FRB: Beige Book - Boston District

FRB: Beige Book - March 6, 2013

Verbatim:

First District--Boston

Economic activity continues to expand in the First District, albeit slowly, according to business contacts. Most contacted retailers but only one-half of responding manufacturers report higher sales in the latest period than a year earlier; nonetheless, most manufacturers are upbeat about 2013. Contacted staffing services firms cite a pick-up in business, while several software and IT services firms say their results are below expectations although they maintain a positive outlook. Commercial real estate fundamentals are largely unchanged, with office leasing activity mixed. Most residential real estate markets across the region continue to show robust sales growth and modest price increases. Across sectors, vendor prices and selling prices are reported to be generally stable and headcount changes fairly modest, either up or down.  
Retail and Tourism
Retailers contacted in this round report overall fiscal year 2012 sales increases mostly ranging from 1 percent to 3 percent from 2011, with one source reporting a 7 percent year-over-year rise; these firms completed their 2012 fiscal years either at the end of December or in February. For January 2013, comparable-store sales ranged from a 1 percent decrease to a 6 percent increase from January 2012. Demand continues to be strong for clothing, home furnishings, and furniture, although a few contacts cite some softening in February which they attribute to consumer uncertainty regarding job creation, budget deficits, and the possible sequestration, as well as weather-related issues that depressed store traffic in certain areas. One contact notes that their customers often use tax refunds to finance durable good purchases, and the American Taxpayer Relief Act of 2012 enacted on January 2, 2013 has caused some people to delay filing their returns. Respondents suggest it will be easier to discern underlying sales trends in another month or two. However, they continue to predict a low-growth economy and a somewhat wary consumer in 2013. Wholesale prices are reportedly holding steady.

As noted in the previous report, the tourism industry posted record highs in 2012 for hotel occupancy rates and revenues. Expectations for 2013 are that hotel occupancy will be flat or down about 1 percent compared to 2012, but that room revenues will be up about 6 percent. International travel is expected to increase by about 9 percent over 2012, fueled by continuing strong traffic from Europe and increased travel from Australia and South America, particularly from Argentina and Brazil. Increases in gas prices do not yet seem to be affecting regional travelers. Restaurants continue to have less robust results than hotels, with the average table check down compared to levels in 2009 to 2011.
 
Manufacturing and Related Services
Manufacturing firms in the First District continue to paint a picture of a slow recovery. Of the 12 firms responding this round, six report higher sales in the fourth quarter versus the same period a year earlier, two report flat sales and four report lower sales. In contrast to the mixed sales picture, 10 of the 12 firms say that their outlook for 2013 is positive. Part of the disconnect reflects the highly cyclical semiconductor industry, which accounts for two of the firms reporting both negative growth in the fourth quarter and positive expected growth in 2013. One firm in particular reports that sales were down by more than one-third in the fourth quarter but that orders are up almost 20 percent. Even some of our own contacts appear to be puzzled at the combination of poor sales results and optimism about growth for 2013; for example, one says his firm--at which January sales were down 6 percent year-on-year--wrote in planned sales growth of 4 percent to 8 percent in the second half "without any specific reason" except that "everyone expects sales to strengthen." A contact in the home improvement goods industry notes that sales were strong in the fourth quarter but cautions that tool sales lag increases in housing starts by 6 to 9 months so it is too soon to tell if the increase is seasonal or cyclical. A contact that supplies material for filtration says the global picture is difficult to pin down because Chinese New Year and the seasonal Christmas shutdowns in Europe made year-on-year comparison particularly difficult in recent months. Finally, several respondents expressed uncertainty regarding China, with one saying that some of his Chinese customers reported dramatic reductions in sales, inconsistent with government statistics.

Employment growth seems to be following sales and not the outlook. Only four of our contacts report increased hiring in the fourth quarter or planned increases in hiring in 2013 and four report the opposite. A contact in the industrial distribution business says that sales growth was negative for much of the second half of last year but they held off staff reductions until now. Three contacts cite difficulty finding the right workers in everything from welding to life sciences.

Investment appeared similar to employment, with four firms reporting higher investment or higher planned investment. A manufacturer of fitness equipment says they are curtailing their investment plans because of slower expected growth in sales.
 
Software and Information Technology Services
New England software and information technology services contacts generally report lackluster activity through February. Several contacts cite weaker-than-expected demand and delays in executing large license agreements, driven in part by economic uncertainty, particularly in Europe and Japan. By contrast, two contacts--whose firms have experienced robust growth since 2010--expanded accounts with a number of global insurance companies, bringing revenues in the fourth quarter to record highs. Many contacts continue to slow the pace at which they are hiring. Indeed, one contact shed approximately 150 jobs in the fourth quarter and has since instituted a "soft hiring freeze"; two other contacts now plan to maintain their current headcount through the end of 2013, following increases of over 5 percent in 2012. Selling prices and capital and technology spending have gone largely unchanged. The outlook among New England software and IT contacts is generally consistent with that of three months ago, with most expecting more robust growth in the second half of 2013.
 
Staffing Services
First District staffing contacts report that business continues to strengthen. Labor market activity since January is characterized as "improved" or "encouraging", with all but one contact registering a year- over-year increase in billable hours. The continued growth reportedly reflects increases in labor demand in the IT, industrial, and business services sectors partially offset by a softening of demand for office and clerical assistants and manufacturing personnel. The number of permanent and temporary-to-permanent placements continues to grow, with one contact reporting that permanent placements in their professional business, which includes IT and engineering, are up nearly 30 percent relative to a year ago. Labor supply has gone largely unchanged since May 2012. Contacts continue to have difficulty finding candidates with high-end skill sets such as mechanical and electrical engineers, software developers, and IT personnel; one respondent says this shortage of qualified labor is putting upward pressure on pay rates. Looking forward, staffing contacts are generally more upbeat than they were three months ago, with most expecting steady or accelerated growth in the second quarter.
 
