December 4, 2013
Economic activity continues to expand in the First District. Most respondents in manufacturing, retail and tourism, software and IT services, and the staffing industry report year-over-year increases in revenue, while both residential and commercial real estate contacts indicate that market conditions continue to improve. Most firms are holding headcounts level; wages are steady or increasing modestly. Upward price pressures remain minimal. Many firms are cautiously optimistic about the outlook, a more upbeat tally than in the October round of calls.
Retail and Tourism
This round's retail contacts report year-over-year comp store sales increases between 7 percent and 25 percent, with one firm down 3 percent. Demand continues to be strong for apparel, home furnishings, and furniture. Inventories are well managed and prices remain steady. Compared to earlier rounds this year, sentiment is a bit more optimistic, or as one source opines, conditions "will not get any worse." Another respondent notes that the first two weeks of November showed some real underlying strength, but also states that sales performance during the 2013 holiday season will be a better test of what seems to be an improving trend. About one-third of contacts have raised their expectations for overall 2013 sales in light of their third quarter results.
October was particularly good for Boston hotel and restaurant activity, exceeding the usual expectations for this traditionally busiest month, on account of the additional business brought in by the World Series appearance of the Red Sox. Hotel revenues were up 7.5 percent year-over-year, supported by an increase in occupancy rates. Transportation services also benefitted from higher-than-usual demand. Some New England tourist attractions suffered from the government shutdown, notably those run by the National Park Service or the Navy (U.S.S. Constitution) and the private firms depending on their visitors. Museums and other attractions continue to experience declining attendance; their revenues are down 6 percent year-over-year.
Manufacturing and Related Services
Only one of the ten firms contacted this cycle reports falling sales. A plastics firm indicates that its core bulk chemical business is slowing--"coming in for a landing"--and its retail garden hose business is "the worst in memory." Two contacts report that sales growth is flat. The first is a computer software firm that largely serves the defense industry; the second is a manufacturer of electrical distribution equipment for whom strong residential demand is being offset by very weak non-residential. A firm that makes tools for home improvement reports that sales are up, but less than they had expected. Defense firms continue to say that sequestration has not yet affected them significantly.
All manufacturing respondents report it is difficult or impossible to raise their product prices. A contact in the bulk chemical business said input prices are falling, which he sees as evidence that "no one in the industry is buying." A commercial aircraft parts manufacturer says that major firms in the industry are trying to drive costs down and, among other things, forcing more and more subcontracting.
None of our contacts reports staff cuts, but only four indicate they are increasing staff. The home improvement equipment firm reports they are bringing 250 jobs back to the United States from China and Mexico. A semiconductor equipment firm plans to hire only contract workers. One contact says the Affordable Care Act is significantly increasing health care costs for his firm.
Most First District respondents continue trying to keep inventories low. Firms that increased inventory mostly say they are doing so in anticipation of higher sales. By exception, the hose manufacturer cites massive inventory accumulation due to low demand. Two contacts report lower capital spending while the rest cite either no change or an increase since the last conversation. One firm reducing investment did so because a major project was completed. A manufacturer of electrical distribution devices says the only thing holding back investment is a shortage of "talent" to execute new projects.
First District manufacturers are mostly optimistic, but guardedly so. The bulk chemical business contact says the slowdown in his industry is serious but not long-term. Firms with substantial exposure to defense are unwilling to make any forecasts due to uncertainty about the budget process.
Software and Information Technology Services
New England software and information technology services contacts generally report stronger-than-expected business activity through November, with modest improvements in both revenues and earnings since August 2013. Contacts attribute this growth to factors ranging from increased consumer demand to improved execution at the firm level. Most contacts expect to report positive year-over-year earnings growth at the end of 2013. By contrast, a healthcare contact reports negative growth due to the expiration of federal stimulus funding for health records software; however, this decline is much smaller than expected. While one firm shed some jobs, most firms either maintained headcounts or slightly increased their hiring pace. Wages have been steady, with plans for merit increases at the end of this quarter in the 3 percent to 5 percent range. Both selling prices and capital and technology spending have gone largely unchanged in recent months. Looking forward, New England software and IT contacts are more optimistic than they were in August, expecting continued growth through the first quarter of 2014.
