Thursday, November 20, 2014

Tuerck letter to Suffolk Environmental Club

The following letter from BHI Executive Director David G. Tuerck was sent to the Suffolk Environmental Club on November 20, 2014:

Dear Students:

Concerning your comments in the Suffolk Journal about Koch money “influencing … scientific results,”  I find it appalling that a group of students at Suffolk – or any student anywhere – would sign on the idea of banning money that goes to support research  without even the slightest attempt to confer in advance with the authors of the work being condemned.

You say you have “questions about what the [Koch] money is being used for exactly.”  Well, I have already told the Journal that almost all the money from Koch has gone to support faculty salaries, student scholarships and a speaking program.

As for the funds that go to the Beacon Hill Institute or its research, you, in my opinion, violated generally-accepted standards of academic integrity when you allied yourselves with the “Koch-free” people without first talking to me and my staff. I have to wonder how you would blindly attach yourself to what is a blatant, anti-free-speech, radical-left political campaign without first finding out what you are talking about. Where, I have to ask, was your faculty advisor when you did this?

What you do when you sign on to that the anti-Koch campaign is ally yourself with a political operative who is using her Suffolk connection to advance her career.  It seems to me that you might want to reconsider allowing yourselves to be used as pawns in her game.

I have a suggestion:  Contact Frank Conte, our Director of Communications, and ask for an appointment to meet with my staff to discuss our work.  Then you can reach your own conclusions about the quality of our research and whether you want it banned from Suffolk.

Sincerely,

David G. Tuerck
Executive Director, Beacon Hill Institute
Professor of Economics
Suffolk University

Related: Letter to the editor, Suffolk Journal, November 19, 2014





Friday, October 17, 2014

Notes on yesterday's MA Employment Situation Report: U-Rate: 6.0% for September 2014

Highlights from yesterday's MA Jobs Release for September 2014. 
  • The MA Executive Office of Labor and Workforce Development reported today the September 2014 unemployment rate rose to 6%. 
  • The state’s economy added 9,400 jobs in September. Meanwhile, August’s previous number of new jobs lost was revised to 4,900 from 5,900. 
  • The labor force in September increased by 14,600 workers. The total MA labor force is now 3.517 million. 
  • The Education and Health Services lost the largest number of jobs in the past month (4,800) while Trade, Transportation and Utilities added the largest number of jobs (10,700).  
  • Manufacturing and Other Services were the two other sectors which lost jobs, 700 and 800 jobs lost, respectively. 
  • Government added only 100 jobs in the past month. However the public sector overall has gained 2,100 jobs in the past year.
  • Information (1,900) and Leisure and Hospitality (1,000) were two sectors with big gains. 

Read BHI's analysis here

Friday, October 3, 2014

BHI work cited in Campaign 2014

BHI's work on labor market reform and interstate competitiveness has drawn the attention of office-seekers far and wide. Safe to say both parties like us. After all, the work speaks for itself. 

Monday, September 22, 2014

"Business activity improving & wages are steady" says Fed's Beige Book for September 3

Verbatim

First District--Boston
Business activity appears to be improving in the First District. A greater fraction of retail and manufacturing contacts cite year-over-year sales or revenue increases than in the last couple of rounds and outlooks are positive. Software and IT services and staffing firms also report strong and/or increasing activity. Commercial and residential real estate markets are largely unchanged since the last report. While some contacts cite difficulty filling skilled positions, most responding firms are neither adding to nor subtracting from headcounts to any substantial degree. With the exception of staffing firms, respondents say wages are steady. Prices, too, are reported to be steady with very few exceptions.

Retail and Tourism
Retailers contacted for this round report comparable-store sales changes ranging from down 1 percent to up 7 percent year-over-year. Spending on clothing, household items, and home improvement categories is said to be good. Prices remain steady and inventory levels are well controlled. Some selective hiring is planned. These retailers expect to achieve their 2014 goals of low single-digit sales increases. Their outlook for the U.S. economy ranges from "mixed" to an expectation of moderate growth--one retailer characterized its outlook as "neither bullish nor bearish."

Boston-area hotels continue to do very well. Occupancy rates averaged 92 percent in July, and revenues were up 9.5 percent from July 2013, mainly because the average price per room was up. Advance hotel bookings are strong through the fall. Through July, Boston restaurant revenues were up 6.9 percent from January-July 2013. Business travel remains strong and leisure travel is up 2 percent year to date, which contacts indicate is a large increase for this market segment. Year to date through July, traffic at Logan Airport was up 4.5 percent. Contacts expect 2014 travel to best 2012 and 2013 records.

Manufacturing and Related Services
Of the dozen manufacturing firms contacted this cycle, only one reports declining sales and two report exceptionally strong sales growth versus the corresponding period a year earlier. The firm reporting a decline in sales attributes it to an exceptionally strong period a year earlier. One of the companies reporting exceptional growth was a semiconductor manufacturer, with 15 percent year-over-year sales growth in the second quarter; this is considered high even for this highly cyclical business. The other strongly growing company is a computer systems vendor who sells largely to the Defense Department; this contact said that clarity about the Federal budget had released significant new spending. Two firms that sell equipment to semiconductor manufacturers report strengthening sales, but a third is facing a "lull" in orders and expects them to pick up in the first half of 2015.

Only one contact, a manufacturer of semiconductor equipment, reports layoffs over the last year. Of the remainder, one reports a small reduction in headcount, four cite no change, and the rest are increasing employment, although no one reports large-scale hiring. A typical comment came from a maker of electrical equipment, who says their hiring is "cautious." Many firms, including those with strong sales growth, indicate they want to do more with less or "keep headcount growth below sales growth." Firms continue to cite problems finding skilled engineers.

All but one contact indicates that prices are stable on both the selling side and the input side. The exception is a producer of milk products who reports that the price of raw milk increased dramatically on account of increased exports, raising U.S. retail prices of milk products. Half the contacts report declining inventories. The contact in the semiconductor industry with sharply higher sales also reports an increase in orders that they are unable to fill on time or at all; they are increasing capital spending to reduce bottlenecks. Most firms report increased capital spending more or less in line with earlier plans.

Outlooks are positive. Even the semiconductor manufacturing firm that laid off workers in the first half of the year expects strong sales growth in the first half of 2015. A manufacturer of toys has a mixed outlook; this contact says high-priced products are not selling well because consumers are cautious. 

Software and Information Technology Services
First District software and information technology services contacts generally report strong demand through August, with year-over-year revenue increases mostly ranging from 7 percent to 20 percent and quarter-over-quarter increases in the mid-single-digits. Contacts attribute this growth to continued macroeconomic recovery, a rebound in the manufacturing sector, and robust demand in the marketplace for software products. By contrast, one contact producing healthcare software reports slight year-over-year decreases in revenues, which he attributes to the expiration of federal stimulus money for health records software. Most firms have added to headcount in the last year, with positions concentrated in sales, research and development, and marketing. Wages are generally flat; however, one firm awarded merit-based increases in the 3 percent to 4 percent range. Selling prices have held constant. Looking forward, while New England software and IT contacts remain concerned about cost implications of the Affordable Care Act, weakness in the Chinese economy, and the overall macroeconomic environment, they continue to be optimistic, expecting a steady rate of growth through the next few months.