Commercial Real Estate
Contacts across the First District offer somewhat mixed reports concerning recent activity and the outlook, but note that fundamentals are largely unchanged since the last report. Leasing interest picked up slightly in Hartford in recent weeks but has not resulted in an increase in completed lease deals nor in significant absorption. In Boston, leasing inquiries remain steady. One Boston contact notes that tenants express little urgency to sign deals while another says that absorption increased slightly in recent weeks. In Providence, leasing activity picked up from last time and Class A downtown office vacancies fell to just under 9 percent from roughly 15 percent a year earlier. A Portland contact reports that leasing activity is stable and office rents unchanged since the last report, notwithstanding some newly announced plant closings in the region that will result in layoffs.

Investment sales reportedly picked up in both Hartford and Providence as some investors were priced out of primary markets such as Boston. Across the region, multifamily structures remain the favored investment class, but high quality office and industrial structures are also seeing healthy demand. More properties are coming up for sale in response to rising prices. Some contacts are concerned that the high sales prices for premier properties in Boston are increasingly out of line with fundamentals. A regional lender notes a significant decline in loan demand for commercial properties since December and cites as possible reasons a temporary decline in the bank's marketing efforts together with a general climate of economic uncertainty. Respondents raise concerns about overbuilding in Boston's apartment market and possibly also in its office sector. While current office construction in Boston is pre-leased rather than speculative, one contact notes that the intended tenants will nonetheless generate significant vacancies at their current locations in other parts of the city.
The outlook is largely unchanged in Portland and Boston, calling for a continuation of slow growth. Upside risks to absorption are cited for both Hartford and Providence, while contacts in both Boston and Hartford note downside macroeconomic risks as a threat to commercial real estate markets.
 
Residential Real Estate
Across New England, strong year-over-year sales growth continued in December in both single- family home and condominium markets. Initial sales figures for January suggest similarly robust year- over-year growth. According to contacts, low interest rates, affordable prices and improving economic conditions are all helping to spur buyer activity. Some contacts note, however, that a small increase in interest rates might actually spur potential homebuyers to purchase more quickly. Overall, realtors say they are confident in the strength of buyer demand, but worry that declining inventory could damp sales growth. In Greater Boston, realtors report that multiple bids on properties have become increasingly common as inventory falls. Declining inventory levels are putting upward pressure on prices in much of the region although the median sale price in New Hampshire slipped notwithstanding fewer listings.

In the next several months, contacts anticipate continued year-over-year growth in sales and most express confidence that home values will continue to appreciate. Some contacts, however, say the strength of the improvements could be easily undermined if the economic recovery slows. Inventory levels are expected to rise in a few months with the onset of warmer weather, although several contacts worry about whether the supply will adequately sustain buyer interest.

On the reading list: Indur M. Goklany's "Humanity Unbound."

It's on our reading list. Goklany provides what appears to be a welcome antidote to the nostrums of the green economy --  a thorough historical look at the contributions of conventional energy to well-being. For green energy to work it would have to supplant the tremendous progress humankind has made thanks to fossil fuels.

Latest Beige Book (1/16/2013) from the Federal Reserve Bank: First District (Boston) growth is modest!

FRB: Beige Book - January 16, 2013 (verbatim)

First District--Boston

Economic activity in the First District continues to grow modestly, according to business contacts. Most retailers and the tourism industry cite year-over-year increases in demand. Aside from some firms with industry-specific or customer-specific issues, First District manufacturers also report growth in sales from a year ago. Similarly, consulting and advertising firms are ahead of a year earlier, although a couple of companies with fast growth over the last few years have recently seen business level off. Commercial real estate contacts are somewhat downbeat; office leasing is slow and demand for commercial real estate loans and pipelines for commercial construction activity are weaker than in recent reports. Residential real estate markets continue to recover, with both sales and prices in November above year-earlier levels. In all sectors, most respondents are holding their selling prices level. Contacts say their hiring depends on demand growth; as a result, most firms are doing little to no hiring, but some firms are expanding headcounts substantially. Notwithstanding ongoing concerns with uncertainty, contacts generally expect continued modest growth in 2013. 

Retail and Tourism
One contact reports a small single-digit year-over-year decrease in December sales while the others cite increases ranging from near zero to 7 percent. Demand remains strong for clothing, shoes, and furniture. Responding retail firms expect to hold their selling prices steady based on an absence of price increases at the wholesale level. These contacts anticipate that 2013 will be characterized by low single-digit growth in sales.
The tourism industry ended 2012:Q4 on a high note, establishing new records for hotel room occupancy rates and revenues. Strong domestic and international corporate business travel and international leisure travel account for much of this performance. Restaurants saw less spending on corporate entertaining and end-of-year holiday events. Advance hotel booking data indicate that the strong trend in business travel will continue, leading to an expectation that occupancy rates will hold level in 2013 compared to the high benchmark established in 2012.
 
Manufacturing and Related Services
Manufacturing in New England continues to expand at a modest pace according to First District contacts. Of 11 responding firms, seven report higher sales in the fourth quarter than in the same period a year earlier, although in some cases the gains are quite modest. Two contacts in the semiconductor industry continue to report a cyclical downturn in their business. A contact in aerospace says that sales of parts for new airplanes are extremely strong but depressed conditions in the aftermarket have spread from the United States to Europe. A contact in the chemical industry says that while sales in pounds fell, the pricing picture improved so much that sales in dollars are up. Sales of frozen fish continue to be weak. The "fiscal cliff" was an explicit problem for a computer firm that sells almost exclusively to Defense Department customers who are worried about sequestration.

Only five of the 11 respondents report significant hiring. Firms with rapidly growing sales are hiring, but firms in slow-growth industries are not. A biotech firm with 3,500 U.S. employees plans to add another 1,000 over the coming year, about half domestically. The computer supplier with customers dependent on defense spending cut its staffing by 10 percent to 15 percent over the period from June to September. A contact in the chemical industry reports both good and bad news about the labor market. On one hand, he says that for the first time since the crisis began, workers are voluntarily leaving to take new jobs. The bad news is that he is having great difficulty filling low-skill jobs. He says that drug test fails are much more common than in the past; in addition, a large number of workers quit almost immediately after taking the job. The contact speculates that both of these hiring problems may result from behaviors developed during extended periods of unemployment.


