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.

Wednesday, August 6, 2014

Beige Book July 16, 2014 First District Boston


Reports on recent business performance in the First District display considerable variation both across and within sectors, but point to slow economic growth overall. Contacts in the retail sector report either slight declines in sales or modest increases. Tourism is enjoying very strong growth, while manufacturers report mixed results. Consulting contacts report moderate to strong growth, while commercial real estate reports are mixed across locations and sectors. Relative to a year ago, sales of single-family homes fell in May in four New England states, but contacts also report rising median home prices in two of these states. Output prices are mostly stable in the manufacturing sector, although some firms recently raised their prices, and in the consulting sector some large firms are enacting fee increases to cover rising wage and benefit costs. While manufacturers report no commodity price pressures, some retail contacts note price increases for some inputs. Some firms in the District are engaged in significant hiring and others are doing little to no hiring, largely in line with business performance. Barring pessimism among a few contacts and selected mention of downside risks, most contacts are at least cautiously optimistic about their near-term growth prospects, and respondents in the tourism, biotechnology, and healthcare consulting industries all describe the outlook as highly favorable.

Retail and Tourism
Retail contacts report year-over-year same-store sales growth ranging from small single-digit decreases to low single-digit increases. Some contacts report that consumers are still cautious, while others say that consumers seem more confident. Some indicate that vendor prices and input costs remain steady, while others report cost increases for paper products and for fuel and freight. Depending on the retailer, the outlook for their own business and for the U.S. economy ranges from "challenging" to "steady" to "improving." The already-strong tourism sector continues to see very robust growth. Boston-area hotel revenues were up 13.2 percent in May from a year ago. Attendance at museums and other attractions is up 8.5 percent year-over-year for May. Tourism-related revenues for the 2014 summer season are projected to be 6 percent to 7 percent higher than in 2013, which was itself a record year.

Manufacturing and Related Services
Of the nine manufacturing firms contacted in this cycle, only two report year-over-year declines in revenues. A maker of frozen fish products reports that demand is down because fish is expensive and also because competitors are underpricing them. A magazine publisher that relies heavily on advertising revenues reports that ad revenues have fallen 10 percent per year for a number of years because of the shift to digital media. Of the firms reporting revenue increases from a year ago, two had very slow growth. One of these, in the chemical industry, reports that its net revenue growth figure conceals wide variation across different product lines, including a year-over-year revenue decline of 9 percent for its largest line and an increase of 12 percent for its second-largest line. Across contacts, the first quarter's harsh winter had no lasting effects on inventories, which reportedly stand at moderate levels. Seven contacts report that they are making new hires, with headcounts increasing in line with individual firms' sales growth. A biotech firm plans to hire 1,000 workers this year, while a manufacturer serving the automobile and aerospace industries reports hiring mostly to replace departing staff. Firms report mostly stable pricing. Two contacts, both selling industrial parts, recently succeeded in putting price increases through to customers. Unlike in many previous reports, no contacts report having problems with commodity prices or supplies. All contacts reporting on investment activity indicate that investment is up over last year, although none of these contacts mention having revised their investment plans recently. With the exception of the magazine publisher, contacts have a positive outlook for the remainder of 2014, and the biotech firm contact is more optimistic than are contacts in such industries as bulk chemicals and automotive springs.

Selected Business Services
Demand for analysis, consulting, and advertising is up across the board, as most contacts perceive that the economy is resurgent. Healthcare consulting firms led with 5 percent to 10 percent revenue growth over a year ago. Economic analysis and government consulting firms report year-over-year revenue growth in the range of 1 percent to 4 percent. Advertising firms also report strong demand. According to contacts, wages at business services firms are up 2 percent to 5 percent over last year, while benefits increased at a slightly higher pace. Larger firms report little trouble passing compensation increases on to clients, but smaller firms see margins being squeezed amid fierce competition, coupled with rising wage and energy costs and perceived consumer reluctance to accept higher prices. Healthcare consulting firms and a few large analysis firms plan to increase employment by 5 percent to 10 percent this year. Government consulting and smaller strategy firms report flat headcounts and no plans to hire moving forward. Firms in consulting and advertising report that a tight market for their targeted hires pushed starting salaries up 5 percent to 10 percent over last year. Revenue growth predictions display a broad range, including negative values and a value of 10 percent, although all firms expect growth to improve moving forward. Healthcare consultants are especially optimistic in light of demand stemming from clients' need to comply with the Affordable Care Act. At the same time, government and healthcare consulting firms cite pending U.S. fiscal and regulatory policy decisions as key risk factors for clients.

