Bloomberg News

U.S. Federal Reserve Beige Book: Boston District (Text)

April 11, 2012

The following is the text of the Federal Reserve Board’s First District-- Boston.


Economic activity continues to expand at a moderate pace in the First District. Most contacted retailers, manufacturers, and consulting and advertising firms report higher revenues in recent months than a year earlier. Commercial real estate markets are mostly unchanged, while residential contacts across the region cite rising sales and declining prices. Except for a consulting firm unable to meet very strong demand growth without aggressive hiring, responding firms are hiring modestly or not at all; a few mentioned small layoffs. Retailers express concern about what rising energy costs may do to consumers’ willingness to spend, while manufacturing contacts acknowledge the increasing costs, but say they are not a problem.

Retail and Tourism

Most First District retail contacts characterize year-to-date 2012 performance as strong, attributing this strength to mild winter weather and improving consumer sentiment. For February, year-over-year comparable-store sales increases ranged from low to high single digits, with the exception of one retailer citing a 23 percent rise. Furniture continues to sell well in the First District, as does apparel and other household items. Paper-based products are expected to see 3 percent to 4 percent price increases. While respondents are optimistic that performance will continue to be good, they remain cautious, noting that gasoline price increases might damp consumer sentiment.

The travel and tourism sector in the First District continues to expect a strong 2012, based on 5.6 percent annual growth in 2011, a strong start to 2012, and analyst forecasts predicting high single-digit to low double-digit increases over 2011. In January and February, hotel revenues were up nearly 10 percent, reflecting improved occupancy rates. Higher hotel occupancy has positive spillover effects for restaurants, retail, and entertainment venues. Business travel is driving this increase, as leisure travel is still subject to some consumer caution. Echoing the retail contacts, tourism contacts say higher gas prices could retard growth in leisure travel, but aggressive price discounting might provide a counterweight.

Manufacturing and Related Services

None of the 10 First District manufacturing firms contacted this round saw year-over-year sales declines in recent months, but performance varied. A semiconductor machinery manufacturer which generates most of its sales in Asia reports flat sales in the first two months of 2012, an improvement over declining sales in the fourth quarter of 2011. By contrast, an information technology equipment provider cites 18 percent sales growth in 2011 and continued strong growth in the first quarter of 2012. Geography matters, as firms with large operations in Europe saw slower growth and some outright overseas declines whereas firms more focused on the U.S. and Asia experienced better results. A contact in the information technology sector argues that the end of 2011 was strong because customers held back on spending during the weak spring and summer period but then made sure to spend that money before the year ended.

All of our contacts report that input costs and, in particular, energy costs are up. However, none says rising costs are a problem and all in this round say energy has little noticeable effect on their costs or revenues. In general, respondents indicate they are hiring to keep up with demand. Two firms undertook relatively small layoffs; one did so because of weaker sales in the fourth quarter of 2012 and the other is offsetting layoffs at one New England plant with increases elsewhere in the region. Firms continue to report difficulty finding qualified workers, especially in skilled manufacturing trades and engineering. One contact, an electrical equipment manufacturer, is trying to re-orient recruiting to hire young engineers, for example, and train them in-house, rather than continuing to search for workers who already have experience with the relevant technology.

None of the contacted firms has revised its outlook since our last conversations earlier this year or in the closing months of 2011. Most appear to expect U.S. economic growth around 2 percent in 2012 and company sales growth in the low single digits. Contacts remain concerned about the European economy and about political “gridlock” here. A few contacts also expressed slight concern about prospects for growth in China.