Staffing Services
New England staffing contacts generally cite increased activity since their last reports in May. While one firm supplying workers to the healthcare sector saw a dip in billable hours from June to early July, strong growth in July and August is putting them back on track. On a year-over-year basis, revenue growth is in the 4 percent to 20 percent range. Only one contact continues to report year-over-year revenue declines in the New England region, attributed primarily to client mix. Labor demand is reportedly strong in the information technology, software, aerospace, nursing, electronics, and legal industries. Supply is largely unchanged since May, with continued shortages of high-end technical workers such as software developers, Java programmers, computer engineers, mechanical design engineers, and quality assurance managers. Maintenance and ambulatory nursing positions are also reportedly difficult to fill. By contrast, one contact notes that entry-level IT workers are plentiful. To attract high-skilled workers, staffing firms continue to expand their social media outreach efforts and invest in technological innovations such as mobile compatibility and website development. Both bill and pay rates have increased, with one contact expecting continued upward pressure on wages through the coming months. Contacts express concern about increased health insurance costs as a result of the Affordable Care Act and the extent to which they will be able to pass these additional costs on to their client base. Despite this challenge, New England staffing contacts are increasingly optimistic, expecting year-over-year revenue growth in the high-single-digit range in coming months. 

Commercial Real Estate
Commercial real estate activity appears mostly steady across the First District. Contacts in Hartford, Portland, and Providence all describe office leasing activity as slow, but the slowness is attributed to typical seasonal patterns. In Providence, lack of suitable industrial space remains a problem in light of healthy demand for space in that sector. In Hartford, interest is expected to be fair-to-strong in a set of downtown commercial structures that were recently (or will soon be) placed for sale, including three well-leased office towers, and there is the sense that an increasing number of owners want to cash in on robust investor demand for commercial real estate. In Portland, retail sector sales and leasing are strong, helped in part by some large national chains that are adding locations in the area, and strong investment demand across property types in recent months has pushed commercial property prices up by 10 percent from a year ago. In Boston, market conditions are largely unchanged since the previous report. Downtown leasing activity held steady, and office leasing demand appears to be strengthening along the Route 128 corridor. However, despite rising profits, most existing firms are not expanding their space needs and some recent lease renewals resulted in reduced footprints. Contacts continue to be impressed by the amount of capital pouring into commercial real estate (as well as into multifamily structures) in the greater Boston area, with prices that reflect highly optimistic expectations. Also in Boston, construction activity remains strong in the hospitality and multifamily sectors, and speculative office construction remains limited.

The outlook is uncertain for Rhode Island, where the outcome of the closely contested gubernatorial election is seen as holding some upside potential for growth in the state via improved business sentiment. Independently, a contact sees a risk of increase in the vacancy rate for class A office space in downtown Providence. In Hartford, economic growth is expected to fall short of the national pace, likely resulting in flat leasing activity, but the commercial real estate lending environment appears to be loosening up some. In Boston, contacts expect moderate economic growth and a continuation of current trends, including strong investor demand. While one Boston contact sees a risk of overbuilding in the hotel and multifamily sectors, the city's office sector is not seen as facing a similar risk. 

Residential Real Estate
Closed sales of single-family homes in June were mixed across the First District compared to June 2013. Sales declined in Massachusetts and Vermont, increased in Connecticut and Maine, and remained unchanged in Rhode Island. (Contacts in New Hampshire were unavailable.) Median sales price changes also varied by state, increasing only in Massachusetts, declining in Rhode Island and Vermont, and holding steady in Connecticut and Maine compared to June 2013. For Massachusetts, this is the fifth consecutive month of year-over-year declines in sales of single family homes and for greater Boston it is the sixth consecutive month of year-over-year declines. Contacts in Massachusetts say the ongoing decline in sales and rise in sales price are driven primarily by a shortage of inventory, with little change in consumer demand. Indeed, Massachusetts inventories have been trending down for more than two years on a year-over-year basis and median sales prices have risen for more than a year and a half. With only 5.5 months of supply, Massachusetts was considered a sellers' market in June (a market is considered balanced when 7.5 to 8.5 months of supply are available). By contrast, Maine is experiencing an increase in inventory and contacts are hopeful that availability will keep the fall market strong. Connecticut contacts cite low inventory of starter homes. Respondents in all five states express concern over student debt levels, believing they will continue to weigh on housing markets for the foreseeable future.

Relative to a year earlier, June condominium sales were higher in Maine, Connecticut, and Vermont and lower in Massachusetts. The median condo sales price increased over the same period in three of those four states; in Connecticut, the median sales price was unchanged.

Sentiment in the First District is generally positive, with expectations of continuing improvement. However, multiple contacts say expectations need to realign to a "new market norm." These contacts say that both buyers and sellers in New England housing markets must adjust to price increases that are well below previous high rates and begin to look at a house as shelter rather than as "a piggy bank."



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Monday, September 8, 2014

On the reading pile: Explaining the Fed's beige book

Chicago Fed Letter

"This article provides the public a first look at a new set of indexes constructed from the Chicago Fed’s Beige Book survey, and describes their ability to track economic activity."

BHI on the August 2014 U.S. Employment Situation

Read our take on today's jobs number here.

Tuesday, August 26, 2014

A peek at the Fed's model


From the Fed's authors: 
The U.S. labor market is large and multifaceted. Often-cited indicators, such as the unemployment rate or payroll employment, measure aparticular dimension of labor market activity, and it is not uncommon for different indicators to send conflicting signals about labor market conditions. Accordingly, analysts typically look at many indicators when attempting to gauge labor market improvement. However, it is often difficult to know how to weigh signals from various indicators.Statistical models can be useful to such efforts because they provide away to summarize information from several indicators. This Notedescribes a dynamic factor model of labor market indicators that we have developed recently, which we call the labor market conditions index (LMCI). Details of the data, model, and estimation will be presented in a forthcoming FEDS working paper. 
We look forward to reading the paper. 

Hat tip: Brian Wesbury of First Trust.

Friday, July 18, 2014

Composition of the Massachusetts workforce: By sector

Education and Health Services is the largest job sector in Massachusetts. More on the June Employment Situation in Massachusetts.

Beacon Hill Institute
Source: Executive Office of Labor and Workforce Development, Commonwealth of Massachusetts

Thursday, June 19, 2014

BHI's Conte in the Herald: Bay State benefits from foreign trade

This morning the Boston Herald published our op-ed on extending Trade Promotion Authority to extend free trade pacts. This benefits Massachusetts.

Thursday, June 5, 2014

State Tax Collections - U.S. Census Bureau

Quick takeaway: State sales taxes remain steady and dropped only slightly during the downturn of 2009.


