The following is the text of the Federal Reserve Board’s First District-- Boston.
FIRST DISTRICT - BOSTON Reports from business contacts in the First District reflect a growing economy, although the pace of growth appears to be somewhat slower than in the last round. Retailers cite mixed sales results, manufacturers note slow growth, and software and IT services firms report disappointing results. By contrast, staffing firms are seeing a pick-up in growth. Commercial real estate contacts indicate that fundamentals remain flat, and sentiment has soured somewhat in recent weeks; residential real estate respondents say growth in home sales has slowed but home prices are rising modestly in some areas. Hurricane Sandy reportedly had very modest effects on economic activity in New England. Prices are said to be level in general, with minimal inflationary pressures. While some firms cite shortages of specialized workers, few are hiring, none extensively, and no one mentions upward wage pressures.
Retail and Tourism
First District retailers contacted for this round report that year-over-year October sales changes ranged from single-digit decreases to single-digit increases. A durable goods retailer reported a large single-digit decrease which they attributed to a decline in customer traffic related to preparations for and the aftermath of Hurricane Sandy. Sales of adult apparel and home furnishings continue to be strong. Some retailers have increased their hiring in anticipation of the holiday season.
Respondents say that prices are holding steady and they do not see inflationary pressures. Many contacts are actively managing inventories to remain nimble and some are undertaking multi-year plans to better position their businesses for the future in which the Internet will account for an increasing share of sales. Because of the so-called fiscal cliff, there is some uncertainty about what to expect in terms of tax policy; this is viewed as particularly affecting planning by small businesses.
Manufacturing and Related Services
Manufacturing respondents give a general picture of weak growth. Of the 10 firms contacted this cycle, all but one report growth versus the period a year earlier but only four report higher year-on-year growth versus the previous quarter. Similarly mixed numbers appear across other measures, with three firms reporting an improved outlook, four reporting higher employment and four reporting higher capital expenditures.
Firms that are growing attribute growth to idiosyncratic factors and not to the economy. A pet healthcare firm plans for 7.5 percent growth in 2012 but says it is all the result of “innovation” and not the economy. A manufacturer of medical equipment said government spending on VA hospitals had led to a large increase in demand for its products. A semiconductor equipment manufacturing firm reported a dramatic reduction in its expected sales in the fourth quarter. As in recent Beige Book rounds, they blame this on the semiconductor equipment “cycle.”
We continue to hear occasional complaints of difficulty finding qualified workers. A pharmaceutical manufacturer reports hiring 75 new people this year but still having 58 openings which they have been trying to fill “for a long time” and which “they do not anticipate to be able to fill this year...” They attribute the difficulty to their need for “highly qualified scientists with specific sets of skills.” A manufacturer of analytical laboratory equipment finds it “increasingly difficult to find qualified people in China.”
In general, manufacturing contacts’ recent weakness has not yet led them to revise substantially their capital expenditure plans. That said, many of these plans involve spending outside the United States. For example, a manufacturer of lab equipment is spending almost 50 percent more this year than is typical, but all that increment involves a new plant in England; capital expenditure in the U.S. is entirely on maintenance.
Software and Information Technology Services
New England software and information technology services contacts generally report weaker-than-expected activity through October, with revenues in the third quarter roughly on par with year-earlier levels. The downtick in activity reportedly reflects heightened political and economic uncertainty, which has rendered many potential clients unwilling to commit to projects. Many contacts report increasing difficulty in executing large license agreements, particularly in Europe, where one contact says sluggishness in the manufacturing sector led to a year-over-year decline in license revenue of nearly 40 percent. Delays in contract signings and project starts have led many respondent firms to slow the pace at which they are hiring; one contact may reduce headcount modestly in coming months, after hiring “in advance of anticipated need” earlier this year. Capital and technology spending and selling prices have gone largely unchanged since February.
Looking forward, New England software and IT contacts are generally less upbeat than they were three and six months ago, with many expressing growing concerns regarding the “fiscal cliff” and macroeconomic conditions in Europe. Most expect only modest growth through Q1 2013.
New England staffing firms generally report improved business conditions, with most describing business since Labor Day as “pretty good.” Year-over-year revenue changes in the third quarter varied widely, from down slightly to up by about 20 percent. Labor demand is up slightly in the IT and engineering sectors, and one contact reports renewed activity in the manufacturing sector. However, demand for office and clerical assistants and accountants remains weak. In terms of labor supply, candidates with high-end skill sets such as nurses, mechanical and electric engineers, and software developers remain hard to find. In addition, one contact reports that turnover has recently decreased, as those with jobs are hunkering down for the holiday season. Nevertheless, bill rates and pay rates have gone largely unchanged since August. The outlook among New England staffing contacts is generally consistent with that of three months ago, with most expecting more robust growth in 2013.
Commercial Real Estate
According to contacts across the First District, commercial real estate fundamentals were roughly flat in recent weeks amid light leasing activity. In Hartford, downtown office vacancy rates (as percentages) remain in the mid-20s, although absorption could improve in the coming months if pending lease deals go through. A Providence contact also sees some chance of significant absorption in the downtown office market but noted downside risks linked to macroeconomic conditions. In Portland, leasing activity in recent months remained light and fell below expectations, resulting in flat rental rates. In Boston, office fundamentals showed modest improvements in the third quarter, but leasing inquiries have reportedly fallen off recently amid concern over the fiscal cliff. Sales activity in Boston also softened, despite prior expectations that property owners would rush to take capital gains at current tax rates in light of pending 2013 rate increases. The multifamily sector remains strong in Hartford and Boston, with rents rising as much as 10 percent over the year for some properties in greater Boston. Loan terms remain highly favorable for high-quality properties and a regional lender to commercial real estate continues to experience record loan volume.
A majority of contacts note that business sentiment soured recently, with the national election results and the fiscal situation cited as key factors. The outlook for commercial real estate among our contacts turned more pessimistic on balance in light of these same factors and also, according to some, risks to growth stemming from Europe and other parts of the world. While contacts report no immediate impacts of Hurricane Sandy on the commercial real estate markets in their respective cities, two contacts point out that insurance rates for commercial structures along the Eastern seaboard are likely to rise going forward, restraining development in some areas.
Residential Real Estate
Sales growth slowed in September throughout much of the First District among both the condominium and single-family home markets. In the Greater Boston area, single-family home sales actually declined, representing the first decrease in 15 consecutive months. By contrast, condominium sales in Greater Boston rose, reaching historic levels for the month of September. Slowing growth across much of the region was attributed to the dwindling number of properties in the market and damped confidence in the local economy. Most contacts note modest price appreciation. However, in Rhode Island and Connecticut, prices declined compared to a year ago, but consistent growth in sales is expected to place upward pressure on prices. First District contacts remain fearful that ongoing declines in inventory levels will hurt the selection of homes on the market and discourage buyers in the market. Some contacts say homeowners interested in selling have been reluctant to list their homes in anticipation of greater future price appreciation.
Outlooks for the coming month remain similar to previous reports in spite of less robust growth recently. Contacts generally say the housing market continues to recover and expect positive year-over-year growth in sales in the coming months because of low interest rates and affordable prices; they also expect modest appreciation in prices. Inventory levels are not expected to increase until the Spring. Overall, contacts remain optimistic about the recovery in the housing market, but caution that gains could be undermined by worsening economic conditions.
SOURCE: Federal Reserve Board