Commercial Real Estate
Reports from commercial real estate contacts across the First District are mixed. Leasing activity is down in Hartford in recent weeks, a fact attributed in part to usual seasonal patterns and in part to weak fundamentals. Office leasing activity is also down in Providence, while at the same time Rhode Island's industrial leasing market is tightening amid strong demand and limited inventory. According to a Portland contact, the city's tourism industry is booming, and three recently-opened hotels enjoy high occupancy rates. Also in Portland, strong office leasing is driven by growth of existing firms rather than by new firms, and investment demand is strong across industrial, multifamily, and medical properties. In Boston, office rents continue to display a modest upward trend, thanks to a lack of new inventory coming to market. A limited amount of speculative office construction is underway in Boston's Seaport District, but contacts foresee constraints on similar construction in the form of high costs and limited financing. A regional lender to commercial real estate saw a surge in loan volume in recent weeks, a fact the contact attributes to changes in business strategy. According to contacts, hiring in both Portland and Hartford--and hence added office demand--is held back by a scarcity of young, educated workers in these cities. Contacts expect that Boston will continue to see at least modest improvement in commercial real estate fundamentals moving forward, while contacts in Providence and Hartford point to uncertainty surrounding the outcomes of upcoming elections in their respective states as a factor that could restrain economic growth in the near-term. A Portland contact's outlook remains bullish.

Residential Real Estate
Realtors report steady foot traffic at open houses and multiple contacts insist that demand remains strong despite year-over-year declines in sales in May in four of five reporting states: Connecticut, Massachusetts, Rhode Island, and Vermont. In Maine, sales rose over the same period. To help explain the falling sales, realtors cite inventory shortages, perceived lack of job security, and economic uncertainty. Lack of inventory continues to hamper sales in Massachusetts, where listings have fallen on a year-over-year basis for 27 consecutive months. At the same time, contacts in that state report seeing increases in new listings in selected areas. Despite declining sales, the median sales price of single-family homes in May continued to rise on a year-over-year basis in Rhode Island and Massachusetts. For the same period, median sales prices were flat in Connecticut and down in both Maine and Vermont. Condominium sales in May are down relative to a year ago in Connecticut, Massachusetts, and Rhode Island, while Vermont contacts report increased condo sales over the same period. The median sales price for condos in May increased from a year ago in Connecticut, Massachusetts, and Vermont; by contrast, the median condo sales price fell in Rhode Island over the same period. Looking forward, contacts in both Maine and Connecticut note that they are busy with pending deals, while pending sales figures for June are below year-earlier levels in Massachusetts, Vermont, and even Connecticut. Nonetheless, realtors across the region are hopeful that closed sales numbers for June will show improvement from a year ago.

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


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


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.

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


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

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

Friday, December 6, 2013

BHI on the November 2013 U-Rate Release: 7.0%

It's now clear that the job market is picking up despite over-wrought concerns about the fiscal cliff and the government shutdown. The time is soon approaching for the Federal Reserve to start tapering; today’s job number is a signal that its bond-buying can’t go on much longer. Read BHI's analysis of today's release here.

Wednesday, December 4, 2013

Boston Beige Book - December 4, 2013

FRB: Beige Book - December 4, 2013

Economic activity continues to expand in the First District. Most respondents in manufacturing, retail and tourism, software and IT services, and the staffing industry report year-over-year increases in revenue, while both residential and commercial real estate contacts indicate that market conditions continue to improve. Most firms are holding headcounts level; wages are steady or increasing modestly. Upward price pressures remain minimal. Many firms are cautiously optimistic about the outlook, a more upbeat tally than in the October round of calls.