Wednesday, June 4, 2014

A response to the Institute on Taxation and Economic Policy's misguided critique of the STAMP model

On May 21, 2014, The Institute on Taxation and Economic Policy (ITEP) released a report entitled, “STAMP is an Unsound Tool for Gauging the Economic Impact of Taxes.” The report makes several criticisms of the Beacon Hill Institute (BHI) State Tax Analysis Modeling Program (STAMP®).  BHI responds here on what ITEP gets wrong about the STAMP model. (PDF file)

FRB: Beige Book - June 4, 2014 Boston District

Verbatim 

First District--Boston 

Business activity generally continues to increase on a year-over-year basis in the First District, but performance varies across sectors. Manufacturers and tourism contacts note strong results, software and IT services firms cite strengthening sales, staffing services respondents indicate activity has picked up recently, while retail reports are somewhat mixed. In real estate, commercial conditions are largely unchanged since the last report, while single-family home sales and prices declined year-over-year in March in four of the six New England states. Contacts in most sectors indicate that price pressures are minimal; a few manufacturers mention high or rising prices for selected inputs. Most responding firms say they are neither augmenting nor cutting headcount; some note that jobs in selected occupations remain difficult to fill. Outlooks remain quite positive, even in sectors where recent results have not been strong, but apparently not sufficiently positive to result in plans for increased hiring.

Retail and Tourism
Retail sources contacted for this round report comparable store sales results ranging from an 8 percent decrease to a 10 percent increase year-over-year. One chain indicates an improving trend, with first quarter sales down 8 percent from a year earlier and April sales down 5 percent; they expect this month to end with sales 1 percent to 2 percent below May 2013.Another contact reports that April sales were up 10 percent but predicts that May will finish 5 percent to 10 percent above last year. Apparel sales have softened a bit, with some of this decline attributed to cooler weather lingering in the northeast; one contact notes that with the weather finally getting warmer over the last few weeks, spring and summer clothing sales have picked up. Furniture sales are down a bit. Some inventories are a bit higher than anticipated. Despite these rather mixed results, contacts continue to believe that the U.S. economy is improving--one source terms the recent weakness "just a hiccup."

Boston hotel revenues were up 4.8 percent year-over-year in 2014:Q1. In April, Boston-area hotel occupancy rates were above 90 percent, which is unusually high, and observers say they expect hotel revenues to exceed those posted for April 2013. Some of this increase is due to business related to the 2014 Marathon, which had almost 36,000 entrants compared to about 17,600 in 2013. Boston area restaurants also did well in April, although final numbers are not yet in. For 2014:Q1, Boston restaurant revenues were up 4.9 percent over 2013:Q1--this breaks down as flat in January, a 3.4 percent increase in February, and a 7.6 percent increase in March. Attendance at Boston area museums and attractions was down in 2012 and 2013, but attendance and revenues in 2014:Q1 were up 3 percent over 2013:Q1.

Manufacturing and Related Services
First District manufacturers report that business conditions in the sector are strong. Of the 13 firms contacted this cycle, 12 report higher year-on-year sales and the one firm with a decline attributes the slow sales to weather and says that underlying sales growth is exceptionally strong. Contacts' only serious concerns involve international sales. A firm that sells building equipment reported "Europe is still a mess." Two contacts express some concern about China, saying that growth had slowed or was slower than expected. For many companies, new products are the engine of growth. For example, a contact in the dairy industry said that almond milk will generate significant growth.

Of the 12 firms reporting information about inventories, six cite flat inventories, five note higher inventories and only one saw a reduction. The reasons for higher inventories are varied; a manufacturer of aircraft engines and a manufacturer of computer storage devices both attribute the higher inventories to new product introductions. None of our contacts view the rising inventories as cause for concern.

Most of our contacts report both flat prices and flat costs. One exception is a dairy firm citing an "all time high" for the price of raw milk. Two contacts indicate that energy prices are up. A manufacturer of aircraft engines notes that the prices of two key inputs, nickel and titanium, have risen and notes the possibility that the problems are due to turmoil in Russia, a key supplier of both metals. So far, the contact says the problems have affected prices but have not disrupted supply.

Most contacts report flat employment and wage growth in line with expectations, but there are some exceptions. Two firms report staff reductions. One of them, a manufacturer of business equipment, has recently concluded a major restructuring of the firm as their legacy business of providing equipment for physical mail has declined. Two firms, a software company and a manufacturer of storage devices, report that the market for software engineers is exceptionally tight. None of our contacts reports significant revisions to their capital spending plans. From almond milk to aircraft engines, the main driver of new spending appears to be new products. All 13 responding firms say their outlook for the rest of the year is positive.

Software and Information Technology Services
New England software and information technology services firms report strengthened business activity through May, with year-over-year revenue growth in the 5 percent to 20 percent range. Contacts attribute this growth to strong demand for technology services, increased consumer spending, and improvements in the manufacturing sectors of the United States and Western Europe. In general, firms are slightly incrementing headcount; two such expansions were a result of acquisitions. Wages largely remain flat, with one firm awarding a merit increase in the 3 percent range. There are no signs of increases in selling prices. Looking forward, New England software and IT contacts remain cautiously optimistic, expecting that revenue growth will continue as long as the global economy remains stable. Concerns include a weakening Chinese economy and general macroeconomic stability.

Staffing Services
New England staffing contacts report higher growth in recent months, with quarter-over-quarter revenue increases in the double-digit range and generally flat year-over-year growth. While the region's inclement winter weather contributed to soft business activity through the first quarter, billable hours increased by early April as the weather improved. Contacts generally report an uptick in labor demand, concentrated in the legal, internet technology, production, welding, and machine operation industries. However, one contact observes decreases in labor demand in the healthcare sector, particularly for medical assistants. Labor supply remains tight for specialized roles in the welding, web development, intellectual property, and internet technology spheres. As a result, firms continue to expand their recruiting and social media efforts to attract new talent and gain a larger share of the existing applicant pool. Bill and pay rates have largely held steady, although two contacts note slight increases in both rates. Looking forward, contacts continue to be optimistic, and anticipate that growth will continue through the next few months.

Commercial Real Estate
Conditions in the First District's commercial real estate market are largely unchanged since the last report. In Boston, office leasing activity is stable. Demand for space in the Seaport District, Back Bay, and Kendall Square remains very strong, while a few buildings in the Financial District still have elevated vacancy rates. Some new apartment buildings in Boston appear to be having trouble achieving the rents and occupancy levels they had hoped for. Contacts attribute this difficulty to the fact that a large number of high-end units came on the market in a short period of time. Some investors are reportedly starting to balk at Boston's high commercial real estate prices, but overall investor interest in the city remains very high. The growth pace of multifamily construction slowed in greater Boston while planned office construction increased, leaving overall construction activity roughly stable year-over-year.

In Hartford, office leasing fundamentals are steady; foot traffic increased but did not translate into increased deal volume. Also in the Hartford area, construction activity increased over last year in both the multifamily and mixed-use sectors, driven in part by state and local funding and tax credits. Leasing deals continue to proceed slowly in greater Providence, where business investment is seen as being held back by political and fiscal uncertainty at the state and local levels. Leasing activity remains robust in Portland, and that city's industrial leasing sector is described as particularly strong. Also in Portland, new permits for office construction continue to increase, with interest concentrated in downtown locations.

