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
Most business contacts in the First District continue to report year-over-year revenue increases, but an uncertain outlook. Responding retailers cite mixed results and increased optimism about 2012; manufacturing contacts, by contrast, say they are uncertain about the outlook even though most current results remain good. Software and IT services companies continue to see good demand growth, while results are mixed, though mostly positive, for staffing firms. Real estate markets remain subdued. With the exception of software and IT services, contacts say their firms are doing mostly replacement hiring; some cite difficulty in filling specific skilled jobs. Cost pressures are said to be modest.
Retail and Tourism
First District retailers contacted in mid-November express less uncertainty about recent business trends than they did in early October; their estimates of 2011 annual sales are generally more positive and the 2012 outlook is more optimistic than last time. One large retailer selling both durable and nondurable goods reports that third quarter comparable store sales were up 3 percent over 2010:Q3. Another durable goods retailer reports that sales in recent weeks have been almost 5 percent above what they consider the benchmark for a solid sales week. Notably, a couple of contacts who last time expected 2011 sales gains of 4 percent or 6.5 percent from 2010 have now revised their estimates upward to between 7.5 percent and 8 percent. With one exception, responding consumer-goods retailers expect final 2011 sales to range from 6 percent to 8 percent over 2010, but one foresees annual 2011 sales to track 1 percent to 9 percent lower than 2010. Respondents say that consumers are regaining some confidence, although such comments are still tempered with caution, particularly regarding durable goods purchases. Budgeted pay increases range from 2 percent to 3.3 percent. Some contacts report ongoing wholesale price increases, while others say cost increases have moderated.
The travel and tourism sector continues to see strength in overseas and business travel, while discretionary domestic leisure spending is fueled by the affluent consumer. One weak spot is booking for end-of-the-year holiday parties. Hotel bookings for 2012 remain strong. The September tourism slowdown noted in the last round of calls seems to have been temporary. This contact continues to expect 2011 tourism growth of 5 percent to 8 percent over 2010 and predicts 2012 tourism revenues to be 10 to 12 percent above 2011.
Manufacturing and Related Services
The First District manufacturing picture remains mixed. On the whole, contacts report relatively strong performance continuing in recent months, but ongoing concern about potential weakness in the global economy is tempering growth forecasts and leading to only limited capital investment and hiring activity. Of the firms contacted this month, all but one recorded sales growth year-on-year and many report double-digit growth. The growth is broad-based geographically; most firms report strongest growth in Asia, followed by domestic sales, but even Europe results remain fairly robust, despite the sovereign debt crisis. One contact making laboratory instruments commented that “reports of Europe’s demise are premature” but others are less sanguine about Europe. A major supplier to the auto industry reports a September year-on-year sales decline in Europe of 7 percent, but a year-to-date European sales increase of 11 percent, only slightly less than the almost-13 percent recorded in Asia.
The pricing picture continues to improve. Materials price increases and shortages that characterized the sector in 2010 are said to have largely subsided. One contact in the chemical business says that input costs are “falling like a rock” and attributes the attenuation to China “putting the brakes on.” A semiconductor contact says that while the price escalation and shortages of rare-earth elements endemic at the beginning of the year are no longer a problem, prices remain high. A laboratory- instrument maker says that high energy prices are leading them to shift freight from air to ships. In general, contacts say they have little trouble passing price increases on to customers. Respondents who cite falling input prices also report increased downward price pressures on the output side.
Manufacturers in the First District are hiring in general but not a lot; most report hiring only selectively to fill vacancies. Only one firm is laying off workers. A contact supplying the auto industry had planned to increase headcount 3 percent in 2012 but has now decided to freeze hiring, approving no new positions and abandoning approved but unfilled positions. Several firms cite trouble finding qualified staff, generally for technical positions, with one contact in the industrial motor business saying that larger firms are “poaching” machinists from a North Carolina plant. A pharmaceutical firm reports problems finding technical staff and also accountants and other less specialized skills.
Contacts do not, in general, report any major changes to their capital spending plans. Several firms mention increased expenditure on information technology, including two who are installing new ERP (enterprise resource planning) software systems. One contact in industrial distribution said that the purpose of the increased investment is to “grow the business without increasing headcount.” Several firms report significant capital expenditures overseas, generally with the goal of supplying overseas markets.