Retail and Tourism
This round's retail contacts report year-over-year comp store sales increases between 7 percent and 25 percent, with one firm down 3 percent. Demand continues to be strong for apparel, home furnishings, and furniture. Inventories are well managed and prices remain steady. Compared to earlier rounds this year, sentiment is a bit more optimistic, or as one source opines, conditions "will not get any worse." Another respondent notes that the first two weeks of November showed some real underlying strength, but also states that sales performance during the 2013 holiday season will be a better test of what seems to be an improving trend. About one-third of contacts have raised their expectations for overall 2013 sales in light of their third quarter results.

October was particularly good for Boston hotel and restaurant activity, exceeding the usual expectations for this traditionally busiest month, on account of the additional business brought in by the World Series appearance of the Red Sox. Hotel revenues were up 7.5 percent year-over-year, supported by an increase in occupancy rates. Transportation services also benefitted from higher-than-usual demand. Some New England tourist attractions suffered from the government shutdown, notably those run by the National Park Service or the Navy (U.S.S. Constitution) and the private firms depending on their visitors. Museums and other attractions continue to experience declining attendance; their revenues are down 6 percent year-over-year.

Manufacturing and Related Services
Only one of the ten firms contacted this cycle reports falling sales. A plastics firm indicates that its core bulk chemical business is slowing--"coming in for a landing"--and its retail garden hose business is "the worst in memory." Two contacts report that sales growth is flat. The first is a computer software firm that largely serves the defense industry; the second is a manufacturer of electrical distribution equipment for whom strong residential demand is being offset by very weak non-residential. A firm that makes tools for home improvement reports that sales are up, but less than they had expected. Defense firms continue to say that sequestration has not yet affected them significantly.

All manufacturing respondents report it is difficult or impossible to raise their product prices. A contact in the bulk chemical business said input prices are falling, which he sees as evidence that "no one in the industry is buying." A commercial aircraft parts manufacturer says that major firms in the industry are trying to drive costs down and, among other things, forcing more and more subcontracting.

None of our contacts reports staff cuts, but only four indicate they are increasing staff. The home improvement equipment firm reports they are bringing 250 jobs back to the United States from China and Mexico. A semiconductor equipment firm plans to hire only contract workers. One contact says the Affordable Care Act is significantly increasing health care costs for his firm.

Most First District respondents continue trying to keep inventories low. Firms that increased inventory mostly say they are doing so in anticipation of higher sales. By exception, the hose manufacturer cites massive inventory accumulation due to low demand. Two contacts report lower capital spending while the rest cite either no change or an increase since the last conversation. One firm reducing investment did so because a major project was completed. A manufacturer of electrical distribution devices says the only thing holding back investment is a shortage of "talent" to execute new projects.

First District manufacturers are mostly optimistic, but guardedly so. The bulk chemical business contact says the slowdown in his industry is serious but not long-term. Firms with substantial exposure to defense are unwilling to make any forecasts due to uncertainty about the budget process.

Software and Information Technology Services
New England software and information technology services contacts generally report stronger-than-expected business activity through November, with modest improvements in both revenues and earnings since August 2013. Contacts attribute this growth to factors ranging from increased consumer demand to improved execution at the firm level. Most contacts expect to report positive year-over-year earnings growth at the end of 2013. By contrast, a healthcare contact reports negative growth due to the expiration of federal stimulus funding for health records software; however, this decline is much smaller than expected. While one firm shed some jobs, most firms either maintained headcounts or slightly increased their hiring pace. Wages have been steady, with plans for merit increases at the end of this quarter in the 3 percent to 5 percent range. Both selling prices and capital and technology spending have gone largely unchanged in recent months. Looking forward, New England software and IT contacts are more optimistic than they were in August, expecting continued growth through the first quarter of 2014.