A regional lender saw an increase in commercial real estate loan volume in recent weeks. Contacts are either cautiously optimistic or, in Portland, unreservedly optimistic, that conditions in their respective commercial real estate markets will continue to improve slowly in the coming months, provided slow-to-modest economic growth continues at local and national levels. The outlook for office construction in greater Boston for the remainder of 2014 is very strong based on recent indicators but, looking farther ahead, contacts say the construction industry faces potential shortages of qualified workers. While such shortages are seen as a potential restraint on construction activity in 2015 and beyond, they are expected to be less severe in the First District than in some other U.S. regions.

Residential Real Estate
Sentiment across First District residential real estate markets can be summarized as generally positive, as contacts express optimism despite March data indicating year-over-year declines in single family home sales and in median sales price for single family homes in four of the six states. (Contacts in New Hampshire were unavailable for comment, while Maine saw an increase in sales and Rhode Island saw median prices rise.) For Rhode Island, Massachusetts, and Connecticut, sales also declined year-over-year in February. Respondents attribute the declines in single family homes sales to inventory shortages, weak employment security, and uncertainty surrounding changes to flood maps and flood insurance legislation. Lack of inventory remains the predominant constraint in Massachusetts, which once again saw available inventory decline relative to last year. While contacts indicate that inventories are beginning to expand in parts of Massachusetts as new sellers enter the market, they emphasize that inventory shortages cannot be resolved without new construction. Need for additional units, especially in the first time homebuyers market, is also noted in Connecticut, where multiple bids have started to occur and contacts state that developers are beginning to build. In Maine and Connecticut, short sales and foreclosures continue to be released to market, partially contributing to the decline in median sales prices.

The First District condominium market is doing somewhat better, with year-over-year closed sales increasing in all contacted states except Connecticut. Median sale prices for condos also increased relative to last year in all contacted states.

Thursday, May 22, 2014

In defense of STAMP as a tax modeling tool

A PDF version of this primer is available here

The following is an assessment of the appropriateness of modeling state tax policy using methods that came to the fore in The General Theory of Employment Interest, and Money, published in 1936 by the British economist, John Maynard Keynes. The two features of Keynes’s book that are most relevant to the topic at hand are (1) that it was written to address the economic conditions of the Great Depression, which was in its 7th full year at the time of the book’s publication, and (2) that it offered a tool, called the Keynesian multiplier, for measuring the effectiveness of the policy recommendations that came out of the book.

Keynes saw it as his purpose to replace the hitherto recognized economic paradigm, then called the “classical” model, with a new paradigm that reflected the depth and persistence of the Depression. In the classical model, economic downturns, even severe economic downturns, were supposed to be self-correcting. The relevance here is that the classical model (whose assumptions mirror those of our CGE model) assumed that supply equaled demand except for brief periods of imbalance between supply and demand, which would be eventually corrected by price and wage adjustments.

Given that the ongoing economic downturn was clearly not self-correcting, argued Keynes, it was necessary to forge a new approach that both explained that downturn and provided a path back to more normal conditions. It was necessary to build a model in which the supply of goods and labor could exceed the demand for goods and labor over a protracted period of time.

Keynes’s approach turned the classical model on its head: Previously, saving was necessary for investment and therefore for production and employment. Now saving was a “leakage” from the spending stream that slowed the pace of economic expansion. Previously, government spending crowded out personal consumption. Now government spending provided a spur to consumption. Government could rescue the economy from a protracted downturn by using its tax and spending powers to boost aggregate demand.

In doing so, the government would take advantage of how the Keynesian multiplier could be relied upon to increase production and consumption. Government would spend, say, another$1,000 on some activity. It didn’t matter if the activity was something useful like building a bridge or something wasteful like paying men to dig holes and fill them in again. Spending was spending. And this spending would cause production to expand by some multiple of $1,000.

A key concept in computing the multiplier is the “marginal propensity to consume,” or ”MPC,” defined as the additional consumption that another dollar of disposable income would yield. Suppose this MPC equaled .5. An “injection” of $1,000 in government spending would immediately bring about $1,000 in new production. But then consumers would spend 50% of that, adding another $500 to production. Then consumers would spend 50% of that, or $250, leading to further new production and to further rounds of new consumption and production so that, at the end of the day, the initial ”injection” of $1,000 in government spending yielded altogether $2,000 in new production. Thus by spending only $1,000, the government would cause production to rise by twice that amount. Hence, the Keynesian multiplier.

A further wrinkle in this analysis is the Keynesian “balanced budget multiplier.” This concept, which comes up in Keynesian models of state tax policy, begins with the idea that, just as government spending is good for the economy, taxes are bad (though for reasons unlike those considered by STAMP). Taxes are bad in this analysis because they reduce disposable income. Suppose that the government decided to raise taxes by $1,000, rather than increase spending by $1,000. Now disposable income would fall by $1,000, and as a result, consumption would fall by $500, causing production to fall by the same amount. Then consumption and production would fall by another $250, and so forth, until both had fallen by $1,000.

Now suppose the government decided to raise spending and taxes by $1,000. We get the following effects on production:

  • Change in production from $1,000 in new government spending = $1,000 + $500 + $250 + $125 + ... + 0 = $2,000.
  • Change in production from $1,000 in new taxes = -$500 - $250 - $125 - ... - 0 = -$1,000.
  • Adding: $2,000 - $1,000 = $1,000.
Voila! The simultaneous $1,000 increase in spending and taxes has a net positive effect on the economy of $1,000. Conversely if the government had cut spending and taxes by $1,000, the economy would have shrunk by the same amount. And interestingly, the result doesn’t depend on the size of the MPC. Economic models that have built-in Keynesian elements show that a given increase in spending and taxes will expand the economy by that increase and that a given decrease in spending and taxes will contract the economy by that decrease.

Despite the fact that Keynes himself recognized that this line of analysis was legitimate only when production and employment were significantly below their ”full-employment” norms, the Keynesian model dominated economic thinking well beyond the end of the Depression and until the early 1970s, when “stagflation” cast doubt on its applicability to current conditions. Thereafter, economists started to rehabilitate the previously discarded classical model, causing mentions of Keynes to disappear almost entirely from the academic literature and to receive less and less consideration in college textbooks.

The recent economic downturn did, in fact, breathe new life into the Keynesian corpse. But the failure of the economy to respond measurably to the 2009 “stimulus” policies suggests that this renewed life will quickly fade. The current economic weakness appears to be due, not to an insufficiency of demand, but to uncertainties surrounding Obamacare and Dodd Frank and to safety net measures that deter people from taking jobs, all of which operate on the supply-side of the economy. When ITEP criticizes us for assuming full employment, it is implying that we should be more “Keynesian” in our approach. We should treat government spending as good for the economy and taxes as bad only insofar as they reduce disposable income. The balanced budget multiplier is a handy tool for government expansionists who want to claim, in effect, that the state government can make the state economy as big as it wants by merely spending more.