The outlook for 2012 is very cloudy. Virtually all of our manufacturing contacts express misgivings. Some are concerned about the crisis in Europe but others express the vague fears that have characterized our conversations over the last 18 months. A contact in the semiconductor industry says there is less “visibility” than at any previous juncture. Most firms have not officially revised their forecasts for 2012 and continue to plan for growth. A chemical industry contact says he is “following his head and not his stomach” because, by the numbers, 2012 looks promising but his experience and intuition tell him otherwise. A contact in the industrial motor business says that their “book-to-bill” ratio is 1.07, so backlog is growing, but he describes himself as “worried.”
Software and Information Technology Services
New England software and information technology contacts report continued growth, with year-over-year revenue increases ranging from mid-single digits to 20 percent in the most recent quarter. Contacts report upticks in demand across the board, including in the manufacturing, financial, and medical sectors. Increased activity has led all contacts to increase their headcounts relative to a year ago, many by over 5 percent; at the same time, many report continued difficulty in attracting and retaining qualified software engineers, programmers, and sales personnel. Respondents report annual wage increases for most employees between 3 percent and 5 percent, with one firm increasing the wages of software engineers by more. Many contacts express renewed concerns regarding the federal budget and the European debt crisis. Nonetheless, First District software and IT contacts are generally more optimistic than they were three months ago. With strong order pipelines, most are expecting revenue in early 2012 to be 10 percent to 20 percent higher than in early 2011.
First District staffing contacts report mixed activity through the end of October, with some experiencing downticks and others posting modest increases. Year-over-year revenue changes vary widely, from flat to up by more than 25 percent. Labor demand is generally flat relative to three months ago, although a few contacts report upticks in the software-IT, manufacturing, and legal sectors. Demand for permanent and temporary-to-permanent hiring continues to grow. Supply of high-end labor remains tight in the region, and a few contacts report difficulty finding medical assistants, CNC operators, and welders. Bill rates and pay rates are steady or up slightly, with most contacts attributing increases to more high-end placements as well as a tight supply of skilled workers. First District staffing contacts say they believe that the labor market is performing better in New England than in the nation as a whole; they express hope for more consistent growth in 2012.
Commercial Real Estate
The majority of contacts in the First District describe conditions in commercial real estate markets as roughly unchanged since the last report, although some note small improvements in fundamentals. In Hartford, vacancy rates for Class A downtown office space continue to hover around 20 percent and leasing demand remains muted in light of a flat labor market. In Boston, office leasing activity is roughly steady at a moderate pace, although tenants reportedly lack a sense of urgency to sign deals. Boston’s Back Bay and East Cambridge submarkets continue to show strong demand and relatively low vacancy rates, with the result that rents on Class A office space in Back Bay now exceed those for comparable space in Boston’s financial district, where vacancy rates remain in the mid-teens. Portland saw modest absorption of retail and Class B office space and in recent weeks amid strong overall leasing volume, while some new vacancies arose in the Class A office market. Leasing demand tapered off in recent weeks in Providence, as suburban Rhode Island experienced a modest uptick in leasing activity.
The investment sales market remains strong in Boston, as prices edge slightly higher for prime office and apartment buildings. Apartment construction in greater Boston remains very active, with numerous developments in progress and more new buildings in the pipeline, although other construction activity remains limited throughout the region. The lending environment continues to offer plentiful financing--and on increasingly favorable terms--for premier properties, especially in Boston, while financing remains harder to obtain for riskier properties and those in secondary and tertiary markets.
Residential Real Estate
Sales activity in New England for single-family homes and condominiums continues to languish according to contacts throughout the region. Sales figures rose moderately in September compared to a year ago, but these increases reflect several months of dismal sales following the expiration of the tax credit in mid-2010. Respondents say housing market conditions have remained largely unchanged in the last several months. Most contacts characterize the market as stable and consistent, but believe the beginning of a recovery remains fairly distant. While low interest rates have made financing more affordable to qualified homebuyers, contacts report tighter credit standards as a constraint. The median sale price of homes also rose in September from a year earlier in the region, except for Rhode Island, where prices have been below year-earlier levels for several months. October data for the Greater Boston area, by contrast, show a 10.5 percent year-over-year decline in the median sale price of homes.
Outlooks for the remainder of the year are mixed, with some contacts anticipating 2011 sales falling short of last year and others predicting sales to reach last year’s level. Respondents expect relatively stable prices in the coming months, but note the possibility of moderate declines.
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