Staffing Services
New England staffing contacts generally report strengthened business conditions through November, with low-double-digit quarter-over-quarter revenue growth, and year-over-year revenue growth in the 3 percent to 10 percent range. This uptick reportedly reflects both an improved macroeconomic climate and changes in firms' business development strategies. Only one staffing contact reports softer results, with revenues in New England down 10 percent year-over-year. Labor demand is largely unchanged since August 2013; one contact reports increased demand in the software and mobile application development sector. Labor supply has thinned in recent months across all industries, and is particularly tight in the software/IT and engineering sectors. Firm strategies to attract more job candidates include improved marketing tactics, and an exchange program that temporarily brings in IT professionals from abroad. The temporary-to-permanent rate continues to be strong, with one contact reporting a 50 percent increase this year. Bill rates and pay rates have either remained flat or have modestly increased since August. Looking forward, staffing contacts are generally more optimistic than they were three months ago, expecting steady growth through the end of the year.

Commercial Real Estate
Contacts across the First District report that leasing fundamentals maintained a very slow pace of improvement in recent weeks, consistent with minimal-to-slow employment growth. However, in some parts of Boston--the Seaport District and Back Bay--absorption has accelerated in recent months and, for the first time since before the Great Recession, speculative office construction is starting to occur. In Rhode Island, tenants are showing an increased willingness to commit to longer-term lease renewals (5-10 years), following an extended period during which shorter-term renewals were favored. At the same time, projected state budget deficits for Rhode Island, and political uncertainty over how such budget gaps will be closed, are seen as a crimp on business expansion in the state. A Connecticut contact echoes the theme of political uncertainty as a drag on growth, as that state is also facing large budget shortfalls in coming fiscal years. A regional lender to commercial real estate cites the U.S. government shutdown as the cause of a sharp decline in loan inquiries, but borrowing activity at the bank has since resumed at a healthy pace. The lending environment remains highly favorable to borrowers, with historically low borrowing rates and increasingly loose lending standards--even too loose in relation to fundamentals, according to some contacts. Abundant investment capital continues to flow into commercial properties across the region, sourced from private equity firms, pension funds, foreign investors, REITs, and high net-worth individuals.  Leverage ratios are reportedly on the rise among some investors, but one contact points out that they remain low in absolute terms.

In Boston and surrounding suburbs, construction activity (both current and planned) is reportedly on the rise in both the hotel and retail sectors. The growth rate of multifamily construction--recently quite high in metro Boston--is expected to slow considerably within 12 to 18 months, while construction in the health care sector across the region is seen as restrained by uncertainty over the implications of national health care reform.

Contacts are cautiously optimistic across the region. Forecasts call for more slow improvement in fundamentals moving forward, pending steady (if slow) employment growth. However, fiscal policy uncertainty at both the state (noted above) and national levels is mentioned by a few contacts as a downside risk to employment growth and hence to improvements in leasing and construction activity.

Residential Real Estate
Based on numbers for September and contacts' "sense" of October results, it appears that sales of single-family homes and condos continue to improve throughout New England, while prices continue to approach, and in some states exceed, pre-recession levels. Sentiment across the region is that the recovery is well underway, but sales activity will likely begin to moderate in the months ahead as winter approaches. Pending sales are expected to decline in a few states, and contacts in the field attribute the decline at least partially to a drop in consumer confidence resulting from the recent government shutdown. While some contacts cite consumers upgrading homes, respondents in other states say sales growth is driven primarily by first-time home buyers. Contacts in Maine and Connecticut also cite an uptick in foreclosures and short sales coming onto the market. The other New England states, however, claim unconventional sales generate a relatively small percentage of total sales. New federal flood insurance legislation and new flood maps drawn by FEMA continue to generate concern across the region as insurance rates are expected to rise and make houses located in potential flood areas more expensive to own. Those worries notwithstanding, the overall message is that this has been a turnaround year in First District residential markets, although economic factors could still change the trajectory of the recovery.

