Bloomberg News

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

July 18, 2012

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

FIRST DISTRICT - BOSTON

Economic activity in the First District continues to expand at a moderate pace. Residential real estate sales increased relative to last year and commercial construction activity continues to gain momentum.. Sales in the retail sector remain about flat, while the manufacturing and business services sectors continue slow growth. Contacts report that their costs and prices are increasing very moderately, if at all. Firms are generally not laying off workers, but most are also not engaged in substantial hiring. Many contacts cite uncertainty regarding future macroeconomic conditions as impinging on their outlook, and some contacts cite this as a reason for postponing investment or other decisions.

Retail

First District retail contacts report that sales range from slightly below to slightly above year-ago levels. Consumer spending continues to be strong for adult clothing and shoes, but spending on furniture and electronics has recently slowed relative to the pace earlier in the year.

All of the contacts report that prices seem to be holding steady, and they do not anticipate much inflation or price volatility in the near future. The contacts continue to expect low positive single digit percentage sales increases for 2012, although the final results will depend on holiday shopping. Many contacts feel that there is a lot of macroeconomic uncertainty and expect aggregate growth to be sluggish through the rest of 2012 and into early 2013.

Manufacturing and Related Services

According to our contacts, the manufacturing sector in the First District continues to grow. However, virtually all of the contacts express some concern about the outlook. Of the 8 firms contacted in this round, 2 report an actual fall in sales relative to year-ago levels, 2 report an increase in growth and the remaining four report slower growth. The firm that reports the largest increase in growth, a manufacturer of fitness equipment, said that sales grew 20% in the first quarter overall but there was a sharp slowdown in March and April followed by a partial recovery in May and June. A manufacturer of electrical equipment said that one area of notable growth is residential real estate, in which they recorded multiple months of double digit growth. Of course, sales in that business line are 65% off their peak during the housing boom.

None of the contacts report any major revisions to their hiring plans. Five of the contacts said they are either not hiring or not hiring much; one said they are hiring and another said it would all depend on the evolution of sales growth. A producer of semiconductor manufacturing equipment reports that it had limited merit pay increases to very high performing employees.

Six of our contacts report no revisions to their capital plans and two report that they plan to hold off of previously planned increases. A fitness equipment manufacturer reports that their original plan had been to increase investment by 5%, but now they plan to keep it at last year’s levels. A contact at an electrical equipment manufacturer notes that they plan to hold off on capital expenditures despite their strong balance sheet and considerable liquidity.

The key word for the overall outlook is uncertainty. In general, our contacts use phrases such as “sitting on the sidelines” and “waiting for the uncertainty to play out.” Not everyone is completely downbeat. One contact, from the toy industry, reports a “better feeling” than a year ago. There is uncertainty about domestic policy, including the “fiscal cliff” and health care, as well as uncertainty about macroeconomic performance in Europe and China.

Commercial Real Estate

Contacts in the First District report that conditions continue to slowly improve in the commercial property market. All contacts, especially those in Boston, note that financing conditions are very favorable for high quality projects. The office market in New England remains flat. Contacts in Boston report difficulty attracting tenants to lower-quality office space and expect vacancy rates to remain steady in the coming months. Contacts believe that the office market is unlikely to improve until the national economy begins to experience robust growth. Construction activity throughout the First District continues to gather momentum, but is mostly limited to the multifamily housing, medical, and higher education sectors. According to contacts, the retail sector is in a holding pattern throughout the First District. Overall, contacts believe that conditions in the New England commercial real estate market are somewhat improved in the last year and, barring a macroeconomic disruption, expect this tepid improvement to continue for the rest of the year.

Residential Real Estate

Home and condo sales in the First District showed significant year-over-year increases in May, continuing the trend of the last several months. Contacts attribute the gains to low interest rates, affordable prices, and pent-up demand. A contact from the Greater Boston area adds that improving economic conditions and raising rents in the area have also contributed to sales activity. The consecutive months of growth have improved confidence in the market, but contacts note a recent decrease in momentum compared to previous months. According to most contacts, the pace of market activity has declined slightly, which may be revealed by sales figures in the coming months. Some contacts note that an unseasonably warm winter and spring provided an early boost to sales in the first half of the year, which may account for some softening in activity during the past month. Meanwhile, price changes are mixed across the region. Maine experienced an increase of approximately 7 percent relative to last year while the median sale price in Rhode Island slipped at least 8 percent. Other states in the region experienced relatively modest changes in price levels from a year ago. Some contacts express concern over appraisal practices, claiming banks appraisers are underestimating home values. Inventory levels declined throughout much of the region, particularly in the Greater Boston area.

As the number of months of consecutive growth continues, contacts have become more optimistic about the direction of the market. Nonetheless, contacts remain cautious about recovery and believe it could be easily derailed by deterioration in economic conditions. Contacts predict continued year-over-year growth in sales for the next several months, but possibly at a slower rate than in previous months while prices are expected to stabilize.

Selected Business Services

Consulting and advertising contacts in the First District report a steady but generally positive second quarter of 2012. No firm had a bad quarter, but few of the contacts are particularly excited about their results. Contacts report that potential clients are unwilling to commit to projects and instead choose to hold their cash and wait for clearer signals regarding the direction of the economy and the resolution of political and policy questions. Some contacts report a strong second quarter, generally due to factors specific to the industries they primarily serve.

Contacts report little to no inflationary pressure and were generally not concerned about their rate of cost growth (primarily salaries). Firms report cost growth ranging from zero to “in line with inflation,” and only a few firms report any change in the prices they charge. Of those that did increase their rates, increases range from 2 to 4 percent relative to last year.

Employment growth is weak as many firms report wanting to wait for more demand before hiring, although no firm reports downsizing. Half of all firms report no change in payrolls, while the other half report increases ranging from 2 to 5 percent year-over-year. Firms that report hiring during the second quarter generally expect to continue hiring at a modest pace, while those that did not hire in the second quarter plan to leave employment levels unchanged for the remainder of 2012.

Most contacts are cautiously optimistic about the rest of 2012, and more bullish about 2013. An overarching theme of the contacts’ comments is uncertainty. Contacts are primarily concerned with uncertainty regarding general macroeconomic conditions, the European debt crisis, and politics and the upcoming election.


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