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.

Wednesday, September 4, 2013

FRB: Beige Book - September 4, 2013

Verbatim from the Boston pages of the Beige Book (September 2013):

First District--Boston

Economic activity in the First District continued to expand at a modest pace. Most contacts reported low-to-moderate single digit year-on-year growth rates. Higher interest rates appear to have different effects on commercial real estate where some contacts reported upward pressure on capitalization rates and residential real estate where contacts report that the prospect of rising rates "nudged" buyers into the market, increasing demand.  No firms report major cyclical layoffs but hiring remains subdued except among fast-growing technology firms. Sequestration has yet to have had any direct effect on contacts with major government businesses but contacts anticipate weakness in the future. Contacts did not complain of higher input prices and did not report that they were raising prices significantly either. 

Retail and Tourism

Most contacts report year-over-year comparable store sales increases between 4 and 5 percent. Demand remains quite strong for all apparel, home furnishing, and home improvement categories, as well as technology products like tablet computers. Contacts indicate that prices remain steady, and feel that consumer sentiment continues to improve. There is some cautious optimism that this more positive trend will continue but expectations for 2013 sales still center on modest single-digit increases.

Both business and leisure travel remain strong with leisure driven by both domestic and international visitors. Attendance at some museums and other attractions is below expectations. While a contact noted that July and August are not heavy months for government-related travel, there is some concern that U.S. government travel budgets, cut 30 percent because of the sequester, will start to have a negative impact on travel industry revenues later in the year.

Manufacturing and Related Services

Three companies--a semiconductor industry supplier, a medical device maker, and a fitness equipment manufacturer--reported double-digit increases in sales compared to the same period a year earlier, four reported single-digit increases from the previous quarter and three companies reported declines. Some contacts reported that sales in Europe were finally growing again. The majority of contacts report no change in prices from the first quarter, either the input prices they face, or their own sale prices. Employment growth continues to be modest. A rapidly growing medical device manufacturer reports increasing headcount at a 15 percent annualized rate but most firms are hiring only "selectively." One firm did report layoffs due to a repositioning of a formerly bricks and mortar business as e-commerce. Defense industry contacts reported little direct effect of sequestration but continued to worry with one contact mentioning rumors that major cuts would come in the fourth quarter. Contacts reported no major revisions of their investment plans and most expect single-digit year-on-year growth in the next quarter.

Software and Information Technology Services

New England software and information technology services contacts generally report weaker than expected business activity through August, with slow revenue growth. Several attribute this sluggishness to continued macroeconomic uncertainty in the U.S. and Europe. In contrast, a contact which mainly works with health care firms attributes the slowdown to the expiration of federal stimulus funding for health records software; however, business in the post-stimulus slump has been better than expected. A business advisory contact sees early signs of improvement in the overall market, as evidenced by an uptick in Q2 sales activity in terms of customer expenditure. Four out of five contacts continue to be cautious in hiring, and plan to remain close to their current headcounts through 2013. Both selling prices and capital and technology spending have gone largely unchanged in recent months. Looking forward, New England software and IT firms are cautiously optimistic, with most expecting only modest growth through the second half of 2013.

Staffing Services

New England staffing contacts generally report strengthened business conditions through August, characterized by mid-single-digit year-on-year revenue growth. This continued growth reportedly reflects both an increase in overall labor demand and a shift to more aggressive marketing strategies at the firm level. Generally, there is a high demand for skilled IT workers and engineers; contacts also report increased demand for manufacturers and medical assistants. On the supply side, there remains a shortage of skilled technical workers to fill high-end IT and engineering jobs. The general consensus is that despite a large pool of available workers, the skills mismatch prevents staffing firms from fully meeting client demand. The number of temporary-to-permanent placements continues to grow; a healthcare contact reports a 30 percent increase in permanent placements this year. Bill rates and pay rates are largely unchanged, with the exception of one firm reporting a decrease relative to May due to the current client mix. Looking forward, staffing contacts continue to be cautiously optimistic, expecting mid-single-digit year-on-year revenue growth through the remainder of 2013.

