September 3, 2014
Business activity appears to be improving in the First District. A greater fraction of retail and manufacturing contacts cite year-over-year sales or revenue increases than in the last couple of rounds and outlooks are positive. Software and IT services and staffing firms also report strong and/or increasing activity. Commercial and residential real estate markets are largely unchanged since the last report. While some contacts cite difficulty filling skilled positions, most responding firms are neither adding to nor subtracting from headcounts to any substantial degree. With the exception of staffing firms, respondents say wages are steady. Prices, too, are reported to be steady with very few exceptions.
Retail and Tourism
Retailers contacted for this round report comparable-store sales changes ranging from down 1 percent to up 7 percent year-over-year. Spending on clothing, household items, and home improvement categories is said to be good. Prices remain steady and inventory levels are well controlled. Some selective hiring is planned. These retailers expect to achieve their 2014 goals of low single-digit sales increases. Their outlook for the U.S. economy ranges from "mixed" to an expectation of moderate growth--one retailer characterized its outlook as "neither bullish nor bearish."
Boston-area hotels continue to do very well. Occupancy rates averaged 92 percent in July, and revenues were up 9.5 percent from July 2013, mainly because the average price per room was up. Advance hotel bookings are strong through the fall. Through July, Boston restaurant revenues were up 6.9 percent from January-July 2013. Business travel remains strong and leisure travel is up 2 percent year to date, which contacts indicate is a large increase for this market segment. Year to date through July, traffic at Logan Airport was up 4.5 percent. Contacts expect 2014 travel to best 2012 and 2013 records.
Manufacturing and Related Services
Of the dozen manufacturing firms contacted this cycle, only one reports declining sales and two report exceptionally strong sales growth versus the corresponding period a year earlier. The firm reporting a decline in sales attributes it to an exceptionally strong period a year earlier. One of the companies reporting exceptional growth was a semiconductor manufacturer, with 15 percent year-over-year sales growth in the second quarter; this is considered high even for this highly cyclical business. The other strongly growing company is a computer systems vendor who sells largely to the Defense Department; this contact said that clarity about the Federal budget had released significant new spending. Two firms that sell equipment to semiconductor manufacturers report strengthening sales, but a third is facing a "lull" in orders and expects them to pick up in the first half of 2015.
Only one contact, a manufacturer of semiconductor equipment, reports layoffs over the last year. Of the remainder, one reports a small reduction in headcount, four cite no change, and the rest are increasing employment, although no one reports large-scale hiring. A typical comment came from a maker of electrical equipment, who says their hiring is "cautious." Many firms, including those with strong sales growth, indicate they want to do more with less or "keep headcount growth below sales growth." Firms continue to cite problems finding skilled engineers.
All but one contact indicates that prices are stable on both the selling side and the input side. The exception is a producer of milk products who reports that the price of raw milk increased dramatically on account of increased exports, raising U.S. retail prices of milk products. Half the contacts report declining inventories. The contact in the semiconductor industry with sharply higher sales also reports an increase in orders that they are unable to fill on time or at all; they are increasing capital spending to reduce bottlenecks. Most firms report increased capital spending more or less in line with earlier plans.
Outlooks are positive. Even the semiconductor manufacturing firm that laid off workers in the first half of the year expects strong sales growth in the first half of 2015. A manufacturer of toys has a mixed outlook; this contact says high-priced products are not selling well because consumers are cautious.
Software and Information Technology Services
First District software and information technology services contacts generally report strong demand through August, with year-over-year revenue increases mostly ranging from 7 percent to 20 percent and quarter-over-quarter increases in the mid-single-digits. Contacts attribute this growth to continued macroeconomic recovery, a rebound in the manufacturing sector, and robust demand in the marketplace for software products. By contrast, one contact producing healthcare software reports slight year-over-year decreases in revenues, which he attributes to the expiration of federal stimulus money for health records software. Most firms have added to headcount in the last year, with positions concentrated in sales, research and development, and marketing. Wages are generally flat; however, one firm awarded merit-based increases in the 3 percent to 4 percent range. Selling prices have held constant. Looking forward, while New England software and IT contacts remain concerned about cost implications of the Affordable Care Act, weakness in the Chinese economy, and the overall macroeconomic environment, they continue to be optimistic, expecting a steady rate of growth through the next few months.
