June 1, 2016
Business contacts cite generally improving economic conditions across the First District. Most retail and manufacturing respondents report increasing sales or revenues from a year earlier; this represents a higher fraction compared with six weeks ago. Staffing services firms are seeing growth in placements and revenues. Commercial and residential real estate respondents both cite positive results. Many respondents have net hiring plans and are raising wages modestly for selected existing employees and to recruit in some positions. Contacts continue to report minimal price pressures. Outlooks are generally upbeat as firms expect "more of the same."
Retail
Retail contacts in this round report that sales results for April through mid-May range from a slight single-digit decrease to growth in the mid-to-upper single digits. One firm notes that its lower sales were weather-related: demand for seasonal items was depressed by the atypically cool spring weather in New England. By contrast, another contact cites increased customer traffic, while a third is seeing "more stability" in sales after observing a lot of daily and weekly volatility over the past six months. Some respondents say that consumer spending patterns are changing: Besides the increasing shift to online sales, they cite the aging of the Baby Boom as a partial explanation for lower observed demand for apparel and other retail goods accompanied by increased spending on restaurants and travel.
Inventories are well-managed. Some contacts have raised inventories to meet expected continuing sales growth and demand for warm-weather items. One retailer is pushing orders ahead in anticipation of China's shut-down of regional factories for six to eight weeks to control pollution before holding the G20 summit in early September. Wholesale prices remain steady, so retail prices are fairly flat, though prices for some items for fall will be up by a few percent. Most retail contacts are engaging in capital spending related to business expansion and IT technology. Overall expectations for 2016 are positive, as contacts say the U.S. economy is in a moderate growth cycle, bolstered by increasing employment and growth in housing starts. They anticipate that these conditions will support same-store sales growth in the low-to-mid single digits.
Manufacturing
Of 11 manufacturing firms contacted this cycle, only one reports declining sales. The latter firm--a maker of brakes and motors for machinery--attributes the decline to the effect of lower commodity prices for mining, oil and gas, and agriculture, with no signs yet of effects of the recent rebound in oil prices. Many contacts report a very strong first quarter, including manufacturers of pressure sensitive film, veterinary products, tools, and scientific equipment, as well as a diversified maker of jet engines and home HVAC systems, among other things. Several contacts indicate that the growth came after a soft second half of 2015 or that first quarter sales were much stronger than expected. For most respondents, the U.S. was a bright spot; Europe was not as strong, although not declining as in some earlier reports. Contacts note that Chinese growth has slowed but is still positive; the only problem area appears to be Latin America, in general, and Brazil, in particular.
The pricing environment appears benign. Not one of our contacts reports significant price pressure from suppliers nor do they feel that they can increase the prices paid by customers. Exchange rates remain a problem for contacts, with 5 of the 11 noting the strong dollar has lowered their revenues or is a "headwind" for them; a couple of these respondents, however, say the negative impacts are weakening.
Inventories are stable or reflect planned increases or decreases. The one contact with declining sales says there had been destocking in the fourth quarter but "nothing like 2009."
None of our contacts reports significant revisions to their employment plans. A manufacturer of mail-room equipment says they reduced staff, but the reduction reflects planned efficiency improvements and not any reduction in demand. Two contacts report regional shifts. A diversified manufacturer reports moving divisional headquarters out of New England at least partly because of the high cost of labor in the region. Another is expanding production in Nebraska instead of Massachusetts due to the lower cost of labor. Three contacts report having difficulty finding skilled technical and scientific workers. No firm reports significant revisions to their capital expenditure plans. Even the firm with declining sales has not changed its investment plans.
The outlook is positive for all respondents. The firms that had very strong first quarters are trying to figure out if it represents a trend. The tool manufacturer says that retail point-of-sale data show consistent strength and no sign of tapering, but they will not change plans without additional positive evidence. A manufacturer of semiconductor equipment says that some growth was tied to the introduction of new smartphones and questions whether the smartphone market has reached saturation and therefore will not generate such strong growth in the future.