As with employment, capital spending is generally slow except for firms in growth industries, with four firms reporting increases and four reporting decreases in spending. One diversified manufacturer of parts for the aerospace and auto industries reports that business units within the firm failed to spend their planned capex allocations in 2012.


The outlook continues to be uncertain for most of our contacts. Only one firm, the defense supplier, cites the fiscal cliff as a serious problem and even they expect some resolution in the new year.
 
Selected Business Services
Consulting and advertising contacts in the First District report generally positive results for the fourth quarter. Several contacts report modest growth, while two contacts--whose firms have experienced rapid growth over the past two years--experienced a leveling off. Marketing and advertising contacts report a slight uptick during the fourth quarter and are confident that business conditions have finally stabilized after the recession, which hit them with a lag. Two contacts with exposure to health care note robust demand for services related to health-care IT implementation and drug-impacts research. At the same time, firms focused on the pharmaceutical industry have experienced slow growth, although one contact expects that pharmaceuticals will start to emerge from its rough spell in 2013. Economic consulting remains strong because of high levels of complex high-stakes litigation; management and strategy consulting contacts report flat business conditions as clients uncertain about fiscal policy and the macroeconomy remain reluctant to invest in consulting services.


Contacts report little to no cost increases and are keeping their prices relatively unchanged. One exception is an advertising firm where health insurance costs rose 12 percent in 2012. Some contacts report no hiring, consistent with a lack of demand growth, while others report net hiring in the low single digits. Plans for future hiring are modest, with contacts generally expecting zero to low single-digit workforce increases in 2013.

Most contacts expect growth to pick up in 2013, with the exception of a government contractor, who is too uncertain about the future of fiscal policy to offer any forecast. No one expects another recession and overall they express a sense of cautious optimism.
 
Commercial Real Estate
Across most of the First District, leasing activity in the final weeks of 2012 is described as very light, driven by a combination of seasonal factors and uncertainty stemming from fiscal cliff negotiations. However, a Portland contact notes an uptick in leasing activity in that city in December, especially in the warehouse sector, although office fundamentals remain flat amid slow employment growth. Boston's warehouse market improved as well, while the city's office vacancy rate remains high--also attributed to slow employment growth--and the trend toward office downsizing persists. In Hartford, the fate of large downtown properties that experienced foreclosure in 2012 remains uncertain; a key question is whether current owners will reinvest in the properties or resell them as is. Demand for commercial real estate loans in the region appears to be softening, while the pipeline of new construction projects in Boston has diminished significantly since the last report.


Most contacts in the region are cautiously optimistic that commercial real estate fundamentals will improve in 2013. However, growth expectations remain very modest and some contacts note downside risks to growth from pending fiscal contraction and ongoing political uncertainty, even taking into account the recently-enacted federal tax deal.
 
Residential Real Estate
Across the First District, contacts report strong year-over-year growth in sales for November in both single-family home and condominium markets. Similar to previous reports, contacts attribute continued growth in sales to low interest rates, affordable prices, and rising rents. Contacts say that buyers have become more confident about purchasing a home as economic conditions continue to improve. As buyer activity increased, inventory levels fell throughout the region. Contacts argue that declining inventory levels have now translated into higher prices in most areas. The median sale price of homes rose year-over-year across the First District, with some states experiencing significant increases. 

In terms of outlooks for the coming year, contacts continue to feel positive about improvements in home values and strong sales. Significant year-over-year growth in sales is expected for the most of 2013, although a warm winter last year coupled with a potentially harsher winter this year may soften year-over-year growth in the coming months. In Massachusetts and the Greater Boston area, contacts express concern that dwindling inventory levels will discourage buyers and even potentially deter some sellers who would like to purchase a replacement home before listing their current one; at the same time, they express worry about prices appreciating too quickly, but say they are not concerned with ongoing moderate price appreciation. Notwithstanding these potential concerns, contacts across the region are generally very optimistic about the strength of the housing market in 2013.

David G. Tuerck on Fox25 discussing the "Fiscal Cliff" deal

Boston News, Weather, Sports | FOX 25 | MyFoxBoston Video Link.

Response to the Union of Concerned Scientists' "Critique" of BHI's RPS studies

Elliott Negin,
Director of News & Commentary
Union of Concerned Scientists
Huffington Post

Dear Mr. Negin:

I write this letter to you to correct your statements and misrepresentation of our studies that you presented to your readers in an article titled Koch Brothers Fund Bogus Studies to Kill Renewable Energy on December 7th 2012.

You state that I ‘essentially conceded’ that we ‘fudged’ our findings due to the funding of groups that utilized our findings or assumptions you make about our funding. This could not be further from the truth, and as I will detail here, your deceptive selections of our papers and incorrect statements are misleading your readers.

As with all of our Renewable Portfolio Standard (RPS) reports the donors and funders of the project wish to remain anonymous, but as I will demonstrate, none of our numbers are ‘fudged.’ We use rigorous analysis and a dynamic economic model with an 11-year track record to produce accurate ranges for the estimated costs that states are likely to experience due to RPS polices. The fact is that by mandating that utilities produce electricity by using more costly and less efficient methods, electricity costs will rise. These price increases are not immaterial and will have direct effect on decisions faced by both residents and businesses in the state.

I do not question the findings or independence of the Union of Concerned Scientists, or yourself, due to the eight Anonymous donations of more than $100,000, or donations from ClimateWorks Foundation, EarthShare or The Energy Foundation of the same size. (1) To do so would be to commit the motive fallacy which always seems to be used by those with no legs to stand on. Questioning funding sources is the ‘red herring’ to avoid any serious discussion on methodical issues in a study. But I do question your findings based on incorrect information and misleading statements.

