no effects so far of higher rates on demand for commercial real estate. A regional lender to commercial real estate continues to face challenges securing desired loan volume in the face of competition from other lenders willing to offer commercial mortgages at very low rates. Construction activity remained robust in greater Boston and the pipeline of deals yet to break ground increased significantly over one year ago. Current and planned construction projects in the Boston area are concentrated in high-end multifamily and mixed-use (retail/residential) structures, although construction activity is poised to rise in the hospitality sector and among institutions of higher education. Contacts continued to expect slow improvements in commercial real estate fundamentals in the coming months, but roughly half of contacts raised the uncertainty around their projections relative to last report, with much of the growing uncertainty linked to uncertainty over long-term interest rates.
Residential Real Estate
Throughout the First district, the market for single-family homes and condos continues to make a healthy recovery as sales and prices continued to increase and days-on-the-market continued to fall. According to contacts, increases in the mortgage rates have nudged potential buyers, hoping to take advantage of low-interest rates, to enter the market. In some areas, particularly in the Greater Boston area and Massachusetts, realtors have observed an increasing frequency of multiple offers being made on properties. Despite shrinking inventory, sources state that modest appreciation in regions where multiple bids are common indicates that the market is not overheating.