Commercial Real Estate
Contacts were mixed in their analysis of the effects of higher interest rates. In Boston and Providence, contacts reported upward pressure on capitalization rates noting that the frequency of renegotiation (or "re-trading") of deals in progress increased in recent weeks. Contacts in Hartford reported no effects so far of higher rates on demand for commercial real estate. A regional lender to commercial real estate continues to face challenges securing desired loan volume in the face of competition from other lenders willing to offer commercial mortgages at very low rates. Construction activity remained robust in greater Boston and the pipeline of deals yet to break ground increased significantly over one year ago. Current and planned construction projects in the Boston area are concentrated in high-end multifamily and mixed-use (retail/residential) structures, although construction activity is poised to rise in the hospitality sector and among institutions of higher education. Contacts continued to expect slow improvements in commercial real estate fundamentals in the coming months, but roughly half of contacts raised the uncertainty around their projections relative to last report, with much of the growing uncertainty linked to uncertainty over long-term interest rates.

Residential Real Estate

Throughout the First district, the market for single-family homes and condos continues to make a healthy recovery as sales and prices continued to increase and days-on-the-market continued to fall. According to contacts, increases in the mortgage rates have nudged potential buyers, hoping to take advantage of low-interest rates, to enter the market. In some areas, particularly in the Greater Boston area and Massachusetts, realtors have observed an increasing frequency of multiple offers being made on properties. Despite shrinking inventory, sources state that modest appreciation in regions where multiple bids are common indicates that the market is not overheating.

Wordle: Untitled

Wednesday, June 5, 2013

FRB: Beige Book - June 5, 2013


First District--Boston

First District business contacts generally report year-over-year increases in economic activity, although some--notably in software and information technology services and staffing--indicate the pace of growth is slowing. Retailers mostly say demand is recovering well after weather-related softness during the winter; manufacturing contacts' sales are also ahead of last year. With only a few exceptions, businesses are not hiring much beyond replacement. Aside from food, input prices are generally said to be unchanged, although a few manufacturers have raised their own prices. The outlook is fairly positive, with most respondents expecting the current pace to continue or pick up. 

Retail and Tourism
Retailers are rebounding from the negative impact of harsh and prolonged winter weather earlier this year, but the late arrival of warmer spring weather has affected the sales of some seasonal items. Merchant contacts report April year-over-year comp-store sales ranging from a 0.5 percent decline to a 9 percent increase. Demand is strong for women's apparel, home furnishings, and furniture. Respondents say consumer sentiment seems a bit more positive, especially over the last month or so, yet overall expectations remain cautious. Contacts continue to predict low-single digit sales increases for 2013. 

Greater Boston tourism revenues are up after softer performance attributed to harsh winter weather earlier in the year. Through Q1 2013, hotel revenues are up 2 percent year-over-year, and occupancy rates are also up 2 percent. Restaurants revenues are 1.5 percent ahead of a year ago. Much of this increase is attributed to strong domestic and foreign business travel. 

Attendance at museums and attractions is down, perhaps due to weather affecting leisure travel plans. Boston-area tourism was reduced by the marathon bombings as some groups were forced to reschedule visits.

Manufacturing and Related Services
Three-quarters of contacted manufacturers report higher sales compared with the same period a year ago. Geographically, firms say that Europe remains weak and that both the U.S. and Asia are growing but slightly below expectations; by contrast, one contact called Europe a bright spot because it exceeded somewhat low expectations. An electrical equipment manufacturer reports low to middle single-digit growth across the board except for their products going into residential construction, which consistently rack up double-digit growth versus the year-earlier period. Several contacts, including the electrical equipment manufacturer and a supplier to the semiconductor industry report unusually volatile month-to-month readings.

All of our contacts report little or no pricing pressure on the input side and several say they were able to make price increases stick on the sell side. A dairy firm says food prices are up because of drought conditions, but notes that recent rainfall may change that. Winter storms had some temporary effect on energy prices for some firms.

Five of eight contacts are hiring, although only one is hiring in any significant way and their hiring is outside the U.S. Of the contacts not adding to headcounts, only one is laying off workers; this firm--a maker of parts for machinery--is planning to reduce headcount by 2 percent to 3 percent over the next six months on top of a similar reduction over the last six months.