We prefer the alternative approach is to revert to classical arguments that government spending crowds out consumption and that taxes matter, not for how they affect disposable income, but for how they affect incentives to work, save and invest. In that framework, a reduction in government spending translates into an increase in personal consumption. Reductions in tax rates, as they apply to sales or income taxes, increase the reward to work, saving and investment and, through that mechanism, cause production to expand. This “supply-side” approach makes sense insofar as the demand-side palliatives called for by the Keynesian model seem to have lost their usefulness some 70 years ago. No one outside of some other modeling organizations takes the idea of the balanced budget multiplier seriously anymore.

It is the position of the Beacon Hill Institute that, in modeling tax policy, Keynes’s ideas work well, insofar as they do at all, for considerations of federal tax policy changes in an economy that is clearly depressed owing to a lack of aggregate demand. The federal government can influence national economic conditions through Keynesian policies since it can run budget deficits and print money, whereas state governments can do neither. Furthermore, the federal government doesn’t have to concern itself with the outmigration of capital, jobs and consumer activity in the way that the states do when it comes to raising taxes.

Economic models that use Keynesian multipliers to rationalize individual projects, such as building a sports arena in a depressed area, are also fine as far as they go. But state policy makers should be wary of models that presume to generalize that approach to making to state tax policy.

The BHI approach to modeling a reduction in, say, the state sales tax is focus on how that tax change will expand consumption by making consumption cheaper in the state and thus bring in more retail business and, by doing so, increase production and salaries. Sales tax revenues will go down, but the reduction in those revenues will be partly offset by an increase in income tax revenues and other tax revenues. Government spending will fall but the taxes previously paid to government will show up as increased consumption. The alternative view, that the path to economic expansion lies in combined spending and tax increases does not fit the facts of the current economy at the national level and certainly does not fit those facts at the state level.

Wednesday, May 21, 2014

Beige Book April 16, 2014

Verbatim

First District--Boston

The First District economy continues to expand moderately, according to business contacts, although growth rates vary across sectors and firms. Most--but not all--retailers and manufacturers are seeing sales and revenue increases from a year ago; several continue to cite adverse effects of the recent winter weather. Advertising and consulting firms report strong growth, with the exception of a government contractor. Real estate markets continue to strengthen, although lack of inventory is constraining home sales in Massachusetts and commercial contacts cite concerns about "highly optimistic" assumptions underlying purchase prices and lending decisions. Very few firms outside of advertising and consulting are adding to head counts. Price changes remain minimal. The outlook is somewhat mixed, but mostly positive.Retail
First District retailers contacted for this round were just completing Q1 or Q4 reports, depending on their fiscal year calendar. Year-over-year comparable-store sales ranged from being down 4 percent to being up slightly more than 10 percent. All of the respondents say that their retail sales were affected, to some degree, by the severe winter weather. One retailer benefited from much higher demand for winter-related items, while the others saw sales suffer because snowstorms kept consumers from shopping. Apparel, furniture, and appliances sold well, as did paint for interior home improvement projects. Inventories are mixed, in part because bad weather cut some stores' sales. For retailers with both brick-and-mortar stores and online sales channels, Internet sales continue to account for an increasing share of total sales.

Contacts continue to report that prices are steady overall, but some expect to see very modest price increases later in the year; one, for example, cites higher prices for a range of apparel inputs as well as higher foreign labor costs. The consensus is that consumer sentiment is continuing to improve.

Manufacturing and Related Services

Of the nine manufacturing firms contacted in this round, seven report higher sales than the same period a year earlier. The two citing declines were a frozen fish company and a manufacturer of pressure sensitive films. Two others, a manufacturer of industrial motors and brakes and a manufacturer of scientific equipment, report very slight sales increases compared with a year ago. Contacts at four firms say the weather adversely affected their sales in the first quarter but they find it difficult to estimate how much of the reduction is likely to be recovered in coming months. A manufacturer of parts for the auto industry said that slow sales in the auto industry have not yet affected build schedules, so inventories of finished cars are piling up. If auto sales don't "bounce back" in the spring, the contact believes that summer shutdowns in the industry will be longer than usual. A firm that makes water treatment devices reports that demand in residential real estate is strong. Globally, respondents indicate that sales in Europe are growing more rapidly, but from a very low base, while sales in Asia are strong.

Contacts report that commodity and other input prices are generally stable. Two firms say they raised prices on January 1 and customers largely accepted the increases. Inventory levels are largely unchanged. Five contacts report no change in employment and two report small increases. A biotechnology company plans to hire 1,000 workers this year and completed about 20 percent of that in the first quarter. A manufacturer of frozen fish closed a plant in Canada and moved production to New England, with no change in overall firm employment. Two-thirds of contacts report higher capital expenditures planned for 2014 versus 2013. For two contacts, a manufacturer of parts for jet engines and a maker of industrial motors and brakes, the increases are large relative to their typical levels of investment and represent substantial increases capacity. None of our manufacturing contacts has a negative outlook, but four said that they expect sales to be flat or to grow very slowly in 2014.

Selected Business Services

Consulting and advertising contacts report a strong first quarter, consistent with an accelerating economy. Healthcare consulting contacts indicate that very strong demand is ongoing, as providers continue to adjust to the changes imposed by the Affordable Care Act (ACA). Economic consulting remains a strong growth industry, although the conclusion of litigation related to mortgage-back securities and the financial sector may restrain growth slightly in the near future. Strategy consultants report strong demand growth, driven by high levels of private equity activity and increased demand for corporate work, as clients have become more comfortable with the economic outlook and begin to release pent-up demand for consulting work. Advertising and marketing contacts also report strong growth, ranging from 5 percent to 20 percent year-over-year, and cite factors including growing confidence in the economic outlook and an increased willingness among large corporations to spend in order to position themselves within their markets. By contrast, a government contractor cites continued contraction, but has observed increasing interest in new projects since the passage of the recent budget deal.

Contacts report small increases in costs and prices, ranging from zero to 4 percent. Some consultants cite minimal pressure to keep prices low, while others say that competition has forced them to keep prices flat. Employment growth is in the zero to 5 percent range, although most firms at zero either increased their workforce in the recent past or expect to do so soon if their current growth continues. All contacts are optimistic about the coming year and expect economic growth either to continue or to accelerate. Contacts cite various ongoing risks, but generally were only minimally concerned.

