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Beige Book Report: Boston

March 7, 2018

Summary of Economic Activity
Economic activity expanded at a moderate pace in the First District, with almost all retail and manufacturing respondents citing sales and revenues in recent weeks ahead of year-earlier levels. By contrast, staffing firms reported year-over-year revenue declines, reflecting ongoing difficulty finding workers to fill openings. Commercial real estate contacts offered generally upbeat reports. Residential real estate markets in the region saw sales declines and price increases, which respondents attributed to very low inventories. Outlooks continued to be generally positive.

Employment and Wages
Most responding firms said labor markets were tight. Retail contacts noted increased difficulty hiring workers in some categories and said they expected the labor market to tighten further over the coming year. Merit raises for existing retail employees were in the range of 2.5 percent to 4.0 percent. One large retailer planned to pass along half its savings from the corporate tax cut to selected workers in the form of higher wages, while a smaller retailer said it planned to raise salaries a bit to match the wage increases announced by some prominent retail chains as a result of the tax cuts. A manufacturing contact with declining sales laid off temporary workers but has, so far, avoided any layoffs of permanent workers. Otherwise, no manufacturing respondents reported any major revisions to their hiring, although several said the market was particularly tight for skilled workers from machinists to electrical engineers. Manufacturing contacts reported higher starting salaries and longer waits to fill open positions. Staffing firms noted high labor demand from clients across the board, regardless of industry or occupation, paired with a dearth of candidates to fill open slots. They reported that bill rates and pay rates have risen, with some noting local minimum wage increases as a source of upward movement.

Firms' comments on pricing were mixed. Retail contacts said wholesale prices were steady; one indicated they will increase prices on most retail products by low single-digits in 2018, while another planned to raise retail prices to cover higher labor costs. Another retail contact noted higher shipping costs because of a shortage of trucks and drivers. In manufacturing, specific supply issues have resulted in selective price increases. Otherwise, manufacturing contacts reported no notable changes in the pricing environment.

Retail and Tourism
First District retail respondents reported that from early January through mid-February, year-over-year sales results were positive, ranging from mid-single-digit to double-digit increases. While two contacts cited high demand for winter items, others believed the increases represented a continuation of more buoyant consumer sentiment that took hold in the second half of 2017.

Contacts said the US economy is expected to do well overall in 2018, notwithstanding challenges facing some retailers. Predictions regarding consumer sentiment varied: One contact said that the cut in federal income taxes and actual or expected wage gains augur well for the retail sector. Others, including one citing recent stock market volatility, opined that consumers were likely to be cautious.

Boston-area hotels had their strongest December in five years. Despite a slow start during the first half, the average room occupancy rate in 2017 was 82.2 percent, the highest rate ever recorded and the fifth straight year above the hotel industry "gold standard" of 80 percent. Some in the tourism industry expressed concern that foreign travel to the United States will decline in 2018.

Manufacturing and Related Services
Only one of the ten First District manufacturers contacted this cycle reported lower sales--a gun maker. Otherwise, all manufacturing contacts reported higher sales than a year ago. Contacts in the semiconductor area reported strong sales and new orders. Demand was strong in other industries as well, including a manufacturer of membranes used in batteries and filters who reported December sales up 10 percent to 15 percent versus the previous year.

Several contacts reported constraints on the supply side. Two said they faced shortages of electronic parts; one attributed the shortages to new phones that "soaked up world supply" for selected components. Another supply issue was trucking. A contact said that companies now have to plan well in advance to guarantee trucking capacity; finding it at short notice is either impossible or very expensive--the main issue is a shortage of drivers.

Manufacturing respondents had a positive outlook. In general, contacts were increasing capital expenditures, although only one reported a major increase in spending (to build a new plant in New Hampshire). Contacts said that it was too soon to determine the effect of the new tax code on capital spending.

Staffing Services
New England staffing firms have seen mostly negative results over the last quarter of 2017 and the start of 2018, with the majority reporting revenue declines year-over-year. For most respondents, this reflects a low unemployment environment that has slowed hiring volumes and increased competition for the remaining labor supply. Some also remarked on the entry of new tech firms specializing in job posting sites, which has made it easier for companies to host job searches without using intermediaries. This has sparked experimentation as they look for ways to distinguish themselves through advertising, branding, improving online reviews, and increased attention to building relationships with potential talent. One respondent reported the temporary placement side of their business was the strongest, while most noted that few workers want temporary positions in the current labor market. All anticipate the continuation of a robust economy and expect to continue to work under the constraints of a tight labor market for the foreseeable future.

Commercial Real Estate
Contacts offered mostly upbeat reports on commercial real estate activity in the First District. Office leasing activity remained robust in greater Providence, driving further increases in rents, although suburban office locations remained less sought-after. Rhode Island's industrial property market continued to experience strong demand. Boston posted an increase in office leasing activity, while leasing activity slowed across all sectors in Connecticut. Construction activity remained robust in Providence and Boston, but luxury multifamily construction continued to dominate in Boston where some contacts cited ongoing concerns about overbuilding in that submarket.

Respondents across the First District voiced concerns that commercial property values could fall in response to rising yields on long-term Treasuries, and cited both upside and downside risks related to recent changes in federal tax laws and the recently signed federal budget. A Connecticut contact said business sentiment remained very weak, leading to a pessimistic outlook for commercial real estate activity. A Rhode Island contact expected slower economic growth in the second half of 2018; by contrast, Boston contacts forecasted stable or strengthening growth despite risks in some submarkets.

Residential Real Estate
Residential real estate markets in the First District showed declines in closed sales despite strong demand. Closed sales for single-family homes decreased in four out of the six reporting areas, while New Hampshire and Maine reported moderate increases. For condos, sales decreased in all reporting areas but Maine. (Three of the six states, as well as the Greater Boston area, reported data through December 2017; Maine, New Hampshire and Vermont reported results to January 2018.)

Median sales prices increased for both single-family homes and condos, except in Vermont. Low inventory continued to be a key constraint in the First District, with all areas except Greater Boston reporting substantial decreases in inventory.

Contacts expressed positive outlooks in terms of market activity, citing strong buyer demand and the prospect of rising mortgage rates as the reasons. A Boston contact noted "Despite these drops in overall sales, activity has remained strong and we're seeing an eager buyer population."

For more information about District economic conditions visit: www.bostonfed.org/regional-economy