Six of eight respondents are increasing capital expenditures and one of the others says its expenditures are low only relative to some exceptional investments in 2012. One contact in the electrical equipment business says they have "too much cash" and are looking for investments. Firms cite mixed opportunities to acquire other companies, with one having a "full pipeline" of acquisitions and another saying there is nothing to buy.

Three-quarters of contacts are reasonably optimistic about the outlook. Several who reported some softness in the winter said their customers were talking about demand growing in the second half.

Software and Information Technology Services
New England software and information technology services contacts generally report continued sluggishness through May to date, with year-over-year revenue increases moderating further in the most recent quarter to the low or middle single digits. Two contacts attribute the slowdown to economic uncertainties in the U.S. and Europe, which they say have led many manufacturers to delay the execution of long-term license agreements. A healthcare contact, by contrast, attributes the dip to the ending of federal stimulus funding for electronic health records software. Only one contact, a provider of cloud-based payment and banking software, reports accelerated growth, with revenues in the first quarter up more than 15 percent relative to Q1 2012. Lackluster activity has led the majority of contacts to slow the pace at which they are hiring; many now plan to maintain their current headcounts through the end of the year. Selling prices and capital and technology spending are largely unchanged. Looking forward, software and IT firms in New England remain cautiously optimistic, with most expecting more robust growth in the second half of 2013. 

Staffing Services
First District staffing contacts report weaker-than-expected demand in recent weeks, with billable hours generally falling towards their year-earlier levels. The dip in activity reportedly reflects a leveling off in the IT sector and downticks in temporary and permanent hiring in the light industrial and manufacturing sectors. There is, however, renewed activity in the healthcare sector, with one contact reporting a substantial increase in demand for ambulatory nurses. In terms of labor supply, candidates with high-end skill sets, such as mechanical and electrical engineers and software developers, remain hard to find. Nevertheless, bill rates and pay rates have gone largely unchanged in 2013. Looking forward, staffing contacts are generally less upbeat than they were three months ago, with most expecting only modest growth through the end of 2013.

Commercial Real Estate
Commercial real estate leasing and sales activity held roughly steady or improved in recent weeks in the First District. A Hartford contact notes a modest increase in foot traffic for downtown and suburban office space but no significant changes in rents or vacancy rates since the last report, virtually no construction, and a flat industrial market. In Boston's inner-suburban corridor, office rents are up and vacancies down. In Boston proper, prime retail rents are up at least 5 percent over the quarter; office fundamentals continue to improve across the city, very slowly in the financial district and at a brisker pace in the Seaport/Innovation district. Leasing volume dipped slightly in downtown Providence and mostly improved in suburban Rhode Island, with rents about flat. Defense-industry tenants in southern Rhode Island are reducing their space needs in response to federal spending cuts, moves that are likely to put downward pressure on rents in the local submarket in coming months. In Portland, retail leasing activity picked up and apartment rents rose while the office leasing market was flat. Business confidence in southern Maine reportedly improved but no major expansions or hiring plans were announced.

Values for prime downtown Boston properties--including office buildings and apartment buildings--continue to rise, leading to talk of overheating. Investors are purchasing empty retail space in Boston for the first time since the onset of the Great Recession. Continuing a recent trend, investors are increasingly purchasing prime, well-leased commercial properties in Hartford, Providence, and Portland, markets which are seen as value propositions in comparison with higher-priced Boston. So far in the cycle, however, new construction in these markets has been very limited. Commercial real estate loan demand rebounded at one regional lender as competition for such loans drove mortgage interest rates to new lows.

Contacts are mostly optimistic that commercial leasing fundamentals will continue to improve at least slowly in the coming months. The outlook includes upside potential for absorption in Providence, Hartford, and Boston based on deals in progress and current employment trends. In Rhode Island, however, the upcoming gubernatorial election and state and local budget deficits--as well as the defense cutbacks noted above--present downside risks. In Connecticut, negative effects of sequestration on defense-industry tenants seem inevitable, but the commercial leasing implications are uncertain.
Residential Real Estate
Throughout much of the First District, the median sales price of single-family homes and condos rose year-over-year in March and April. Sales of single-family homes also increased from a year earlier in most of the region during April, after weaker sales results in March. According to contacts, demand for homes remains strong due to low interest rates, relatively low prices, and improving confidence among buyers. However, contacts continue to report that shrinking inventory levels are slowing sales and placing upward pressure on prices. In Massachusetts and the Greater Boston area, dwindling inventory levels have been a significant source of concern; contacts in the other states also express worry about falling inventory levels, but to a lesser extent. 