Staffing Services
New England staffing contacts generally cite increased activity since their last reports in May. While one firm supplying workers to the healthcare sector saw a dip in billable hours from June to early July, strong growth in July and August is putting them back on track. On a year-over-year basis, revenue growth is in the 4 percent to 20 percent range. Only one contact continues to report year-over-year revenue declines in the New England region, attributed primarily to client mix. Labor demand is reportedly strong in the information technology, software, aerospace, nursing, electronics, and legal industries. Supply is largely unchanged since May, with continued shortages of high-end technical workers such as software developers, Java programmers, computer engineers, mechanical design engineers, and quality assurance managers. Maintenance and ambulatory nursing positions are also reportedly difficult to fill. By contrast, one contact notes that entry-level IT workers are plentiful. To attract high-skilled workers, staffing firms continue to expand their social media outreach efforts and invest in technological innovations such as mobile compatibility and website development. Both bill and pay rates have increased, with one contact expecting continued upward pressure on wages through the coming months. Contacts express concern about increased health insurance costs as a result of the Affordable Care Act and the extent to which they will be able to pass these additional costs on to their client base. Despite this challenge, New England staffing contacts are increasingly optimistic, expecting year-over-year revenue growth in the high-single-digit range in coming months.
Commercial Real Estate
Commercial real estate activity appears mostly steady across the First District. Contacts in Hartford, Portland, and Providence all describe office leasing activity as slow, but the slowness is attributed to typical seasonal patterns. In Providence, lack of suitable industrial space remains a problem in light of healthy demand for space in that sector. In Hartford, interest is expected to be fair-to-strong in a set of downtown commercial structures that were recently (or will soon be) placed for sale, including three well-leased office towers, and there is the sense that an increasing number of owners want to cash in on robust investor demand for commercial real estate. In Portland, retail sector sales and leasing are strong, helped in part by some large national chains that are adding locations in the area, and strong investment demand across property types in recent months has pushed commercial property prices up by 10 percent from a year ago. In Boston, market conditions are largely unchanged since the previous report. Downtown leasing activity held steady, and office leasing demand appears to be strengthening along the Route 128 corridor. However, despite rising profits, most existing firms are not expanding their space needs and some recent lease renewals resulted in reduced footprints. Contacts continue to be impressed by the amount of capital pouring into commercial real estate (as well as into multifamily structures) in the greater Boston area, with prices that reflect highly optimistic expectations. Also in Boston, construction activity remains strong in the hospitality and multifamily sectors, and speculative office construction remains limited.
The outlook is uncertain for Rhode Island, where the outcome of the closely contested gubernatorial election is seen as holding some upside potential for growth in the state via improved business sentiment. Independently, a contact sees a risk of increase in the vacancy rate for class A office space in downtown Providence. In Hartford, economic growth is expected to fall short of the national pace, likely resulting in flat leasing activity, but the commercial real estate lending environment appears to be loosening up some. In Boston, contacts expect moderate economic growth and a continuation of current trends, including strong investor demand. While one Boston contact sees a risk of overbuilding in the hotel and multifamily sectors, the city's office sector is not seen as facing a similar risk.
Residential Real Estate
Closed sales of single-family homes in June were mixed across the First District compared to June 2013. Sales declined in Massachusetts and Vermont, increased in Connecticut and Maine, and remained unchanged in Rhode Island. (Contacts in New Hampshire were unavailable.) Median sales price changes also varied by state, increasing only in Massachusetts, declining in Rhode Island and Vermont, and holding steady in Connecticut and Maine compared to June 2013. For Massachusetts, this is the fifth consecutive month of year-over-year declines in sales of single family homes and for greater Boston it is the sixth consecutive month of year-over-year declines. Contacts in Massachusetts say the ongoing decline in sales and rise in sales price are driven primarily by a shortage of inventory, with little change in consumer demand. Indeed, Massachusetts inventories have been trending down for more than two years on a year-over-year basis and median sales prices have risen for more than a year and a half. With only 5.5 months of supply, Massachusetts was considered a sellers' market in June (a market is considered balanced when 7.5 to 8.5 months of supply are available). By contrast, Maine is experiencing an increase in inventory and contacts are hopeful that availability will keep the fall market strong. Connecticut contacts cite low inventory of starter homes. Respondents in all five states express concern over student debt levels, believing they will continue to weigh on housing markets for the foreseeable future.
Relative to a year earlier, June condominium sales were higher in Maine, Connecticut, and Vermont and lower in Massachusetts. The median condo sales price increased over the same period in three of those four states; in Connecticut, the median sales price was unchanged.
Sentiment in the First District is generally positive, with expectations of continuing improvement. However, multiple contacts say expectations need to realign to a "new market norm." These contacts say that both buyers and sellers in New England housing markets must adjust to price increases that are well below previous high rates and begin to look at a house as shelter rather than as "a piggy bank."