January 18, 2017
Summary of Economic Activity
Business activity continued to expand in the First District at the close of 2016. Both retailers and manufacturers cited modest to moderate increases in revenues in recent weeks compared with a year earlier. Software and information services firms reported strong order increases in the fourth quarter. Commercial real estate markets were mostly steady in the region; in the Boston area office rents increased and sales prices for commercial properties were stable. Residential real estate markets across the region continued to experience increases in both sales and prices. Although none sought substantial additions to headcount, a number of firms reported difficulty finding workers to fill openings. Prices were largely stable. Most responding firms cited a positive outlook, expecting end-of-year growth rates to continue in 2017.
Employment and Wages
Contacts in multiple sectors mentioned tightening labor markets. For example, one retailer reported that their firm's labor costs went up 5 percent in 2016 because they had to pay more to attract workers and they faced state-mandated minimum wage increases. A majority of manufacturing contacts reported that they were actively recruiting and half indicated that they were struggling to find workers. Manufacturers' mentions of hiring difficulty extended across both skilled and unskilled workers and appeared to be an issue all across the region, including western Massachusetts, central Connecticut, and Rhode Island, as well as the Boston area. Software and IT services respondents kept headcounts relatively stable this past quarter and raised wages by mid-single digit percentages.
Prices
Retailers reported that input and selling prices remained generally steady. Manufacturing contacts similarly did not report exceptional pricing pressure from either customers or suppliers. A global supply glut of selected chemicals reduced prices of both those chemicals and products made with them. A supplier to the auto industry expressed concern that high levels of inventory in the auto business would lead to discounting and, in turn, price-cutting pressure on suppliers as occurred in the mid-2000s.
Retail and Tourism
Retail contacts consulted for this round reported that sales growth was generally good between mid-November and early January. In one case, this more positive recent trend made up for lower-than-expected sales earlier in 2016, which were partly driven by weather. Apparel sales were up, but demand for hardware items was reported to be down. Two respondents concluding their fiscal years on December 31 reported 2016 sales increases ranging from 1 percent to just over 3 percent. Another contact cited preliminary 2016 sales increases in the mid-single digit range. Continued modest sales growth is expected for 2017.
A contact in the restaurant industry reported that sales in December were generally good, which he indicated serves as a positive predictor for the next couple of months, as customers spend gift cards purchased during the holiday season. Locally owned restaurants were said to be doing better than the larger publicly-traded chain outlets. This respondent expected that overall restaurant sales will be up 1 to 2 percent for 2016. Looking forward, there was concern that a tight labor market combined with increases required by minimum wage laws will stifle restaurant expansion and job growth over the next few years, and some sense that this trend has already started. Restaurant expansion may also be limited by rising real estate costs.
Manufacturing and Related Services
All eight manufacturers contacted this cycle reported higher sales versus the same period a year earlier. A sporting goods manufacturer reported robust year-over-year sales increases in the fall but does not expect that pace to continue. A manufacturer and retailer of furniture reported that sales slowed in mid-November but recovered in the balance of the year and were up slightly versus the year-earlier period. A toy maker reported exceptionally strong sales in the fourth quarter. A manufacturer of components for capital goods said that the second half of 2016 was better than the first half.
Most respondents reported higher capital expenditures but none reported major revisions to spending plans. Information technology remained a major area of capital expenditure for several firms. A manufacturer of components for capital goods said that new technologies were allowing firms to get more out of existing equipment and that this was depressing capital expenditures.
All the contacted manufacturers cited a positive outlook notwithstanding some uncertainty about the impact of possible policy changes by the new administration.
Software and Information Technology Services
Contacts in software and IT services--with a very limited number of respondents--reported mixed revenue results near the end of 2016, but strong demand in Q4. A healthcare software firm reported a slight decline in 2016 revenue from 2015, though they attributed this to accounting changes more than a real decline in business. They experienced a "huge" Q4 for new orders, and thus were gearing up for a strong 2017. The contact identified uncertainty surrounding the future of the Affordable Care Act as a possible headwind for their hospital clients. An IT firm selling to manufacturers summed up 2016 as "a stable year after a rocky 2015." They reported high single-digit growth in bookings in Q4 over last year. The contact was hopeful that manufacturing will continue to recover in the coming year, possibly including tailwinds from the incoming administration. However, they expressed concern about a resurging U.S dollar.
Commercial Real Estate
Conditions in commercial real estate markets across the First District were stable in recent weeks. Office leasing activity was steady or modestly slower in the region's major metro areas. Investment sales activity and sales prices for prime commercial properties in Boston were also stable, as foreign investors were undeterred by higher interest rates and a stronger dollar. One contact estimated that office rents in greater Boston increased 10 percent on average in 2016. Apartment construction activity slowed in recent months in both Boston and Portland, while office construction was stable at a slow pace in Boston and minimal in the rest of the region.
The outlook among contacts was cautiously optimistic, with significant uncertainty related to domestic politics. Contacts across the District expected capitalization rates to increase in 2017 to keep pace with rising interest rates, noting that such increases imply that rents will have to increase and/or valuations will have to decrease. On balance, contacts anticipated that property values will remain flat in 2017. Apartment construction activity was expected to slow further in coming months as borrowing costs continue to rise and lending terms continue to tighten, but prospects for new office construction appeared brighter for 2017 in light of rising office rents and low office vacancy rates around the region.
Residential Real Estate
Continuing recent trends, residential real estate markets in the First District showed robust increases in sales and prices relative to last year. Closed sales for single-family homes and condos increased in all six First District states as well as in the Boston metro area (five of the six First District states and Boston reported changes from November 2015 to November 2016; Maine reported on October 2015 to October 2016). Massachusetts recorded the most closed sales on record for the month of November. As usual, many contacts cited falling inventories as an issue: inventories decreased year-over-year in every reporting region. A contact in Massachusetts reported that "with such little inventory, buyers needed to be quick with their best offers from the start."
Home prices also rose year-over-year. For single-family homes, the median sales price increased in every reporting region. The same was true for condos, except in Vermont where prices decreased slightly.
Overall, contacts were optimistic about the outlook for the end of the year and into 2017. Many said rising interest rates would stimulate buyers to make offers at the end of 2016, but they did not expect further moderate increases in interest rates to restrain the region's consistently strong buyer demand.