First, you quote our paper:

“assumed that the Energy Information Administration’s projected renewable energy price estimates are too low,”

Which is true, but you leave out the part of the story that does not fit your caricature of findings that disagree with your belief. In our research we found that EIA estimates were in the lower range of levelized energy costs and higher in capacity factor for renewable energies for the nation as a whole. For this reason we included them in our paper, as the ‘low case’ to fully represent the huge range of possibilities that this policy could have. We also included other creditable estimates in our modeling to represent a ‘high case’, as well as a combination of the two sets to calculate our ‘medium case’. Additionally, in our calculations we use state specific information when it is available. For example actual wind power farms in Kansas have capacity factors close to 40 percent, higher than EIA estimates, which we utilized to improve our results.

Secondly, to continue the quote above:

“…and that cost containment measures embedded in state polices will fail.”

But again you fail to include any of our discussion of why they are likely to fail, and regardless should not be included in an examination of the policies. In researching the cost caps, we were unable to find any examples of effective, enforceable cost caps for RPS or Renewable Energy Standards (RES) being enforced. This is not particularly surprising, as most policies have step-up mechanisms and the larger costs are likely to be incurred as the policies are fully implemented. But it does begin to show a trend. Furthermore, most cost containment measures are worded such that the decision to implement them is more likely to be a political decision then an economic one.

For example, in Missouri the Missouri Public Service Commission (MPSC), which is the department responsible for measuring the cost cap, as well as ensuring the RPS is fully implemented, should determine the rate increase “by estimating and comparing the electric utility’s cost of compliance with least-cost renewable generation and the cost of continuing to generate or purchase from entirely nonrenewable sources.” Additionally, “future environmental regulatory risk including that of greenhouse gas regulations should be taken into account.”(2) If a MPSC analyst can determine the least cost energy of a theoretical power plant, the cost of a theoretical purchase contract, AND determine the cost of all possible future environmental regulations, then the analyst would be wasting his skills.

Aside from the points mentioned above about the cost-cap provisions, they are irrelevant to the goal of our study, which is to estimate the cost of compliance to a RPS in the time frame legislated. There are three possible outcomes of the RPS. It is (1) met in the timeframe required, (2) the cost cap provision is enacted and the RPS is not met in the timeframe required or (3) the RPS is not met due to technical impossibilities. Our studies measure (1) as (2) is more based on political science, requiring large assumptions, than economics while (3) is not relevant to policy discussion.

Thirdly, you reference your colleague’s ‘fact check’ of our Michigan RPS analysis. This ‘fact check’ plays fast and loose with the facts, making false claims and entirely misrepresenting our study. I will supply the summary corrections again for you here.

You said we “ignored the fact that the state already has a standard in place, enabling them to inflate the costs of implementing the stronger standard.” This would be a valid critique, if it were true. In fact, in Graphic 2 of the paper we compare the two polices side by side, including the results of the difference between the two policies.

Next you stated that we “made questionable assumptions about renewable energy technologies--often citing out-of-date, controversial or unsubstantiated material to support their assertions--instead of using real-world cost and performance data from local projects.” As stated above, we use a range of estimate to provide a better interval that we are confident the results will be in. In Mr. Deyette’s ‘fact-check’, he suggests we use capacity factors for wind power based on the Great Lakes region. The number he suggests is within our range of estimates, which is one of the most defensible reasons for using ranges. No one knows what the capacity factor of wind will be in 2025, we make assumptions about the range to provide a range of net costs as guidance.

Finally, you allege we “failed to factor in the new standard's benefits, including economic development, job growth, cleaner air and reduced carbon pollution.” We go to lengths in both the papers and the STAMP® documentation to show this is not true, and your statement is uninformed. As we state in the paper:

“The jobs that are lost due to higher energy costs are not as easy to identify as the jobs created by new energy construction projects, but they are just as important. While Public Act 295 might generate visible new jobs and construction projects, our projections clearly indicate that Michigan electricity ratepayers will pay higher rates, face fewer employment opportunities, and see investment redirected to other states.”

The STAMP® model does account for the benefits of the policy. More jobs and investment will be seen in some sectors of the Michigan economy, mainly in those related to the installation and building of green energy. But the higher electric prices would have larger negative effects on the state, leading to the net negative costs we report.

Your haphazard analysis which makes-up facts and consistently misconstrues statements is an insult to your readers and a sad inquiry into our paper. I would be happy to discuss any methodical questions or concerns you have with our papers in an effort to improve them, but accusing me of ‘fudging’ studies for money based on ignorant facts is disappointing.


Sincerely,


Michael Head
Research Economist
The Beacon Hill Institute at Suffolk University


cc: Joanna Zelman, Editor, Green Department, Huffington Post.
1 Union of Concerned Scientists, Annual Report (2011);14, http://www.ucsusa.org/assets/documents/ucs/annual-report-2011.pdf.
2 Missouri Register 35 (16):1190 August 16, 2010.
https://www.efis.psc.mo.gov/mpsc/commoncomponents/viewdocument.asp?DocId=935517878.

FRB: Beige Book - November 28, 2012

FRB: Beige Book - November 28, 2012 vertbatim

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.

Staffing Services
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.

FRB: Beige Book - October 10, 2012

FRB: Beige Book - October 10, 2012

First District--Boston

Reports from business contacts in the First District indicate the region's economy is expanding at a modest pace. Most retail and manufacturing contacts report sales or revenue gains from a year earlier, although the manufacturers say growth is slower than earlier in the year and some have seen actual declines. Consulting and advertising firms are generally upbeat, with results depending on specific client industries. Residential real estate contacts note increases in sales and only small changes in median sale prices. Commercial real estate leasing activity has slowed somewhat, while investment conditions remain positive. With the exception of a consulting firm that has expanded recently and a manufacturer citing especially strong growth, responding firms are doing only modest hiring. While contacts in most industries mention the upcoming election, so-called fiscal cliff, and Europe as risk factors increasing uncertainty, it is only in commercial real estate leasing that respondents say current activity levels are measurably damped by such concerns.

