Beige Book Report: Boston
September 6, 2017
Summary of Economic Activity
Business contacts indicated that economic activity in the First District expanded modestly to moderately through mid-summer, with both retailers and manufacturers mostly reporting increases in revenues compared with a year earlier. Most staffing firms, by contrast, cited revenue declines attributed to tight labor supply. Commercial real estate markets were mixed across the region, with little change in leasing fundamentals and some loosening of commercial sales markets. Residential real estate markets in the region continued to experience increases in prices and declines in sales. Most responding firms cited a positive outlook.
Employment and Wages
Despite labor supply falling short of demand in many cases, wage pressures continued to be modest. Retailers' hiring plans were said to be in line with planned store expansions and they cited "not much" wage pressure. All nine manufacturing contacts this round indicated that employment was flat or increasing. All but one of the manufacturers who commented on the ability to recruit said that they were not having any trouble hiring and replacing workers. Two manufacturing respondents said they were forgoing cost-of-living increases this year. Among staffing firms, all contacts reported high demand for labor and tight labor supply. Demand for skilled labor has been strong, but contacts said many job applicants fall short on requested training; some suggested that clients needed to moderate their expectations. Likewise, low-skill labor supply has not met demand, with two firms citing public assistance as a challenge to recruitment, given the low wages in these positions. All responding staffing firms reported rising pay rates.
Prices
Prices were generally reported to be stable. Retailers reported that prices on most items remained steady. Restauranteurs said that while there were some small price increases on food, some menu prices have gone up more, in the 2.5 percent range. Manufacturing contacts mostly reported stable prices, and a manufacturer of dairy products said that pricing had been "exceptionally stable" in the last two years; a commercial aviation contact said they continue to feel strong downward price pressure from big customers despite record aircraft sales.
Retail and Tourism
Retail contacts consulted for this round reported that their most recent year-over-year comp store sales results ranged from low single-digit decreases to low single-digit increases. One contact noted that younger adults tend to make more purchases online, leading to fewer in-store sales, and two contacts attributed recent sales increases or decreases in part to changes in customer traffic. The outlook for the remainder of 2017 is positive.
A contact in the Massachusetts restaurant industry reported that restaurant revenues through June were up about 3.6 percent from a year earlier. Restaurants in tourist areas such as the Berkshires, Cape Cod, and Boston's North Shore have experienced severe staffing shortages, especially those that have historically relied on seasonal workers needing H2B visas. This labor shortage has had a negative effect on revenues in what is traditionally the high summer tourist season. There is also concern among many Massachusetts restaurant owners that the just-signed law "Further Regulating Employer Contributions to Health Care" imposes substantial penalties on employers whose (non-disabled) employees obtain health coverage through MassHealth (Medicaid, CHIPS) or receive subsidized coverage through the state's health insurance exchange.
Manufacturing and Related Services
Of the nine manufacturing firms contacted, all reported sales in line with their expectations. Sales were up for seven respondents, while two reported changes near zero. Strong areas included commercial aviation and semiconductors. One semiconductor contact reported a year-on-year increase in sales in the second quarter in excess of 30 percent but cautioned that semiconductors are notoriously cyclical. A manufacturer of electrical equipment described the last two years as an "industrial recession" and said that we are now in a recovery.
Only one contact reported a major revision to capital spending plans. The dairy firm said that capital spending was up more than 40 percent last year as they expanded alternatives to traditional dairy products such as almond milk. A manufacturer of electrical equipment said that political pressure had led them to reduce off-shoring to Mexico and China and to increase spending on factory automation.
All respondents said the outlook was positive. A manufacturer of test equipment said that uncertainty about the federal budget and shutdowns was a cause for concern.
Staffing Services
Staffing services contacts in New England gave mixed reports on current revenue growth, with the majority of firms seeing an overall decline year-on-year, which they attribute in large part to difficulty recruiting candidates. Skilled labor markets, particularly in health care and IT, have been strong sources of revenue among contacts, buoying businesses more concentrated in these sectors. All respondents remained optimistic but said they were less optimistic than three months ago. Most anticipate only slight improvement in revenue growth from this quarter to next.
Multiple firms cited the current political situation as a negative influence on hiring; health care reform was singled out as a source of instability, as job applicants now seek employer-based coverage as their top job benefit. All contacts said they are adapting to the tight-supply landscape through targeted recruitment including an expanded online presence, a better referral process, active community engagement, and building stronger relationships with job market candidates.
Commercial Real Estate
Commercial real estate markets remained somewhat mixed across the First District. Contacts reported that leasing activity was very slow in both Hartford and Portland, modest in Providence, and moderate in Boston. In both Portland and Providence, limited inventories in the office and industrial sectors were seen as restraints on leasing activity. However, a Portland contact noted that demand for office space was also soft. Leasing fundamentals were mostly flat across the region, with the exception that office rents increased modestly in Providence and rose slightly in Boston.
Commercial real estate sales fell modestly in Boston and Portland and remained light elsewhere in the District. Prices for premier office properties in Boston were stable despite a modest decline in the number of interested buyers. Maine saw an uptick in retail vacancies and retail property foreclosures. Throughout most of the District, investor demand for industrial properties remained robust, and banks bid aggressively to lend to industrial buyers. At the same time, some banks required more equity on loans for construction of new apartments. One new hotel project was proposed in the Portland area, which reportedly has enjoyed a strong summer tourism season. The outlook among contacts was mostly unchanged, and contacts were cautiously optimistic on balance.
Residential Real Estate
Residential real estate markets in the First District continued recent trends of supply shortages and price increases. For single-family homes, all areas but New Hampshire and Vermont reported moderate decreases in closed sales (New Hampshire data refer to changes from June 2016 to June 2017; the other areas reported July-to-July changes). Pending sales generally increased. For condos, closed sales were down in Boston, Connecticut and Vermont. Persistent upward pressure on prices was observed across the region, with median sales prices increasing in all states except Vermont for both single-family homes and condos.
Low inventory prevails. On a year-over-year basis, all reporting areas experienced a sharp decrease in inventory for both single-family homes and condos. A contact pointed out that varying rules across cities and towns created regulatory difficulties for home builders.
Contacts expressed concern about the decline in sales, noting that as prices increase, potential sellers become wary about finding new listings elsewhere and may be less likely to list their homes. Nonetheless, some contacts expect the market to become more active with the prospect of rising interest rates.
For more information about District economic conditions visit: www.bostonfed.org/regional-economy