Staffing Services
New England staffing services contacts generally report strong business activity through May, with upticks in both direct hires and temporary placements, and year-over-year revenue increases ranging from 1 to 35 percent. Contacts observe an increase in underlying business confidence in recent months, along with heightened market competition for workers. As a result, workers reportedly have more choices in jobs and starting salaries. Labor demand continues to be robust, with increased client demand for specialized workers in the internet technology, software, legal, medical, mechanical engineering, business services, and management consulting sectors. Workers with less specialized or non-technical skills are less in demand. Contacts report that labor supply decreased in recent months, which they attribute to a decline in overall unemployment, as well as some mismatch of skills between labor supply and demand. Firms are utilizing social media and referral networks, and offering sign-on bonuses in order to recruit job candidates. Both bill and pay rates increased from 3 to 10 percent year-over-year. Firms are reportedly recognizing the need to pay higher wages to attract top talent, and workers are negotiating higher starting salaries. Looking forward, contacts are optimistic, expecting steady sequential and year-on-year growth. They expect to end the year with year-over-year revenue increases in the low to mid-single-digit range.
Commercial Real Estate
Contacts report that commercial real estate leasing activity is steady or improving across the First District. Hartford saw a surge in industrial leasing in recent weeks and steady, if light, office leasing activity. Office leasing picked up in Providence following a slow first quarter, and rental rates in that city are seen as stable. Boston's office leasing environment remains strong, yielding further declines in vacancy rates, although tenants appear reluctant to commit to new leases on the most expensive spaces. Portland continues to see strong leasing demand across all commercial property types and rents are described as stable. Investment sales are steady in Boston, Portland, and Hartford, although the bidding environment remains less exuberant in Boston than it was a year ago.
Construction activity remains limited in Hartford, as prospects for retail developments dim; nonetheless, industrial construction may be warranted in the Hartford area in coming months, following the recent robust leasing activity. Office construction continues to increase in Boston but remains below normal relative to fundamentals. Construction is modest in Rhode Island but is set to increase later in the year based on planned infrastructure projects. Apartment construction remains very active in Boston. However, contacts say lending for apartment construction is slowing among the region's smaller banks as they seek to stay within their own pre-set limits on that sector's loan allocation. Contacts across the District are mostly optimistic that commercial real estate activity will hold steady or improve in coming months, although one Boston contact notes the risk of a modest slowdown in office leasing.
Residential Real Estate
Residential real estate markets in the First District continue to exhibit strong trends at the end of the first quarter of 2016. March closed sales of single-family homes increased year-over-year in all six New England states; in Vermont, April data show a slight decrease. Massachusetts saw the most closed sales in any March since 2004. Pending sales for single-family homes increased year-over-year in every state, with gains as large as 36 percent in the Boston area. Most contacts note that these increases are not surprising given the mild winter relative to last year; some, however, say the momentum was even more than expected. A contact in Rhode Island reports, "we had far and away more sales than we've seen at this time of the year for quite some time." Median sales price also increased year-over-year in March in every state except Vermont.
The market for condominiums also improved relative to last year, with closed and pending condo sales up in every First District state in March (April for Vermont). Median condo prices showed moderate increases year-over-year in five states; the only exception was Connecticut where condo prices decreased.
Inventory continues to be an issue throughout the First District. Inventories of both single-family homes and condos decreased year-over-year in every state that reports these data. A Rhode Island contact comments that low inventories put sellers "in the driver's seat" in the bidding process. A contact in Massachusetts echoes previous comments that construction is too low to meet increasing demand from buyers. One notable exception to the inventory declines was the Boston area, where inventories of both single family homes and condos increased year-over-year; one contact hypothesizes that this is due to mild weather allowing sellers to put their homes on the market sooner this year than last.
Overall, contacts have a strong outlook for residential real estate markets. Several cite other economic indicators such as the stable unemployment rate, rising wages, and low interest rates as drivers of growth. Two contacts specifically note that although demand is strong, buyers are approaching the market more cautiously and avoiding risk.