Retail and Tourism
First District retailers contacted for this round indicate that sales through mid to late September are slightly above 2011. Year-over-year sales increases in recent months range from low single-digit to high single-digit percentage gains, although one retailer reports that its 2012 sales to date are 2 percent to 3 percent below last year's. Furniture sales have picked up after declining during the summer, while spending on apparel and household items remains strong. Contacts express some concern that consumer sentiment could be negatively affected by domestic politics and the fiscal cliff, which increases their uncertainty about how well the end-of-year 2012 holiday sales season will turn out. While such concerns lead retailers to expect the U.S. economy will remain flat over the next 6 to 8 months, respondents are nonetheless cautiously optimistic that their 2012 revenues will end up slightly ahead of 2011 levels.

The Boston tourism industry continues to benefit from a rebound in domestic and international business travel, although the leisure sector has seen a small drop in advance bookings compared to six months ago. The tourism industry has slightly downgraded its overall forecast for 2012, but this year's performance looks to be the industry's best since 1999-2000. Expectations are that Boston tourism will be strong again in 2013, with revenues rising slightly from 2012.

Manufacturing and Related Services
Discussions with manufacturing contacts in the First District paint a picture of an economy that is growing slowly but, on net, still growing. About half the respondents report a substantial slowdown in growth or outright fall in sales in the most recent period compared with a year earlier. Three contacts supplying equipment to factories note weakness in the semiconductor industry, which they say reflects its idiosyncratic cycle and not the macro economy. A contact in the toy business reports that orders for Christmas are coming later and later in the year, partly because lead times have shrunk and firms can order in September for November delivery.

Not all responding firms report softening. For example, a contact at a pharmaceutical firm says the company's growth is strong. The firm plans to hire 1,000 people over the next year, which represents a 20 percent increase in headcount; the hires will be mostly in sales and marketing.
For the most part, firms reporting weakness indicate it has yet to affect either hiring or investment substantially. Only about one-quarter of respondents say they are actually cutting staff; for one firm, the layoffs are in Europe and another firm attributes them at least partly to increased productivity. Several contacts report that their firms are re-evaluating their benefits structures as a way to conserve cash. No contact reports making any adjustments or even projecting any adjustments to their capital spending plans. Indeed, one contact at a semiconductor equipment maker says they are maintaining their long-term investment plans despite quarter-on-quarter sales declines on the order of 20 percent in the third quarter which are expected to continue in the fourth.

In general, firms remain somewhat tentative about 2013, although this is partly because they are currently engaged in their annual "planning cycles" for 2013. One contact in the industrial distribution business says he expects they will plan for 1 percent to 2 percent growth in 2013, in line with Q3 this year; by contrast, their 2011 plan for 2012 assumed 5 percent to 6 percent sales growth. One contact in the publishing business says that they will "continue to thrive on low single-digit organic growth." Many contacts say that slow growth is the "new normal."
 
Selected Business Services
Consulting and advertising contacts in the First District report a generally positive, although not exuberant, third quarter. Only one contact cites flat revenues, while the others note varying levels of growth largely determined by the prospects of their respective client bases. Marketing and advertising contacts report weaker conditions than consulting firms. They note a large degree of uncertainty in the market as well as a shift in demand towards services focused on social media and e-commerce. Demand for health care consulting services has skyrocketed due to "unprecedented" levels of merger and acquisition activity among health care providers and the need for improved efficiency as a result of the ACA. At the same time, firms focused on the pharmaceutical industry have experienced slow growth because their clients have been hurt by blockbuster drugs losing patent protection and cost pressures from governments. Economic consulting remains strong, reflecting high levels of complex high-stakes litigation; management and strategy consulting contacts cite a recent upswing in business.

Contacts report little to no cost increases, with the exception of higher travel costs, and are keeping their prices relatively unchanged. Most contacts record some hiring, mostly in the low single digits, although one contact in government policy consulting has increased staff by 25 percent since last year to address a large backlog and ongoing demand growth. Plans for future hiring are modest.

Most contacts expect a continuation of current growth trends for the rest of 2012 and are more bullish about 2013. Respondents express concern about factors with the potential to slow the macro economy, such as political uncertainty, the fiscal cliff, and Europe. Several firms rely heavily on government spending and are thus especially concerned with the fiscal situation and upcoming election. Nevertheless, no respondent expects another recession and the overall tone is cautiously optimistic.
 
Commercial Real Estate
Contacts across the First District report that commercial real estate fundamentals have been basically flat in recent weeks. Leasing activity is said to be down in Boston as firms say political uncertainty makes them reluctant to make leasing commitments in advance of the national election. At the same time, the credit environment remains favorable, as interest rates on commercial real estate loans remain very low by historical standards. One contact notes that the supply of high-quality commercial properties for sale has declined recently, and hypothesizes that owners have nowhere better to park their money right now. Construction activity is proceeding as expected on large commercial projects in Boston. While the multifamily sector remains strong across the region, with numerous apartment buildings under construction in Boston in particular, one contact surmises that additional apartment projects under discussion may be delayed or shelved pending rent discovery once current projects come on line.

Contacts express a mix of cautious optimism and generalized uncertainty concerning the outlook; the fiscal cliff and Europe are noted as key risks to growth. Some contacts mention a longer-run concern regarding the consequences of an inevitable eventual increase in interest rates; the risk is that net operating incomes will not increase enough to offset increased financing costs when loans currently being underwritten at very low rates require refinancing.
 
Residential Real Estate
Year-over-year sales growth continued in August in both single-family home and condominium markets throughout the First District. According to contacts, low interest rates and affordable prices contributed to improving sales figures, along with increases in residential rents. Several contacts report improving conditions for borrowers, but many contacts say that qualifying for a mortgage remains difficult. As for prices, contacts in the region report mixed movements in median sale prices, with some areas experiencing modest price appreciation and others moderate depreciation. In the Greater Boston area, contacts say a slight decline in the median sale price was unexpected in light of significant demand and dwindling inventory levels; they attribute the decline to significant increases in the sales of low to mid-tier properties. Throughout the region, inventory continues to decline. Contacts say they fear declining inventory will discourage buyers searching for homes as well as potential sellers who may not be able to find another well-kept property. Increasingly, properties in "move-in condition" receive multiple bids, sometimes above original asking prices.