Several respondents note that much of the housing recovery has been centered around urban areas while rural areas have experienced more modest improvements. Within the Greater Boston area, realtors have observed an increasing frequency of multiple offers on properties.

Contacts anticipate that single-family home and condo prices will continue to rise over the next several months, with inventory levels a significant factor determining the degree to which sales can grow. Overall, contacts say they feel optimistic about the trajectory of the housing market and believe the market will continue to recover as general economic conditions improve. 

[BHI Blog Editor's Note: A word cloud with apologies to]
Wordle: Boston District Federal Reserve's Beige Book (June 2013)

Friday, May 24, 2013

FRB: Beige Book for Boston District April 17, 2013


First District--Boston

Economic activity in the First District continues to expand modestly according to business contacts, although conditions are somewhat mixed across individual firms. Retailers generally cite slower than expected sales, and tourism has softened, partly on account of unseasonal weather. Over half of responding First District manufacturers report demand improvements in the first quarter; the rest are less upbeat. Most consulting and advertising firms say business is strong. Reports from the commercial real estate sector are more positive in this round than previously, with leasing activity improving in some markets. In the residential sector, limited inventory is said to be constraining home sales in the region, but median home prices are rising modestly. Contacts say hiring reflects demand growth, so few firms are adding substantially to headcounts except in the consulting sector. Price pressures are minimal. Most respondents expect current trends to continue, yielding modest to moderate growth in the second quarter and the second half of the year.

Retail and Tourism
Retailers contacted for this round cite mixed results for first quarter 2013. One reports that year-over-year comp store sales were up 2.5 percent to 2.6 percent, while others report slower than expected sales. Some contacts attribute their slowdowns partly to the prolonged winter weather, noting that while this winter has been unseasonably cold in some regions, winter 2012 was unusually mild. Demand remains strong for clothing, shoes, and home furnishings. Inventories are in good shape, and any price increases are moderate. Contacts continue to expect that 2013 sales increases will be in the modest single digits.

The tourism business softened in February and March compared with a year earlier; some of this slowdown is also attributed to weather-related factors, especially for restaurants and museums. January through March is seasonally the slowest period for leisure travel. Tourist activity from Europe dropped about 5 percent this quarter compared to a year ago. Corporate business travel and entertaining remain strong.

Manufacturing and Related Services
Conversations with a dozen manufacturing contacts paint a mixed picture. More than half report that demand for their products improved in the first quarter versus the previous quarter or a year earlier.  The two firms reporting the strongest sales growth were in the health care sector--a drug company and a medical device manufacturer--and both reported spectacular growth. At the other end of the spectrum, two firms in the semiconductor business report that sales continue to languish. One, a maker of analog devices, acknowledged that the semiconductor business is cyclical, but said that the duration of the current slowdown is unlike anything he had encountered in his years in the industry. 

Hiring patterns largely mirror sales growth, with four firms reporting substantial hiring, three citing stability, and five firms reporting staff reductions. The two health care-related firms led the pack, increasing staff at annualized rates of 15 percent to 18 percent. For the medical device manufacturer, the hiring was largely support personnel such as sales, marketing, and back office.

Weakness in demand is not yet translating into lower capital expenditures, with only one firm reporting a reduction. Half the firms noted increases in spending and the rest reported no change. One of firms engaged in substantial capital spending relative to sales is the analog semiconductor firm reporting continued weakness in sales; the firm's managers indicate they remain confident that the long-term growth patterns in the industry will justify their investment. 

Looking forward, only one-third of manufacturing respondents were negative about the outlook.  Most of the rest were optimistic or "cautiously optimistic." 