Commercial Real Estate

Commercial real estate contacts in Boston report that brisk demand for and tight supply of office space in portions of the city, including the Seaport District and Back Bay, have pushed asking rents up in those locations in recent months. While these localized rent increases are contributing to increases in average office asking rents in greater Boston, contacts note that rents remain flat in portions of the Financial District and in a number of suburban locations, and that rising maintenance costs mean that net rents are growing more slowly than asking rents. Speculative office construction remains limited, although respondents say that the pipeline of planned office construction for greater Boston is growing. Contacts continue to express concerns that prices being paid by investors for commercial properties in Boston, along with lending terms for commercial mortgages, embody highly optimistic assumptions concerning future rent growth on the properties. Demand for Boston properties has been particularly strong among foreign investors and domestic pension funds. A few contacts, located in Boston as well as elsewhere in the region, also expressed concern that current construction levels of high-end apartments are excessive in relation to potential demand for such units. At the same time, these contacts indicate that recently delivered luxury apartment units appear to be fetching rents in line with developers' projections.

In Hartford, sluggish leasing activity is attributed to the long, harsh winter, although fundamentals and business sentiment are described as stable. Also in Hartford, a new apartment construction project recently broke ground downtown, and investment sales interest remains healthy. Leasing deals proceeded slowly in greater Providence in the first quarter, leading to decreased confidence by one contact there, who nonetheless cites some positive developments in the Rhode Island economy that should contribute to job creation in coming months. Rents in Providence are described as flat on average, with some modest upward pressure in the class A office sector and diminishing concessions in suburban locations. Leasing activity reportedly increased in Portland in recent weeks, up from the already healthy pace seen at the beginning of the year. In addition to strong leasing demand, which pertained especially to the class A office sector and the retail sector, Portland's investment sales and development and construction inquiries grew in number. Growing demand for new construction reflects current, very low vacancy rates for downtown retail and class A office space in Portland. A regional lender faces ongoing competitive pressure to lower credit spreads for commercial mortgages, and continues to see a healthy pipeline of loan demand for most property types, with the exception of class B office space.
Contacts in both Hartford and Providence expect more slow improvement in fundamentals. The outlook for Portland's commercial real estate market is bullish in light of its recent growth and planned business expansions, while contacts expect that mixed performance will persist across different locations in the Boston metropolitan area.

Residential Real Estate
Realtors in the First District express caution but optimism about the mixed sales results that continued in the region in February. Year-over-year sales of single family homes decreased in Rhode Island, Massachusetts, and Connecticut, and increased in Maine and Vermont. (Contacts in New Hampshire were unavailable for comment in this round.) In the condominium market, sales increased relative to last year in Connecticut, Massachusetts, and Vermont, while decreasing in Rhode Island; condo sales information is not reported in Maine. The consensus across the First District is that the decline in sales will be short lived; respondents say it was partially driven by the tough winter, as well as uncertainty about new federal flood insurance rules. Signs of spring weather and new legislation limiting flood insurance premium increases are lessening these concerns. In Massachusetts, however, inventory shortages are said to be the key reason for the decline in sales. One Massachusetts contact stated "there is just not enough supply to meet demand." As a result, Massachusetts contacts say multiple bids are common and the median sales price for single family homes has increased compared to the year-earlier median in 17 consecutive months. Median sales prices also increased year-over-year in Connecticut and Maine, but declined in Vermont and Rhode Island. Residential real estate contacts say they expect sales to pick up seasonally this spring, but foresee no significant market shifts.

Wednesday, March 26, 2014

Blasts from the past for critiques of BHI that don't last.

 
Another day, another reason for a handy compendium of response to "critiques" of BHI's work (and an note on argumentation.)


WSJ's Notable & Quotable for today nails the data problem with prevailing wages

From today's Wall Street Journal (gated)

Philip K. Howard, from his new book "The Rule of Nobody: Saving America From Dead Laws and Broken Government" (Norton, 2014):
 The 2009 economic stimulus package promoted by President Obama included $5 billion to weatherize some 607,000 homes-with the goals of both spurring the economy and increasing energy efficiency. But the project was required to comply with a statute called the Davis-Bacon Act (signed into law by President Hoover in 1931), which provides that construction projects with federal funding must pay workers the "prevailing wage"-basically a union perk that costs taxpayers about 20 percent more than actual labor rates. This requirement comes with a mass of red tape; bureaucrats in the Labor Department must set wages, as a matter of law, for each category of construction worker in each of three thousand counties in America. There was no schedule for "weatherproofers." So the Labor Department began a slow trudge of determining how much weatherproofers should be paid in Merced County, California; Monmouth County, New Jersey; and several thousand other counties. The stimulus plan had projected that California would weatherproof twenty-five hundred homes per month. At the end of 2009, the actual total was twelve.
 http://online.wsj.com/news/articles/SB10001424052702303725404579461330128654314?mg=reno64-wsj&url=http%3A%2F%2Fonline.wsj.com%2Farticle%2FSB10001424052702303725404579461330128654314.html

For more on the prevailing wage, see BHI's 2008 study.

Wednesday, March 5, 2014

FRB: Beige Book - March 5, 2014

FRB: Beige Book - March 5, 2014

Verbatim

First District--Boston

Business contacts in the First District continue to report modest increases in revenues and sales. Respondents in several sectors cite negative effects of severe winter weather. Firms report little hiring and wage increases remain very modest. Price pressures are reportedly minimal, but a few contacts note specific items for which prices are rising or are expected to rise. The outlook is generally positive, albeit cautiously so.

Retail and Tourism
This round's retail contacts completed their 2013 fiscal years at the end of December or in mid-February. Most report 2013 year-over-year sales increases ranging from 3 percent to the mid-single digits, though one cites an increase in the mid-teens. Several respondents report continued good results so far in 2014, but two retailers indicate that the pace of sales has slowed a bit. Some of this softness is said to be due to weather-related issues or to tough year-over-year comparisons with the post-Hurricane Sandy rebound. A furniture retailer reports that President's Day sales were extremely strong. Prices remain steady overall, though contacts say a modest increase in apparel prices is coming, reflecting a rise in some raw material prices and overseas labor costs. Retail respondents expect continued overall improvement in U.S. economic conditions and consumer sentiment in 2014.

Boston area hotels attained new record highs for hotel occupancy rates and revenues in 2013, building on the strong records sent in 2012. Expectations are for continued strong growth in 2014, though hotels expect to see revenue growth but not increases in occupancy rates; these are forecast at 80 percent, a 1 percentage point increase over 2013. Severe winter weather in January and February had hotels faring well, but restaurants, museums, and other venues losing revenue due to the harsh weather conditions. An industry contact says that this pattern seems to hold for much of the eastern seaboard.

Manufacturing and Related Services
Of 13 manufacturers contacted this round, nine report higher sales than the same period a year earlier. Two firms, a toy manufacturer and a publisher, cite flat sales but the reasons appear to be idiosyncratic. Two others, a manufacturer of electrical equipment for residential and commercial buildings and a maker of membranes, report falling sales but both attribute the drop to the weather. The direct effect of the storms was the loss of several days of production in February. In addition, demand fell both because some of their products are intermediate goods for other plants in afflicted areas and because end users demanded less. For example, reduced construction meant that there was less demand for electrical supplies. Three firms in the semiconductor industry report strong sales, confirming the end of that sector's slowdown, which began in 2011. Two firms, a maker of electrical equipment and a tool maker, both reported that residential investment was a significant driver of growth.