Contacts expect sales to continue to grow on a year-over-year basis in the next several months. Nonetheless, many note that the recovery remains fragile and could be derailed by deterioration in economic conditions. Declining inventory levels also remains a concern, but several contacts expect an influx of sellers in the spring market. Median sale prices are expected to remain flat or improve modestly in the coming months.

Christian Science Monitor "New GDP numbers do Obama no favors"

Muddling through!

Economists expect only modest improvement in the second half of the year. Most believe the economy will keep growing, but at a subpar rate of around 2 percent.

"The economy was sluggish in the second quarter and the slight upward revision ... does nothing to change that picture," said John Ryding, an economist at RDQ Economics, in a note to clients.

The report was the government's second look at gross domestic product for the second quarter. GDP measures the country's total output of goods and services, from the purchase of restaurant meals to construction of highways and bridges. A third and final estimate of second-quarter growth will be released next month.

Growth at or below 2 percent is not enough to lower the unemployment rate, which was 8.3 percent in July. Most expect the unemployment rate to stay above 8 percent for the rest of this year.

John Steele Gordon: A Short Primer on the National Debt - WSJ.com

John Steele Gordon: A Short Primer on the National Debt - WSJ.com

But while these numbers are fun to play with, they don't mean much. It's the debt's size relative to gross domestic product that matters, just as personal debts must be measured against a person's income before they can be properly evaluated. The GDP of the United States was $15.003 trillion at the end of the first quarter in 2011. That makes the public debt equal to 66.1% of GDP and the intra-governmental debt 31.1%. Total debt is now 97.2% of GDP and climbing rapidly.

And it's the climbing rapidly part that is worrisome, not the debt's current size relative to GDP. Indeed, the debt has been substantially higher by that measure in earlier times. In 1946, in the immediate aftermath of World War II, it was 129.98% of GDP. But while the debt had increased enormously during the war (it had been 50% of a much smaller GDP in 1940), it did not increase substantially over the next 15 years. It was $269 billion in 1946 and $286 billion in 1960. The American economy grew so much in those years that the debt, while slightly up in absolute terms, was down to only 58% of GDP by 1960.

Boston excerpt from the Fed's Beige Book - August 2012

Taken from the FRB: Beige Book - August 29, 2012

First District--Boston

Reports from business contacts in the First District are somewhat mixed. Tourism contacts and some retailers cite strong results, but other merchants are more downbeat. Manufacturers mostly report solid performance, but a couple have seen sales fall compared with a year earlier. Software and IT services firms indicate business is good, but somewhat slower than three months ago, while staffing firms say recent results are below expectations. Commercial real estate conditions are not much changed, with the Boston market said to be stronger than the rest of New England; gradual recovery continues in most residential real estate markets around the region. Business contacts say they are hiring only modestly; prices are generally reported to be stable. Outlooks remain uncertain. 

Retail and Tourism
First District retail contacts offer a very mixed take on economic conditions in the region. Demand remains strong for adult clothing, but spending on durable items such as furniture and electronics continues to be lower than earlier in the year. Some companies cite disappointing sales during the last six weeks, while others report some upside surprises. Sales results range from low single-digit declines to high single-digit increases compared with a year earlier. Some contacts say that consumer sentiment has become more negative, while others observe that consumers are "coming back." Retailers note wholesale prices remain flat so they are holding selling prices steady. Respondents still express uncertainty about the direction of the U.S. economy and say they expect little improvement over the next six to eight months. 

The tourism industry continues to see growth. Contacts expect that overall 2012 performance will be strong, but express concern that performance will weaken over the last few months of the year. While a rebound in business travel has fueled 2012 performance to date, weakness in Europe might slow this down. Moreover, rising gas prices could have negative repercussions for leisure travel.

 

Manufacturing and Related Services
The general manufacturing picture in the First District continues to be mixed, although contacts seem to be slightly more upbeat than earlier this summer. Of 12 contacted firms, only two report lower overall sales than a year earlier: A manufacturer of semiconductors attributes the decline largely to industry-specific cycles and a software company that sells mostly into the defense business says slower sales reflect fears about impending sequestration. All other responding firms report flat or rising sales.

On the employment front, while most contacts say they are hiring, none reports any significant additions. A major defense contractor expects significant layoffs in the coming months but attributes them largely to rationalization of operations in the wake of a merger. A tool manufacturer blames weak demand for a 5 percent headcount reduction but says they will concentrate most of the layoffs in Europe. On the plus side, a luxury goods manufacturer reports that, for the first time since 2008, workers are quitting to take better jobs with other firms. A firm in the chemical industry indicates it is exceptionally profitable but is still hiring only "selectively" to replace outgoing workers and fill specific needs.

Few manufacturers report revising their investment plans in recent months; several note that they have plenty of cash available but don't yet feel confident or see the need for additional capital spending. Several firms mention that merger and acquisition activity is heating up. Some say they hope to pick up bargains but others say that prices are too high. A contact in the chemical industry says that he has done due diligence on several potential targets and each time he was outbid. A respondent in the semiconductor industry reports that they were the target of acquisition interest and a medical device supplier was recently acquired by Japanese firm.

Contacts say the pricing picture is much more benign than it has been in recent years. A dairy business is the only respondent complaining of high input prices, which are specifically related to the drought in the Midwest. 

A contact in the chemical business reports that pricing of inputs to his processes is exceptionally good, which he attributes to weakness in China, Brazil, and India.

Few manufacturing contacts have significantly revised their outlooks. The main concerns remain the so-called "fiscal cliff" and the situation in Europe. Europe does not seem to be as much of an issue as it has been in recent cycles, however, with only four contacts specifically mentioning it and only one identifying it as a major problem. Two respondents independently note that firms are paying bills on time, which they say is a good sign about the state of the economy.