Selected Business Services
Consulting and advertising contacts in the First District report a generally strong first quarter and were positive about their firms' recent performance and near-term outlook. Marketing and advertising contacts note an uptick in growth due to clients in stronger financial positions and with more money to spend. Several contacts report robust demand for health care consulting services as the industry adapts to massive changes attributable in part to the Affordable Care Act. Economic consulting remains strong because of high levels of complex high-stakes litigation; management and strategy consulting contacts cite improved business conditions as clients have become more optimistic and seem to believe that it is time to invest for future growth. The only contact to report a bad quarter works mostly with the federal government
and has been heavily affected by fiscal contraction.

Contacts generally report cost increases around 2 percent and most firms either raised their rates between zero and 5 percent, or plan to do so later in the year. Several firms have done no hiring because of strong recent hiring or a desire to wait until stronger demand seems more certain. Other firms report stronger hiring, particularly related to health care consulting, in order to deal with increasing demand.

Most contacts expect growth to remain strong or to pick up through the rest of 2013. One exception is a government contractor who is too uncertain about future fiscal policy to offer a forecast. Other respondents seem minimally concerned about fiscal issues, the European debt crisis, and the state of the macro economy, a change from the recent past. One contact specifically notes that client businesses seem to have become comfortable with the level of uncertainty in the economy and are deciding to move forward with investment and business expansion rather than wait for more clarity; several other contacts' reports are consistent with this characterization.

Commercial Real Estate
Reports from commercial real estate contacts in the First District contain much good news. Boston contacts uniformly remark that the office leasing market has firmed up in recent months and that the vacancy rate is down significantly from one year ago. Activity is particularly strong in the seaport district, but financial district towers are also seeing absorption of long-vacant space. Investment sales activity in greater Boston remains brisk, especially for multifamily structures. Planned construction projects in Boston picked up considerably, with a focus on mixed-use projects, and should lead to job gains for the sector moving forward. In Hartford, the state government purchased a large downtown office tower, absorbing a large block of Class A space, boosting business sentiment and, it is speculated, helping put upward pressure on rents. In Portland, the retail property market saw healthy leasing activity and investment sales activity picked up modestly. In Providence, progress continues on some large office leasing deals (despite not yet leading to completions), investment sales activity continues to rise, and business sentiment is seen as increasingly optimistic. On the downside, Hartford saw stagnant office leasing and virtually no construction activity, while Portland's office vacancy rate remains stubbornly high at 12 percent. Small-scale commercial real estate loan demand remains well below last year's pace, according to one regional lender. Construction materials costs are on the rise, putting pressure on profit margins at small firms in particular.

In Portland, property fundamentals are expected to remain flat despite forecasts of healthy transaction volume and a possible increase in hiring by some large firms. In Hartford, the outlook remains cautiously optimistic. In Providence, upside risks to absorption and rents remain, while the federal sequester poses a threat to the state's defense industry. In Boston, one contact expects improvement in fundamentals to remain slow while another expects absorption to accelerate if employment growth continues at its current pace. Boston is expected to remain a magnet for investors owing to its strength in the health and education sectors. However, Boston contacts continue to express concern over property valuations that appear high in relation to income-growth potential.

Residential Real Estate
Strong consecutive months of year-over-year growth in single-family homes sales halted in February, with some New England states experiencing marginal increases and most observing a decline. According to contacts, buyer demand remains strong, but dwindling inventory levels have hampered growth in sales. Meanwhile, median sale prices across the region rose from a year ago. Contacts attribute the price rise to the declining stock of distressed properties compared to a year ago as well as to the general decline in inventory reducing supply relative to demand. Particularly in urban areas throughout New England, decreasing inventory levels have placed upward pressure on prices. In the Greater Boston area, contacts report that multiple bids on properties have become more common as inventory continues to dwindle.

Contacts express concern that low inventory levels in the next several months could discourage buyers and continue to be a significant factor limiting the growth of sales. On the other hand, inventory levels may rise with the beginning of the busy spring season. In addition, rising prices will eventually lure into the market sellers who have been waiting for the value of their homes to pick up before listing them.

Wednesday, March 6, 2013

FRB: Beige Book - Boston District: March 6, 2013


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.