The news on inventories is mixed. Six contacts say that they continue to make a concerted effort to reduce inventories. However, one contact was building inventory on the assumption that the drop in sales due to the winter weather would lead to an increase in demand in the second quarter to make up for it. An electrical equipment supplier said that in some product lines, bad weather led to higher demand for replacement parts which reduced inventories. None of our contacts report any major pricing pressure, up or down, either from suppliers or customers. One contact said that pressure on pipeline capacity in New England is driving up natural gas prices.

Most firms report increased capital spending in 2013 and plans to increase again in 2014. However, most of those plans were already in place and there is little evidence of positive revisions in recent months. Five contacts report flat employment, four note positive hiring, and four cite reduced staffing. Respondents say engineering staff remains somewhat difficult to find, but otherwise none of our contacts have complaints about the labor market.

Eleven of 13 contacts report positive or very positive outlooks for 2014. The exceptions are a toy maker, who is generally cautious, and a publisher anticipating falling sales.

Software and Information Technology Services
First District software and information technology services contacts generally report stronger-than-expected business activity through February, with revenue growth exceeding earlier forecasts. For example, a healthcare contact expected a large year-over-year revenue decline due to the expiration of federal stimulus for health records software; however, the firm ended the year with just a marginal dip in revenues and positive net income growth. Only one contact, a provider of payment and banking software, reports accelerated growth, with year-over-year revenue increases in the 15 percent range. The majority of firms are maintaining headcount; one contact added positions in sales and marketing. Wages remain steady, with firms awarding (and in one case reinstating) merit increases in the 2.5 percent to 3.5 percent range. Both selling prices and capital and technology spending have gone largely unchanged. The outlook among software and IT contacts is cautious optimism, with expectations of modest revenue growth through the end of the quarter. Contacts remain concerned about general macroeconomic conditions and uncertainty surrounding healthcare reform.

Staffing Services
New England staffing contacts report softened business conditions in recent months, attributed to both the holiday season and the large number of snowstorms occurring throughout the Northeast. Although revenues are up slightly year-over-year, they are down on a quarter-over-quarter basis. Despite these difficulties, labor demand remains strong across most industries, with contacts noting particularly high demand in the software, engineering, legal, specialty manufacturing, and healthcare sectors. Demand has weakened in the defense sector. On the supply side, contacts cite a shortage of candidates to fill nursing, specialized manufacturing, and IT roles. This reportedly reflects a skills mismatch, amplified by the holidays and severe weather. In response, firms continue to invest in social media initiatives to reach a broader audience of candidates. The temporary-to-permanent conversion rate remains strong. Bill rates and pay rates have generally held steady, with the exception of two contacts reporting an upward trend in pay rates and one contact reporting a  slight increase in bill rates. Looking forward, staffing contacts are optimistic  that growth will accelerate as weather conditions improve, expecting mid-single-digit revenue growth through the next few months. Several contacts express concerns about continued uncertainty regarding how healthcare reform will affect the staffing industry.

Commercial Real Estate
Commercial real estate activity was mixed across the First District, but contacts report that leasing fundamentals were largely stable in recent weeks. In Providence, demand for multifamily housing remains strong downtown, while industrial leasing activity is still weak. In Boston, office demand continues to be uneven within the city, with strength in the Seaport District, increasing demand in some suburban areas, and comparative weakness--including downward pressure on rents--in the Financial District. In Boston and Hartford, severe winter weather modestly reduced office leasing inquiries. Also, according to one contact, investment sales activity slowed in the region in the aftermath of a year-end surge in transactions. At the same time, contacts indicate that investment demand for commercial real estate remains strong across the region, and especially strong in Boston. A Portland contact characterizes leasing activity as solid and notes that land sales continue to gather momentum. Planned developments in Portland include a diverse mix of structures: recreational facilities, hotels, office space, and specialty retail. According to a regional banking contact, the bank lending environment for commercial real estate remains highly competitive, with solid loan demand across numerous sectors, albeit including fewer condominium development loans than had been expected. Recent trends in construction activity persist, with slow growth in the institutional sector, a declining pipeline of multifamily structures, and an increase in planned mixed-use developments and speculative office construction in parts of Boston.

While contacts are mostly optimistic concerning the outlook for commercial real estate in their respective markets, some downside risks are noted, including renewed macroeconomic uncertainty stemming from recent, weaker-than-expected employment reports, an uncertain future path of interest rates, and fallout from unrest in the Ukraine, Syria, and Venezuela. Other factors seen as restraining growth include rising construction and maintenance costs, and, in Rhode Island, political stagnation stemming from the current gubernatorial election.

Residential Real Estate
The First District experienced mixed results for sales of single family houses and condominiums in December. Contacts in New Hampshire and Rhode Island cite declines in sales of single family homes, while Massachusetts experienced no change, and respondents in Connecticut, Maine, and Vermont cite increases in sales relative to December 2012. Scarce inventory is said to be the most significant constraint on the growth of sales, while uncertainty from new qualified mortgage rules and flood insurance reforms are also believed to be causing buyers to remain cautious about making offers. Contacts in Connecticut say that sales are being affected by weak consumer confidence and a shortage of stable employment opportunities. Median sale prices increased year-over-year in four of the six New England states, decreasing only in Connecticut and Vermont. In Massachusetts, particularly in the Greater Boston area, price appreciation driven by low inventory levels has become a concern as realtors caution that high prices could keep first time home buyers out of the market.

Pending sales suggest the market for single family houses and condos is off to a good start in 2014, increasing in all states except Rhode Island. Contacts express optimism about local housing markets looking forward but say they expect the snowy winter to depress sales in the near term. 

Monday, March 3, 2014

David G. Tuerck interviewed by Massachusetts Matters on the recent UAW vote in Tennessee.


Wednesday, January 15, 2014

BHI on the U.S. Employment Situation December 2013

Last Friday, the BLS reported the December 2013 unemployment rate fell to 6.7% from 7.0% in November. Non‐farm payrolls increased by 74,000 in December. Read BHI's analysis here.

FRB Beige Book Boston District 1/15/2014

Verbatim
First District--Boston


The First District economy continues to expand modestly, according to business contacts. All but one retailer and most manufacturing and selected business services contacts cite sales or revenue increases in recent months. While existing home sales were below year-earlier levels in three of the six New England states, home prices continued to rise; at the same time, commercial real estate in the region maintains modest strength. Economic and health care consulting is the only sector citing significant net hiring. Most contacts indicate that price pressures are a non-issue. The outlook is generally positive.

Retail and Tourism
Retail respondents in this round report December year-over-year sales changes ranging from a low single-digit decrease to an increase of 10 percent. Two contacts ended their fiscal years on December 31 and cite preliminary tallies showing 2013 sales up 1.5 percent and 5.0 percent compared to 2012. The latter result exceeded earlier expectations of 2013 comp store sales increases of 1.7 percent to 3.0 percent over 2012; this contact attributes the better-than-expected performance to increasing consumer confidence observed since late August. Respondents say demand is strong across all apparel categories, home furnishings, and items related to home improvement. One contact reports that inventories were down significantly due to stronger-than-expected sales, while others report "good" inventory levels.