Selected Business Services

Consulting and advertising contacts in the First District report increasing revenues in the first quarter of 2012 and most say that the pace of growth, while not rapid, is sustainable. Despite the fact that recent growth is generally slower than at the end of 2011, contacts are relatively upbeat, partly because the faster growth of late 2011 represented a recovery from a very weak third quarter, in which several contacts experienced declining revenues and laid off workers. Revenue results, while good for marketing and advertising firms, are stronger for consulting firms, especially economic consulting. A firm that focuses on marketing and promotional materials saw year-over- year growth of about 10 percent while another that focuses on advertising cites stable revenues recently after rapid growth in the latter half of 2011. Strategy and business consulting contacts report growth around 5 percent, as clients who had previously been sitting on large stockpiles of cash are beginning to spend them to address pent-up need for consulting services cut during the recession. Clients have reportedly begun to focus on increasing sales and positioning themselves within markets rather than solely on cutting costs. Economic consulting contacts note that demand is extremely strong for high-end consulting and revenue growth is limited mostly by their own capacity to respond. Demand for health care consulting is generally strong, with the exception of pharmaceuticals, but some business lines have slowed as firms wait until the uncertainty over health care reform clears up. One consulting firm has seen rapid growth due to two new large government contracts, but notes that individual consulting firms’ prospects are contingent upon the funding status of and uncertainty surrounding the specific agencies with which they do business.

Contacts report wage increases in the low single digits and expect this pace to continue. Input costs consist primarily of salaries in this sector, but other cost growth is generally low. Firms say they are able to pass on cost increases to clients and thus see either steady or slightly increasing profit margins. Responding firms say they changed employment levels very little in the first quarter of 2012, except for economic consultants who are hiring to meet demand growth, and a strategic and management consultant with small layoffs. Aside from economic consulting, contacts do not plan to expand headcounts in the near future, requiring more rapid increases in demand to reinitiate hiring.

Most contacts expect moderate growth for the rest of 2012, with some anticipating an acceleration either late in the year or in 2013. They note very few downside risks, saying their biggest concerns are the macro economy in general and uncertainty surrounding partisanship in Washington and the upcoming election.

Commercial Real Estate

Reports from commercial real estate contacts in the First District indicate that conditions are largely unchanged since the last report. Boston’s commercial property market remains more active than other New England markets, which are ―quiet,‖ a term one contact used to describe Portland. Contacts note that investment demand for prime office and apartment properties continues to be robust in Boston and expect it to remain so for the foreseeable future. Office and retail demand elsewhere in New England is moderate. Contacts in these areas do not foresee increases in vacancy rates, but note that a dearth of interest from potential entrants to these markets means they are unlikely to fall in the near future. Retail sector rents remain flat across the region and all contacts reported retail sector vacancy rates somewhere between flat and modestly decreasing.

Construction activity continues at moderate levels in Boston and low levels elsewhere in the District. One contact perceives an increased interest in new retail and medical office projects in Boston for the first time in recent history. Another contact expects education sector construction activity in the Boston area to increase later in the year, but notes that large health care projects continue to be delayed. Market appetites for multifamily apartment development remain strong in Boston. According to contacts, favorable terms but strict standards characterize financing markets for construction projects in Boston and financing conditions in Boston remain markedly better than in the region’s smaller markets. Respondents throughout the region remain cautiously optimistic about the coming months, but many acknowledge that commercial markets will not begin to pick up until macroeconomic conditions improve substantially.

Residential Real Estate

Residential real estate in New England shows signs of strengthening as sales continued to increase in February, except in Connecticut where February sales were close to year-earlier levels. According to most contacts, activity is improving across all price segments. Contacts cite low interest rates, falling prices, improving economic conditions, and milder weather as factors contributing to the observed sales increases. Nonetheless, contacts remain cautious about the prospect of housing-market recovery because home prices continued to decline across the six states. Most contacts attribute falling prices to distressed properties; however, they also say the role of distressed properties in the market is diminishing. In the Greater Boston area, by contrast, the median sale price of homes and condos rose in February compared to a year ago. Respondents say buyer activity in Boston has intensified and they are concerned that inventory levels will not provide adequate selection for homebuyers.

Contacts in states with significant levels of inventory remain cautiously optimistic about the near future; they say sales growth observed in recent months appears promising, but declining prices remain a source of concern. Other contacts maintain a more optimistic outlook for coming months due to inventory levels coming into balance with buyer activity. Based on pending sales figures and current market activity, contacts expect growth in year-over-year sales to continue into spring.

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