Staffing Services
New England staffing contacts generally report strengthened business conditions through November, with low-double-digit quarter-over-quarter revenue growth, and year-over-year revenue growth in the 3 percent to 10 percent range. This uptick reportedly reflects both an improved macroeconomic climate and changes in firms' business development strategies. Only one staffing contact reports softer results, with revenues in New England down 10 percent year-over-year. Labor demand is largely unchanged since August 2013; one contact reports increased demand in the software and mobile application development sector. Labor supply has thinned in recent months across all industries, and is particularly tight in the software/IT and engineering sectors. Firm strategies to attract more job candidates include improved marketing tactics, and an exchange program that temporarily brings in IT professionals from abroad. The temporary-to-permanent rate continues to be strong, with one contact reporting a 50 percent increase this year. Bill rates and pay rates have either remained flat or have modestly increased since August. Looking forward, staffing contacts are generally more optimistic than they were three months ago, expecting steady growth through the end of the year.
Commercial Real Estate
Contacts across the First District report that leasing fundamentals maintained a very slow pace of improvement in recent weeks, consistent with minimal-to-slow employment growth. However, in some parts of Boston--the Seaport District and Back Bay--absorption has accelerated in recent months and, for the first time since before the Great Recession, speculative office construction is starting to occur. In Rhode Island, tenants are showing an increased willingness to commit to longer-term lease renewals (5-10 years), following an extended period during which shorter-term renewals were favored. At the same time, projected state budget deficits for Rhode Island, and political uncertainty over how such budget gaps will be closed, are seen as a crimp on business expansion in the state. A Connecticut contact echoes the theme of political uncertainty as a drag on growth, as that state is also facing large budget shortfalls in coming fiscal years. A regional lender to commercial real estate cites the U.S. government shutdown as the cause of a sharp decline in loan inquiries, but borrowing activity at the bank has since resumed at a healthy pace. The lending environment remains highly favorable to borrowers, with historically low borrowing rates and increasingly loose lending standards--even too loose in relation to fundamentals, according to some contacts. Abundant investment capital continues to flow into commercial properties across the region, sourced from private equity firms, pension funds, foreign investors, REITs, and high net-worth individuals. Leverage ratios are reportedly on the rise among some investors, but one contact points out that they remain low in absolute terms.
In Boston and surrounding suburbs, construction activity (both current and planned) is reportedly on the rise in both the hotel and retail sectors. The growth rate of multifamily construction--recently quite high in metro Boston--is expected to slow considerably within 12 to 18 months, while construction in the health care sector across the region is seen as restrained by uncertainty over the implications of national health care reform.
Contacts are cautiously optimistic across the region. Forecasts call for more slow improvement in fundamentals moving forward, pending steady (if slow) employment growth. However, fiscal policy uncertainty at both the state (noted above) and national levels is mentioned by a few contacts as a downside risk to employment growth and hence to improvements in leasing and construction activity.
Residential Real Estate
Based on numbers for September and contacts' "sense" of October results, it appears that sales of single-family homes and condos continue to improve throughout New England, while prices continue to approach, and in some states exceed, pre-recession levels. Sentiment across the region is that the recovery is well underway, but sales activity will likely begin to moderate in the months ahead as winter approaches. Pending sales are expected to decline in a few states, and contacts in the field attribute the decline at least partially to a drop in consumer confidence resulting from the recent government shutdown. While some contacts cite consumers upgrading homes, respondents in other states say sales growth is driven primarily by first-time home buyers. Contacts in Maine and Connecticut also cite an uptick in foreclosures and short sales coming onto the market. The other New England states, however, claim unconventional sales generate a relatively small percentage of total sales. New federal flood insurance legislation and new flood maps drawn by FEMA continue to generate concern across the region as insurance rates are expected to rise and make houses located in potential flood areas more expensive to own. Those worries notwithstanding, the overall message is that this has been a turnaround year in First District residential markets, although economic factors could still change the trajectory of the recovery.