Retail contacts continue to cite steady prices and predict modest price increases for 2014 in the range of 1.25 percent to 2.0 percent. As noted in the previous round, respondents say consumer sentiment is improving based on a better outlook for the U.S. economy. One contact expects consumer spending in 2014 to be constrained by rising financing costs for mortgages and automobiles, given that wage increases remain modest at best.

Manufacturing and Related Services
Of the 11 firms contacted in this round, none reports falling sales and eight report increasing sales. Among the three firms reporting no change were a chemical firm for whom the flat demand was an improvement after falling sales and a publisher who cited falling demand for information from the financial services sector. Another firm, a manufacturer of storage devices for computers, said that they had lowered their earnings guidance for the fourth quarter. Many other contacts report relatively strong sales. A medical equipment manufacturer says that growth was strong not just for its new products, which typically grow at double-digit rates, but also for legacy products where there was pent-up replacement demand. A manufacturer of semiconductor equipment cites very strong demand, suggesting that the semiconductor industry is on an up-cycle after weakness in recent quarters.

Many contacts say they are attempting to reduce inventories. A manufacturer of medical equipment indicates that an exceptionally large backlog has allowed them to tailor production more precisely as well as to lower inventories. In general, respondents report little pricing pressure from either suppliers or customers. One exception is a frozen fish producer for whom prices of shrimp and haddock were "through the roof." Another exception is a producer of parts for the commercial aircraft industry who said that Boeing has been putting exceptional pressure on its suppliers to lower prices, something reported earlier by other firms in that industry. A publisher plans employment reductions, but most manufacturing contacts report modest hiring plans, in line with or below sales growth.

All but three contacted manufacturers cite increased capital expenditures. A firm that makes parts for commercial aircraft said it had revised up its capital expenditures by 20 percent in the fourth quarter after a similar-sized increase earlier in the year. A drug firm says uncertainty about the manufacturing R&D tax credit had negatively affected investment plans. Another drug company says capital expenditures are falling because of financial problems at their parent company in Japan.

The outlook is positive for all respondents except the publisher who is concerned that demand from the financial services industry will remain problematic in 2014.

Selected Business Services
Consulting and advertising contacts report a strong fourth quarter, consistent with a sustainably, but not rapidly, growing economy. The strongest business is driven by the healthcare industry, where demand has come from providers who need help preparing for and complying with the Affordable Care Act (ACA) and from providers and insurers who desire to use IT and analytics to improve efficiency. Economic consulting remains a strong growth industry and strategy consultant's report mixed results, with the industry split between larger firms who have done very well and smaller firms whose revenues are flatter. Marketing contacts estimate industry-wide growth of 6 percent to 7 percent, driven by large corporate orders and a continued shift in demand towards higher-value items as companies have more to spend on marketing and branding. Overall, consulting and marketing contacts report that large corporate clients have cash and are increasingly willing to spend it. Finally, a government consultant reports a slight drop in revenues and a reduced backlog as the sequester and federal budget uncertainty continue to reduce agencies' ability to purchase his firm's services.

Contacts cite minimal cost increases, with the exception of a healthcare consulting contact whose regulatory compliance costs have skyrocketed due to fragmented state regulatory frameworks. Wages generally rose from zero to 3 percent, although several firms paid high bonuses because employees were busy. Firms raised the rates charged clients between zero and 4 percent, with firms facing stronger demand at the higher end of that range. Healthcare and economic consulting contacts report either rapid hiring (restrained by the difficulty of recruiting some skills) or a lull after recent rapid hiring. Strategy consultants, marketing contacts, and the government contractor cite flat employment. Firms say they are generally able to find qualified workers, with the exception of software engineers and IT personnel.

Contacts are positive about 2014 and expect their recent growth to either continue or increase. Contacts express minimal concern about macroeconomic factors, with the exception of a healthcare consultant who worries that persistent high unemployment will reduce healthcare utilization. Several contacts mention some concern that Congressional decisions may yet cause a crisis. Overall, respondents are bullish about the future and worry primarily about idiosyncratic firm-specific factors.

Commercial Real Estate
Commercial real estate leasing activity in the First District held roughly steady on average in December, while investment sales activity and construction remained robust or strengthened significantly, according to contacts from across the region. In the Boston area, the Seaport District maintained a steady, "impressive" leasing pace, and office leasing activity picked up in some suburban areas. In Boston's Financial District, however, the vacancy rate remains in the mid-teens, allowing modest rent increases that are, according to one contact, probably only large enough to cover rising costs. Investment sales activity saw a year-end burst of activity in Boston, with strong contributions from foreign investors, pushing capitalization rates and loan spreads to historically low levels and reigniting concerns that prices are too high relative to reasonable expectations of rent growth. In Rhode Island, commercial leasing inquiries picked up modestly in December, but new tenants are still scarce. Investment sales activity in the state remains brisk and new developments--driven by the education sector--are slated for downtown Providence. In Connecticut, investment sales activity remained strong in December and, while leasing activity held roughly steady, contacts say some large, vacant tracts of office space in greater Hartford may be effectively obsolete and unlettable.

Concerning construction activity, the pipeline of planned multifamily properties in greater Boston continued to dwindle, consistent with the perception among some contacts that the large number of unit's currently awaiting delivery may produce a glut. At the same time, planned construction in the education, health care, and life sciences sectors increased significantly in recent months, and the number of retail projects under construction in greater Boston appears to be rising, according to contacts. A regional lender closed a higher volume of commercial real estate loans in 2013 than in 2012, despite facing brisk competition and steady, intense pressure on interest rate spreads. The outlook among contacts for 2014 is generally optimistic. As reasons for optimism, one contact perceives that recent developments in Washington have reduced economic uncertainty, while some others say that macroeconomic "momentum" is on the rise. Downside risks include the upcoming costs to businesses of compliance with the ACA and the trend toward office downsizing on a space-per-person basis.

Residential Real Estate

Residential real estate markets in three New England states followed national trends, as October or November sales of single family homes and condominiums came in below year-earlier levels in Massachusetts, New Hampshire, and Connecticut; meanwhile home sales increased year-over-year in Maine, Rhode Island, and Vermont. As happened nationwide, the median sales price for single family homes rose in four of the six states. After many consecutive months of year-over-year sales increases, regional contacts attribute the recent sales declines to lower consumer confidence as a result of the most recent government shutdown, to a shift in sales toward earlier quarters due to lower interest rates at the time, and to a lack of inventory. One source notes, "[the market] lost a little steam in Q3 and continued at a slower pace in Q4." A Massachusetts contact says limited inventory is constraining the market, as the available months of supply for single family homes and condominiums were 4.3 and 2.8 months respectively in November. "New listings are up, but we have been burning through inventory," reports a source in Massachusetts. Despite the recent decline in unit sales, New England realtors agree that 2013 has been a good year overall and they remain optimistic about sales increases looking forward

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