 

Software and Information Technology Services
New England software and information technology services contacts report flat to favorable results in the second quarter of 2012, with year-over-year revenue increases generally between 5 percent and 10 percent. Contacts report strong demand in the banking and medical sectors as well as some new activity in the automotive, telecommunications, and manufacturing sectors. However, these upticks in demand are, for many contacts, tempered by the strong dollar and economic uncertainties, particularly in Europe, which are having an increasingly negative effect on revenues. Indeed, one contact reports that revenues from Europe fell more than 50 percent over the four quarters ended in Q2, as many clients delayed execution of big license agreements. Most respondents continue to add to their headcounts, although a few have slowed the rate at which they are hiring. Capital and technology spending and selling prices have gone largely unchanged since February.

The outlook among software and IT services contacts is not appreciably different from that of three months ago. Most are cautiously optimistic and expect current growth rates to continue into 2013.

 

Staffing Services
New England staffing firms generally report lighter-than-expected volumes through mid-August, with most contacts characterizing business as "slow" or "flat." The May-to-August dip reportedly reflects a softening of demand for office and clerical assistants and light industrial workers. Nevertheless, year-over-year revenue changes in the second quarter remained largely positive, bolstered by steady demand from the engineering, legal, and IT sectors. The number of permanent and temporary-to-permanent placements continues to grow slowly, with one contact noting that clients are "definitely more willing to commit." Labor supply has gone largely unchanged since May. Contacts continue to have difficulty finding candidates with high-end skill sets such as mechanical and electrical engineers, software developers, and IT personnel; two contacts report that this shortage of qualified labor is putting upward pressure on pay rates and recruiting costs. Looking forward, staffing contacts are slightly less upbeat than they were 3 months ago. Most expect only modest growth until 2013.

 

Commercial Real Estate
Commercial real estate fundamentals held roughly steady in recent weeks across the First District. Boston continues to enjoy strong leasing demand in pockets of the city and comparatively slow but steady activity in the Financial District. Leasing activity remains light in Hartford, where the retail sector is seen as a weak point. Activity in Providence is mixed across sectors and year-to-date has fallen short of expectations as a result of vacancy shocks. In Portland, office leasing activity is up from earlier in the year, but rents have stayed roughly flat. Across the District, a few contacts note that traditional downtown tenant types, such as law firms and large financial firms, continue to reduce square footage of office space per worker. These reductions are viewed as structural and suggest that future employment growth in professional services may lead to less absorption than previous norms of office space would imply.

Investor interest in Greater Boston commercial real estate remains high, especially for multifamily rental properties, and interest rate spreads are lower than a year earlier for comparable deals. Apartment construction extended its recent boom in the city and some large build-to-suit office projects have broken ground in recent months. One Boston-based bank lender notes an increase in small-scale (under $10M) loan demand in recent months in the office and retail sectors. Outside of Boston, construction and investment sales activity remain limited. A few contacts remark that political uncertainty is putting a damper on business sentiment. In particular, the threat of tax hikes (at all levels of government) is seen as a possible restraint on economic activity in the coming months. By contrast, no contacts cite significant upside risks to growth in the commercial property sector, although Boston is expected to remain a magnet for investors.

 

Residential Real Estate
Sales of single-family homes and condominiums continued to grow year-over-year in June and July throughout most of the First District. However, in Connecticut, June sales increased marginally in the single-family home market and declined year-over-year in the condo market, but the latest reports for July suggest more substantial increases in Connecticut home sales. Similar to previous reports, contacts cite low interest rates and prices, in addition to pent-up demand, as significant factors in improving sales activity. According to a contact in Greater Boston, rising residential rents continue to spur interest in home ownership. Reports for July suggest the median sales price of homes rose in five of the six New England states; the exception was Rhode Island, where prices continue to decline. Contacts outside of Rhode Island cite declining inventory as the cause for modest price appreciation. Several contacts in areas with low inventory levels note some potential sellers are waiting for their homes to appreciate in value before listing them. Falling inventories in Greater Boston have prompted concern among local real estate professionals that potential homebuyers will be discouraged by an insufficient variety of homes.

Consecutive months of year-over-year growth in sales have made contacts feel more confident about recovery in the housing market. In areas where inventory levels have been high for the past few years, concerns have been calmed by declining inventory and increasing home prices. Most contacts predict year-over-year growth in sales, albeit at a slower pace than recently, and anticipate modest increases in the median sale price of homes in coming months.

Boston Beige: "Most contacts are cautiously optimistic about the rest of 2012, and more bullish about 2013."

From the Federal Reserve Bank's Beige Book - July 18, 2012
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 percent 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 percent 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 percent, 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.

David Henderson takes on a Keynesian myth

From Defining Ideas at the Hoover Institution's blog

"Keynesians and others have their own explanations for why the Keynesian predictions of postwar economic disaster did not come to pass. The three most popular are: Rosie the Riveter left the labor force; the G. I. Bill put many returning soldiers in college rather than into the workforce; and the American people stopped saving and started spending the money they had accumulated during the war. The data, however, do not support these explanations."

Latest Beige Book Rundown

FRB: Beige Book - June 6, 2012 The Boston summary: Improvement is modest but hiring outside IT is thin. Few complain about inflation. 

Economic activity in the First District continues to expand, with contacts in most sectors citing steady growth. Commercial real estate markets show slight improvement and residential real estate contacts are finally mentioning recovery, albeit fragile. Respondents in this round rarely mention prices or pricing. Except for software and IT services where growth continues to be relatively strong, few firms are doing substantial hiring. The outlook is generally for more of the same, although a couple of manufacturers mention making contingency plans for a potential slowdown.

       Retail

First District retail contacts continue to report that business is good, consumer sentiment seems to be improving, and fears have moderated about higher gasoline prices hurting spending in other categories. Recent year-over-year sales changes range from near zero to gains of 2 percent to 5 percent. One firm, buoyed by recent performance, has increased its overall 2012 sales forecast from 2.5 percent to 4.5 percent. Consumer spending is particularly strong on adult clothing, household goods, and items related to home improvement and maintenance. While respondents have generally positive expectations for their businesses in 2012, some express concern that U.S. economic growth will be hampered by domestic political tensions and potential negative spillovers from a European economic downturn.

