U.S. Federal Reserve Beige Book: Boston District (Text)
The following is the text of the Federal Reserve Board’s First District-- Boston.
FIRST DISTRICT - BOSTON
Business contacts in the First District continue to report mixed results. Some manufacturers cite slowing demand while others continue to enjoy strong sales, retail activity is mostly flat, tourism is up, staffing and software and IT services firms note continued growth, and real estate markets remain sluggish. Respondents say input cost pressures have eased somewhat since the last report. Firms are doing little hiring. Contacts in all sectors note that the outlook is increasingly uncertain.
Retail and Tourism
Year to date through early August, contacted First District retailers report generally flat sales compared to a year earlier. Reports range from down 5 percent to up almost 4 percent. Consumers are conservative in the purchases they are making and, in particular, are avoiding big-ticket items. Sales of furniture and office supplies have been sluggish, while apparel and home improvement categories have performed a bit better. One contact saw a pronounced downward sales trend in recent weeks that he attributes to consumer concerns about the debt ceiling debate, stock market gyrations, ongoing high unemployment, and continuing unease about the U.S. economy’s medium-term prospects. Some contacts are hiring, but most are cautious about adding to head count and one may have layoffs after the holidays. Retailers say that commodity price increases have moderated. Inventory levels are being positioned for an uncertain economic environment. All respondents voice concern that the economic outlook is sluggish for the foreseeable future; they are scaling back capital spending plans for 2012.
Travel and tourism in the region continued a strong upward trend through the second quarter that began a year earlier; as of June 2011 year-to-date activity in the hotel and visitor sector was up 7 percent from 2010. However, since mid-July, activity has softened and slowed, leading to an increase in promotional offers to shore up hotel bookings. The tourism industry has scaled back its 2011 forecast and now thinks that a 5 percent increase would represent a great year. The revised forecast reflects both lower consumer confidence and potential reductions in business travel based on an uncertain economic outlook for the next six months.
Manufacturing and Related Services
Manufacturing contacts report relatively mixed business conditions, especially compared to the widespread favorable reports earlier this year. Some firms cite flatter and/or slower revenue growth in the current quarter compared to the first half of the year, while others say sales growth continues to be relatively robust. Semiconductor-related manufacturers in particular note declines in demand, although they attribute it to standard demand cycles for their products, given the surge in purchasing they saw in late 2010 and early 2011. A diversified manufacturer and a company in the aerospace industry also report somewhat softening demand, which they attribute to a possible end to the post-recession sales bounce-back as well as increased economic uncertainty making some customers less willing to stockpile inventory. A number of firms also note a slowdown in European demand for their products. By contrast, sales growth at pharmaceutical companies remains steady, and demand at various industrial supply manufacturers continues to be strong. Contacts at these industrial products firms note that they have little lead time between orders and sales and thus they would know very quickly if demand were slowing. Despite continued favorable conditions at some companies, nearly all manufacturing contacts voice concern regarding the current state of economic uncertainty and more than one commented that the country is “talking itself into a recession.” Some respondents continue to postpone hiring and/or investment to keep costs low while others report having contingency plans in place should demand turn down noticeably.
Employment remains steady at the vast majority of contacted manufacturers. One exception is an industrial products manufacturer with headcount up 9 percent year-to-date who plans to continue to hire as long as demand for their products remains strong. By contrast, a semiconductor firm has eliminated some of its temporary workforce because demand for its products is off. A small number of manufacturers report continued difficulty finding workers for highly skilled positions.
Fewer manufacturers report input price pressures and/or supply shortages than in recent rounds, although the costs of rare earth metals continue to pose input price pressure for some firms. One firm notes that anticipated supply disruptions from the earthquake in Japan never materialized. Most manufacturers reporting higher raw material costs continue to be able to pass the price increases on to their customers with little resistance. A semiconductor firm, however, notes that economic conditions limit its ability to pass along cost increases. Healthcare costs continue to be a concern for contacted manufacturers, although nearly all report providing merit pay increases to their employees this year.
Responding manufacturers say capital spending remains more or less on plan, with the majority of capital spending increases relative to last year going to construction and/or updating of facilities. Most contacted firms report having excellent cash positions and being willing to invest should a good opportunity arise. Uncertainty surrounding the economic climate, however, continues to limit their willingness to invest and hire; they are waiting to see what happens with the economy before noticeably changing their current operating strategy.
Software and Information Technology Services New England software and information technology contacts report that the upward trends of 2010 and early 2011 continued through the end of the second quarter. Year-over-year revenue increases, ranging from 4 percent to 30 percent, were driven by notable increases in both software license sales and recurring service revenues. Reports on activity since July are mixed, however, with some contacts experiencing downticks and others posting larger-than- expected increases. Headcounts continue to rise in line with revenue growth, although many contacts report increasing difficulty in finding qualified software engineers, programmers, and sales personnel. As a result, some have bolstered their recruitment efforts and one contact has added jobs overseas. Wages are steady or up slightly, with annual merit increases generally in the 3 percent to 5 percent range. Selling prices have been left unchanged as a result of a competitive market environment. The outlook among New England software and IT services respondents is not appreciably different from that of 3 months ago, with most expecting growth in late 2011 and early 2012 to be in the 10 percent to 20 percent range.
Nearly all New England staffing contacts report upticks in business volume through the end of second quarter and into the third; however, many respondents lament that overall activity remains below expectations. Revenues are flat to increasing year-over-year, with increases in the range of 5 percent to 25 percent. Labor demand continues to strengthen, albeit modestly, with notable improvements in the manufacturing and information technology sectors. Demand for permanent and temporary-to- permanent hiring continues to grow; indeed, two contacts report that permanent placements are up more than 20 percent relative to last year. Notwithstanding stronger demand, jobs remain difficult to fill as clients remain fastidious in their candidate expectations. One contact notes that jobs that used to take just a few days to fill continue to take weeks. Supply of high-end labor remains tight in the region, but there has been no significant change since May. Bill rates and pay rates are steady. Looking forward, New England staffing contacts are generally less upbeat than they were three and six months ago, with many expecting to “move sideways” into 2012.
Commercial Real Estate
Commercial leasing fundamentals are roughly unchanged since the last report. Office leasing activity was stable in Boston but resulted in no significant absorption or changes in rental rates. In Hartford, the modest momentum observed in the first half stalled as sentiment turned negative, and the risk of a significant slowdown in leasing and sales activity in the fourth quarter is considered high. Investor demand for prime office and apartment buildings in Greater Boston remains strong, raising concern among some contacts that sales prices are moving too high relative to rents and occupancy. The lending environment for commercial real estate in Boston is characterized by aggressive competition among banks, resulting in downward pressure on mortgage rates. Looking forward, relatively weak office-leasing demand in Boston is expected to persist in light of recently-announced layoffs at a few large downtown employers.
Residential Real Estate
States throughout New England experienced increases in home sales in July compared to last year; however, contacts express little enthusiasm about these increases because they largely reflect struggling sales activity following the expiration of the homebuyers’ tax credit last year rather than any improvement in activity this year. Respondents report that activity in the housing market remains sluggish, with potential buyers remaining apprehensive about economic conditions. The median sale price of single-family homes and condos remained close to even with a year ago throughout much of the region. Contacts report sellers pricing competitively in order to attract bids and buyers negotiating even lower prices. Meanwhile, listings continue to climb in the region, but most contacts did not express serious concern about the level of inventory reached.
Outlooks for the remainder of the year appear largely pessimistic, with contacts expecting a continuation of slow activity. Most anticipate sales for this year will not reach last year’s total and forecast little improvement over the next one to two years.