July 13, 2016
First District reports reflect modest gains in economic activity on balance. Same-store growth in retail sales is nil to modest, and expectations are positive but muted for sales growth moving forward. Reports from manufacturers are mostly positive, but an unusually high number of manufacturing contacts could not be reached. Also based on a small number of contacts, software and IT services firms report robust growth in sales from a year earlier. Hiring activity is cautious in both retail and manufacturing. Hiring is potentially stronger in software services, but that conclusion is based on a single contact's report. Tight labor markets are seen for at least some positions in each of retail, manufacturing, and software/IT services, and a severe labor shortage is said to restrain hiring and expansion in Massachusetts' restaurant industry. Commercial real estate activity is flat or improving across most of the District, but a modest slowdown in office leasing is reported for greater Boston. Single-family home sales increased in all states in the District amid robust buyer demand but low inventory continues to weigh on the residential market. The outlook is generally positive for at least modest growth moving forward. While a number of contacts cited the UK's "Brexit" vote to exit the European Union as a downside risk to aggregate economic growth, those with direct exposure do not expect severe negative impacts on their own firms' outcomes.
Retail
Among retail contacts, year-over-year sales are either flat or up 1 to 2 percent over one year ago, although one contact reports an increase in the high teens that reflects the impact of new acquisitions. Firms are hiring only to replace departing employees, and some report increased difficulty in making such hires. Contacts expect only modest gains in sales moving forward, consistent with their modest expectations for overall U.S. economic growth.
A contact in the restaurant industry predicts that sales in the second quarter of 2016 will be up 1 to 2 percent over a year earlier and expresses hope that growth will improve during the summer tourist and vacation season. However, the contact reports that the restaurant industry in Massachusetts is facing the worst labor shortage he has seen in 35 years of experience. While restaurant owners in the state are finding creative ways to deal with the problem, such as sharing employees across multiple establishments, what he terms the labor "crisis" is starting to negatively affect owners' expansion plans.
Manufacturing
Fewer contacts than normal were reached this cycle. Some were on vacation and others were reportedly busy in the wake of the Brexit vote; the resulting sample is skewed towards the semiconductor industry. Reports overall are positive. Semiconductor contacts report that business picked up in the first half of 2016 after a weak second half of 2015. A manufacturer of frozen fish reports weak retail sales in the second quarter, attributed partly to unseasonably warm weather which led people to eat out more. A manufacturer of materials for engine filters says that demand from mining and construction firms is weak and in the case of mining the weakness reflects continued low commodity prices.
Nothing unusual is reported concerning pricing. Any pricing pressures are skewed to the downside, related in one instance to demands for lower prices by large and powerful customers.
No major shifts in inventories are reported. A contact with customers in the mining industry reports that those customers are trying to figure out the "new normal" level of sales and to adjust inventories accordingly. A contact in the semiconductor industry notes that thanks to a more efficient supply chain inventory mismatches are much less of a problem than in the past.
Contacts are cautious about hiring. A semiconductor manufacturer restructured in the first half of 2016 and reduced its headcount by 100 workers. The frozen fish manufacturer reduced its workweek to deal with slower sales. Three contacts report having difficulties hiring engineers and machinists. Capital expenditure plans are unchanged. However, a contact that sells to automotive and aerospace firms says that although capital spending was below plan for the first half of 2016, full-year spending is expected to remain on plan. The outlook is positive among all contacts. One semiconductor manufacturer is very confident about the third quarter but his outlook is uncertain beyond that period.
Software and IT Services
A contact that sells software solutions for health care providers experienced over-the-year growth in revenues in the high single-digits and growth in operating profits in the low double-digits. The same firm's prices are unchanged but its labor costs fell as the pace of retirements doubled between the first and second quarter of 2016. The firm is hiring across the board, but is setting very high quality standards when hiring new software developers.
A manufacturing IT contact reports over-the-year growth in bookings in the low teens. Investments and hiring at that firm are focused on "internet of things" projects, which are seeing stronger demand growth than traditional industrial projects. The firm's net hiring budget is flat, and competition for labor to fill financial positions is described as robust.
Both contacts cite the Brexit vote as a potentially destabilizing factor but appear mostly comfortable with their direct exposure to the event. The manufacturing IT contact cited the strong dollar of 2015 as a factor that restrained demand for its exports, and foresees renewed weakness in export demand if the dollar continues to strengthen in response to the referendum. However, contacts are bullish concerning their respective outlooks for the next 1 to 2 years.
Commercial Real Estate
On balance commercial real estate markets appear stable or improving in the First District. In greater Boston, a modest slowdown in office leasing is reported, especially for high-rent space, but rents are steady amid low vacancy rates. Office leasing activity held steady at a moderate pace in Portland and Providence, but in Hartford activity remains light and some firms gave up space. Investment sales activity is down in Boston from last year's brisk pace. However, industrial sales activity picked up recently in Boston and parts of Connecticut, and a Portland contact sees a strong industrial property market with potential for new construction. Throughout the District, office construction remains limited in light of high building costs. Infrastructure construction is on the rise in Rhode Island, and hotel construction is planned for greater Portland. A regional lender to commercial real estate reports an uptick in loan demand at his firm amid reduced competition from other lenders. The outlook for Connecticut's commercial real estate market remains somewhat pessimistic based on weak job growth in the state. A Boston contact expects the Brexit vote to exert downward pressure on economic activity in the U.S. and the region, but notes that the vote should also boost foreign investment in Boston's commercial real estate market. Elsewhere in the District contacts are cautiously optimistic for commercial real estate but see risks as tilted to the downside based on global economic and political uncertainty.
Residential Real Estate
Residential real estate markets in the First District remain strong. Five of the six First District states, as well as the greater Boston metro area, reported sales and inventory trends for the period May 2015 to May 2016; New Hampshire reported on trends between April 2015 and April 2016.
Closed sales of single-family homes are up by moderate-to-large margins in every state in the District, and pending single-family sales increased at a slow-to-moderate pace depending on the state. A contact in Rhode Island considers a summer slowdown "unlikely" in light of strong recent sales. Median sales prices for single-family homes are on average up modestly from a year ago--with Vermont and Connecticut reporting moderate price declines and the remaining states reporting small-to-moderate increases. Condominium sales figures varied across states. Closed sales of condominiums are up in all states except Connecticut and Vermont, while pending sales increased in Massachusetts and New Hampshire and decreased in Rhode Island, Maine, and Vermont. As in the single-family market, median condo sales price changes are moderate, with the exception of a large over-the-year decline in Rhode Island. However, a contact in that state believes the decline is likely transitory because the data are prone to volatility.
For both single family homes and condos, inventory is down in every reporting region. In addition, number of days on market decreased from a year earlier in all states reporting such data, as did months' available supply of both single-family homes and condominiums. Contacts continue to attribute the lack of inventory to a combination of lack of new construction and a dearth of sellers coming to market.
Despite persistent inventory issues, contacts are optimistic. Those in Massachusetts, Vermont, and Rhode Island all expressed a positive outlook, primarily attributable to strong buyer demand. They cite stable employment figures and continued low interest rates as the key factors supporting such demand.