Thursday, October 17, 2013

Boston Beige Book Outlook

FRB: Beige Book -- October 16, 2013

First District--Boston

Reports from business contacts indicate the First District economy continues to grow, at a pace that varies depending on sector. Most retailers and manufacturers report moderate increases in revenue, while consulting and advertising contacts cite robust growth. Residential and commercial real estate markets continue to improve. Aside from consulting, most firms are doing little to no hiring, or hiring only for replacement. Prices are largely unchanged. Firms doing business with the government have been affected by the sequester; other firms are also concerned about potential effects of the government shutdown on consumer demand or broader economic effects of hitting the debt ceiling. 

Retail and Tourism
The retail contacts reporting for this round cite September year-over-year comp store sales ranging from a 2 percent decrease to increases in the upper single digits. Consumer demand remains strong for apparel, home improvement items, home furnishings, and sporting goods, with online sales accounting for an increasing fraction of total sales. Inventories are said to be in good shape and prices remain steady. Contacts say that while consumer sentiment seems to have improved over the summer months through mid-September--which they attribute in part to more positive trends in the housing market–the recent decline in the stock market and federal government shutdown may damp consumer spending. Respondents note uncertainty about the underlying strength of the economic recovery. 

Domestic and international leisure travel and corporate business travel and entertaining are quite strong. Hotel occupancy rates in Boston and Cambridge reached a nine-year high in August, with average room rates the highest in a decade. However, if the federal government shutdown lasts more than ten days, it could curtail some leisure travel, as domestic leisure travelers seem to operate within a 10-day booking window. October is New England's busiest month of the year for travel, so such a curtailment now could be particularly significant for businesses throughout the region that rely on tourism.
Manufacturing and Related Services
Of 11 manufacturing firms contacted this cycle, only one, a frozen food producer, reports falling sales. Among firms reporting higher sales, those in the medical and technology areas with blockbuster products report double-digit sales growth, more or less independently of the state of the economy. The rest of the firms generally report year-on-year sales growth in low single digits and, for such firms, small changes are very significant. For example, a diversified firm in the building equipment and aerospace industries reports sales growth of only 3 percent when they expected 4 percent; as a result, the firm has imposed serious restrictions on hiring and, in some areas, substantial layoffs, as the firm attempts to meet earnings targets through cost containment.

On the global front, China has reportedly stabilized, but several contacts mention that other emerging markets declined, pointing in particular to Brazil and India. Indeed, a contact at a manufacturer of computer storage devices describes the two countries as "disasters." Interestingly, the devaluation of the Indian currency was good for this firm's income statement because, due to outsourcing, their costs in India exceed their revenues; nonetheless, the contact views the turmoil in India as worrisome news. A firm in the semiconductor industry reports that an unusually long down-cycle in sales appears to have come to an end and that sales have returned to their historic peak, achieved in 2010.

Eight of the 11 contacts say they are keeping employment steady and hiring only for replacement or for key needs. Of the remaining three, one plans to consolidate two business lines and cut headquarters staff, including some highly paid executives. The other two, a drug manufacturer and a computer storage firm, are hiring significantly and roughly in line with their sales growth.
Only one contact, a firm in the semiconductor equipment business, reports revising investment plans down recently. The rest are holding steady or accelerating their plans. In particular, the firm planning layoffs is at the same time "investing for the long run," albeit mostly in Asia.

The outlook ranges from fair to very good. One contact in publishing expects slow growth for at least the next 12 to 18 months. Another contact said he was, "increasingly nervous that there is another little slowdown here." But many other contacts are quite optimistic, including a firm that had disappointing results in 2013, where the contact expects 2014 to be better.
Selected Business Services
Consulting and advertising contacts report a strong third quarter, consistent with a sustainably, but not rapidly, growing economy. Healthcare consultants cite the strongest results, as the double-digit revenue growth of the past few years continues. Demand for healthcare consulting services is driven by increased merger and acquisition activity among providers, adoption of new technology, compliance with new regulations, and the need for organizational change due to structural shifts in the healthcare industry. Demand for economic consulting remains strong, and strategy consultants report that "the economy is slowly picking up steam." Marketing contacts estimate industry-wide growth of 6 percent to 7 percent, driven by large corporate orders and a shift in demand towards higher-value items as companies have more to spend on marketing and branding. By contrast, a government consultant reports a slight drop in revenues and a smaller backlog as the sequester continues to reduce agencies' ability to purchase services.