The travel and tourism sector in the First District continues to report strong results. Both business and leisure travel have been up in the first four months of the year, and advance hotel bookings continue to be robust. For 2012, the industry expects a 9.5 percent increase over 2011.

Manufacturing and Related Services.

According to our contacts, the manufacturing sector in the First District continues to grow, but the outlook remains guarded, perhaps slightly more so than in recent months.

Thirteen of 16 responding firms report growing sales in the most recent period compared with a year earlier. Idiosyncratic factors appear to be driving the weakness for one firm with declining sales; contacts at the other two could not point to anything other than general macroeconomic weakness as explanations. A manufacturer of industrial motors mentions the situation in Europe while noting that sales are soft in all regions in which the company sells.
The jury is still out on the role of weather in the evolution of business conditions over the last six months. Several of our contacts cited mysterious sales declines at various points which then corrected themselves. A manufacturer of hoses was off 30 percent at the end of March but then had his "best April ever" and was back on plan by this round. He hypothesizes that winter goods weren't selling, so big retailers--hoping to avoid having to store snow shovels and road salt over the summer--lacked space until recently to put spring goods on the shelves.

Dramatic changes in U.S. energy supply continue to affect economic activity, according to manufacturing respondents. A chemical manufacturer in the First District said that the low current price of natural gas is restructuring the world chemical industry. For the first time in decades, chemical firms are building ethylene crackers in the United States.

All contacts doing business in Europe report that the European manufacturing economy is near or in recession. Asia continues to be relatively strong, but one contact in the industrial membrane business said that "the best and most stable market" is the United States.

Fourteen of 16 contacts report that their firms are hiring; nonetheless, they remain reluctant to add to headcount in any significant way. One manufacturer of parts for the aerospace and automotive industry says that, despite strong growth, they have relied mostly on temporary workers to increase production. A contact in the industrial distribution business reports that if conditions do not improve, they will cut staff. Another firm which makes industrial motors says they are drawing up contingency plans for a serious decline which include a hiring freeze.

Software and Information Technology Services

New England software and information technology firms report mixed results through May, with some experiencing continued growth and others citing modest slowdowns. Nevertheless, year-over-year revenue increases in the first quarter remained largely in the high-single digits, bolstered by steady demand from the healthcare and banking sectors and a resurgence of activity in the manufacturing sector. Indeed, one contact closed a deal in Q1 with a very large electronics manufacturer, and another reports that deal sizes are beginning to grow, particularly in their software solutions for manufacturers and distributors. Other contacts, however, assert that clients in general remain reticent to finalize large deals.

Most contacts report increases in headcount, with many continuing to add sales and marketing personnel as well as billable consultants; by contrast, one firm recently completed a realignment in which headcount was reduced by approximately 5 percent. Capital and technology spending and selling prices have gone largely unchanged since February. Looking forward, New England software and IT contacts remain cautiously optimistic, with upticks in activity and strong pipelines tempered by concerns regarding the U.S. economy and the European debt crisis.

Staffing Services

New England staffing firms report that business conditions are largely unchanged since the previous conversations in February, with year-over-year revenue increases in the first quarter generally in the mid-single digits. Labor demand from the healthcare and manufacturing sectors is steady, and one contact reports renewed activity in the financial sector. However, demand for office and clerical assistance has weakened in recent weeks, and activity in the construction, civil engineering, and accounting sectors remains anemic. The number of permanent and temporary-to-permanent placements continues to grow, albeit modestly; however, two contacts say this trend is likely attributable to their own internal efforts to boost permanent hires, rather than improvements in labor-market fundamentals.
Regarding labor supply, candidates with high-end skill sets such as nurses, mechanical and electrical engineers, and software developers remain difficult to find; one contact reports that this shortage of qualified labor has begun to put upward pressure on pay rates. Other contacts, however, say that increases in bill rates and pay rates, if any, are due almost entirely to changes in their business mix. The outlook among New England staffing contacts is generally consistent with that of three months ago, with most expecting their current rate of growth to continue or pick up through the end of the year.

Commercial Real Estate

According to contacts, commercial property markets in the First District remain in a holding pattern, with some signs of improvement. The strength of Boston's commercial market continues to stand out within the region and nationally, making it the target of a tremendous amount of investor interest. Construction activity in Boston appears to be increasing--contacts report an uptick in large-scale build-to-suit construction activity for the first time in several years. However, the market is still not strong enough to warrant speculative construction. In Portland, construction activity has increased significantly from the last report, propelled by projects in the public, industrial office, and multifamily sectors. Elsewhere in the First District, construction activity is muted. Strict lending standards are still the norm District-wide.

Despite a recent uptick in showings, demand in the industrial sector remains flat across New England. Office leasing volumes throughout the District are unchanged from six weeks ago, and the retail sector continues to be quiet in New England. The outlook among contacts is that, barring significant macroeconomic turmoil, conditions should remain flat or improve slightly in the rest of the year.

Residential Real Estate

Residential real estate shows further signs of improvement in the First District as year-over-year increases in sales continued in April across the region. Contacts report steady increases in market activity, which they attribute to low interest rates and competitive prices as well as confidence in economic conditions. In the Greater Boston area, sales continue to increase while inventories fall to low levels, particularly in the condominium market. Some respondents say activity among first-time homebuyers has increased, reflecting continued affordability. Reports also indicate increased activity for homes in the mid-price range. Changes in median sales prices compared to a year ago vary across the First District, with some states experiencing modest gains and others observing moderate declines. Rhode Island, where the median sales price in April dropped almost 8 percent from a year earlier, faced the largest price decline in the region, but the drop was close to zero excluding distressed sales.

Though contacts characterize housing markets as recovering, they note that conditions remain fragile; in particular, with sales gains fairly well established, their concerns focus on the possibility of further price declines. Contacts expect the delicate recovery of housing markets to continue gradually; most anticipate modest gains in sales activity for the next several months and modest price changes, up and down. Respondents say declining inventory levels and increasing demand in Greater Boston may put upward pressure on prices there.

Bernanke Lecture Series Part 1

It's Professor Ben! Recorded at the George Washington University



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