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Beige Book Report: Boston

September 12, 2018

Summary of Economic Activity
Economic activity in the First District expanded at a moderate pace since the last report. Responding retailers, manufacturers, and staffing firms cited year-over-year increases in sales and revenues in recent weeks. In most reporting areas in the region, residential real estate markets saw increases in both closed sales and prices. Activity in commercial real estate markets was generally steady; contacts noted rising construction costs. Staffing firms as well as respondents in retail and manufacturing cited tight labor markets; wage pressures varied. Prices rose modestly if at all, despite increasing freight costs. Overall, the outlook continued to be positive.

Employment and Wages
Most contacts said labor markets were tight; net hiring remained modest to nil while wage increases were mixed. Retail hiring continued at a modest pace; contacts reported wage pressures varied across the region. The labor shortage for restaurant workers continued to be very troublesome, particularly on the Cape: contacts cited not enough U.S. workers and not enough visas for seasonal foreign workers. Most manufacturing contacts have not increased headcount. They reported that locating engineers and skilled machinists remained difficult, but assembly line and administrative workers were not hard to find. Staffing firms cited increasing labor demand and decreasing labor supply across the board, a combination that continued to present challenges, especially for recruiting skilled workers. Some staffing firms noted increases in bill and pay rates, ranging from low single digits to 10 percent.

Prices were reported to be unchanged or up slightly. Retail contacts indicated that selling prices remained steady, on average; one prominent retailer noted that food prices were up somewhat, but its overall retail price level was flat because of lower prices in other categories. However, higher fuel prices and a scarcity of truckers continued to drive up freight costs; manufacturers also noted increased trucking costs. Five of nine manufacturing contacts reported that their selling prices had gone up, but increases were small.

Retail and Tourism
Retailers contacted in this round said that year-over-year comparable-store sales ranged from low to mid-single digit increases from a year earlier. Two firms reported overall sales increases in the double digits due to business expansion. Apparel sales were particularly strong, as were sales of electronics and seasonal items. Contacts expressed concern and uncertainty regarding tariffs, particularly for inputs and goods sourced from China, such as cotton, electronics, and furniture. Absent the tariff issue, expectations for sales were positive through the end of 2018.

A contact in the Massachusetts restaurant industry reported that sales were up 4.6 percent in 2018 through June 30, based on meal tax receipts. Restaurant sales in July were up 7.1 percent year-over-year, a robust increase that was partly attributed to hot and humid weather and many rainy weekends; with this weather pattern continuing, sales through the end of August were expected to be strong as well. Menu prices were up about 2.6 percent year-over-year, driven by higher operating costs: wholesale food prices were up, as were costs associated with insurance, labor, and rent. The cost challenges confronting the restaurant industry were reportedly inducing caution about expansion.

Manufacturing and Related Services
All contacted manufacturers reported higher sales than in their last reports. Growth was consistent across geographies and industries. A semiconductor contact said that slowing smartphone expansion led the firm's growth to slow slightly, although it remains positive. A maker of motion-control equipment said that tariffs on steel and aluminum had led those metal producers to increase capital spending and demand for capital goods. By contrast, First District contacts cited no major revisions to their capital spending plans; they indicated that tax reform made investment somewhat more attractive but did not change the basic calculations.

Most contacts noted the tariff issue but said that, so far, the effects have been small and they did not expect too much damage if they are expanded. A gun manufacturer said that they had locked in steel prices for two years prior to the tariffs. A contact in the motion-control industry said they expected to pass on any tariffs in the form of surcharges or price increases.

Manufacturing respondents' outlooks remained positive. Most had not revised their outlook recently, but a capital equipment manufacturer said they had raised their investor guidance at the end of July versus February.

Staffing Services
New England staffing firms continued to grow over the summer; nearly all responding firms reported year-over-year revenue growth, ranging from the low single-digits to as much as about 20 percent. Some firms reported spending more to attract and retain talent, including the adoption of new technology and incentive programs. Demand for permanent workers is greater than for temporary workers, but supply issues are even more pronounced for temporary positions, making temp vacancies more difficult to fill. Some contacts stated that because the New England economy is faring better than the rest of the country, labor supply is even more challenging in New England than elsewhere.

While they all expressed concern about labor supply, staffing contacts expressed optimism about upcoming quarters; they expect to finish the year strong.

Commercial Real Estate
Commercial real estate activity held roughly steady on balance in recent months, although rising construction costs and shortages of construction labor were seen as growing constraints. Office and warehouse leasing demand remained strong in Boston and Portland amid low vacancy rates, resulting in positive but slow net absorption and further upward pressure on rents. The Hartford area continued to experience weaker leasing activity than Boston or Portland, although conditions were seen as mostly stable and distribution space enjoyed decent demand.

The financing environment remained favorable for commercial real estate construction and investment in the First District, and recent loan deals were seen as safe in the sense of involving relatively low amounts of leverage. Construction was stable but mixed across areas and sectors; multifamily housing and hospitality continued to lead. Commercial real estate contacts said that construction costs had increased moderately-to-steeply in recent months, and the increases were attributed in part to rising materials costs--stemming partly from tariffs on imported goods--and in part to rising wages for scarce construction labor. The tight construction labor market also contributed to delays in project completions. Contacts maintained a mostly favorable outlook.

Residential Real Estate
Residential real estate markets in Boston and four First District states with available data showed brisk sales activity in the month of July; current data were unavailable for Connecticut and Vermont. For single family homes, closed sales increased in all reporting areas but Rhode Island. For condos, closed sales increased in all reporting areas except Maine. Rhode Island saw some improvements in inventory and supply. The Rhode Island contact noted, "Last month marked the first time in nearly two years that the single-family home inventory climbed above 4,000. All indications are that the market may have reached the point at which supply and demand begin to become more balanced."

Median sales prices increased in most reporting areas, but not Rhode Island. Contacts expressed concern that a seller's market environment was distorting house prices. A Massachusetts contact said that some level of price correction would be healthy for the current market, to reduce buyer discouragement and seller concerns about finding a home to buy after they sell. A contact from New Hampshire also commented, "Housing-price-bubble chatter has increased this summer. It is too early to predict a change, but the common markers that caused the last housing cool-down are present."

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