Most firms' annual salary adjustments range from 2 percent to 4 percent. A majority of contacts report minimal increases in health insurance costs; however, two cite troublingly large increases. Firms' own rate increases are about 3 percent to 5 percent. Economic and healthcare consulting firms have been increasing employment 10 percent to 15 percent on an annual basis, strategy consultants closer to 5 percent, while marketing and government consultants report little to no hiring.

Contacts expect growth to continue at or moderately above its current level as long as the economy is not hit with a shock. Other than the government contractor, contacts are not worried about the sequester or European uncertainty, and several note that European risk has been "priced in" or forgotten about. Several are very concerned, however, about the potential for a debt ceiling-induced financial crisis.
Commercial Real Estate
Reports from First District contacts describe the region's commercial real estate markets as either stable or strengthening. A Boston contact cites improvement in leasing fundamentals in recent weeks across diverse sectors--including office and assisted living facilities--while investment sales demand is up from an already-strong pace. Redevelopment activity picked up in Boston's retail sector, with plans for filling and retooling vacant space in both urban and suburban locations. Another Boston contact says office leasing activity is roughly unchanged since the last report, with strong demand in the Seaport and Kendall Square areas and comparatively weak demand for locations in the Financial District. Build-to-suit office construction continues in prime neighborhoods but otherwise office construction is negligible in metro Boston. 

A Portland contact notes significant improvements in leasing fundamentals and investment demand in recent months. In Hartford, the sale of two large office building in recent months has resulted in a significant decline in the office vacancy rate for class A space, from upwards of 25 percent to roughly 17 percent, a decline that should lead to some firming of rents after a long period of stagnation. Also in Hartford, investor demand for prime office and multifamily properties stayed strong. A Providence contact is mostly upbeat, citing a modest uptick in leasing activity in recent weeks and some positive absorption of downtown office space. While leasing volume increased across the region, contacts note that most leasing deals consist of renewals-in-place or relocations of existing firms, with little to no net expansion of firms' footprints.

In Boston, local conditions lead contacts to expect more slow-to-modest growth in the commercial real estate sector moving forward, but national economic and political conditions lend uncertainty and downside risks to the outlook. In both Rhode Island and Connecticut, contacts are cautiously optimistic that commercial leasing fundamentals will continue to improve, but note that their respective states face persistent challenges to economic growth, leaving their overall prospects weaker than the U.S. average. A Portland contact is mostly optimistic that southern Maine will continue to see modest growth in leasing fundamentals, but expects investment sales to slow with rising interest rates.
Residential Real Estate
Residential real estate contacts in the First District say markets continue to strengthen and they are "cautiously optimistic" about the outlook. According to a source in New Hampshire, realtors are no longer talking about returning to a "non-recession" market, but rather stating that market conditions have returned to normal. August saw sales of single-family homes and condominiums continuing to increase across the region compared to August 2012. Market participants, however, are watching interest rates closely. Where current market activity is largely driven by first time home buyers--such as in Maine and Connecticut--higher interest rates could slow sales. In other states, rising interest rates may be temporarily spurring activity as buyers attempt to lock in lower rates. With the exception of one state which saw condo prices fall, median prices for single-family homes and condominiums rose in August relative to last year. Inventory trends vary across the states, with Massachusetts seeing inventory for single-family homes and condos low compared to historic norms--making it a sellers' market--while inventory in Maine increased in August compared to a year ago and New Hampshire sources indicate there "appears to be more balance between buyers and sellers."

While First District realtors say that this has been a turnaround year, they fear economic shocks could still stall the recovery. In addition, respondents express concern about negative effects on housing markets of the Biggert-Waters Flood Insurance Reform Act of 2012; they say that lack of affordable flood insurance may cause values to fall and buyer delays in newly redrawn flood zones.