The following is the text of the
Federal Reserve Board’s First District– Boston.
FIRST DISTRICT – BOSTON
Economic activity in the First District continues to expand at a
moderate pace. Residential real estate sales increased relative
to last year and commercial construction activity continues to
gain momentum.. Sales in the retail sector remain about flat,
while the manufacturing and business services sectors continue
slow growth. Contacts report that their costs and prices are
increasing very moderately, if at all. Firms are generally not
laying off workers, but most are also not engaged in substantial
hiring. Many contacts cite uncertainty regarding future
macroeconomic conditions as impinging on their outlook, and some
contacts cite this as a reason for postponing investment or
other decisions.
Retail
First District retail contacts report that sales range from
slightly below to slightly above year-ago levels. Consumer
spending continues to be strong for adult clothing and shoes,
but spending on furniture and electronics has recently slowed
relative to the pace earlier in the year.
All of the contacts report that prices seem to be holding
steady, and they do not anticipate much inflation or price
volatility in the near future. The contacts continue to expect
low positive single digit percentage sales increases for 2012,
although the final results will depend on holiday shopping. Many
contacts feel that there is a lot of macroeconomic uncertainty
and expect aggregate growth to be sluggish through the rest of
2012 and into early 2013.
Manufacturing and Related Services
According to our contacts, the manufacturing sector in the First
District continues to grow. However, virtually all of the
contacts express some concern about the outlook. Of the 8 firms
contacted in this round, 2 report an actual fall in sales
relative to year-ago levels, 2 report an increase in growth and
the remaining four report slower growth. The firm that reports
the largest increase in growth, a manufacturer of fitness
equipment, said that sales grew 20% in the first quarter overall
but there was a sharp slowdown in March and April followed by a
partial recovery in May and June. A manufacturer of electrical
equipment said that one area of notable growth is residential
real estate, in which they recorded multiple months of double
digit growth. Of course, sales in that business line are 65% off
their peak during the housing boom.
None of the contacts report any major revisions to their hiring
plans. Five of the contacts said they are either not hiring or
not hiring much; one said they are hiring and another said it
would all depend on the evolution of sales growth. A producer of
semiconductor manufacturing equipment reports that it had
limited merit pay increases to very high performing employees.
Six of our contacts report no revisions to their capital plans
and two report that they plan to hold off of previously planned
increases. A fitness equipment manufacturer reports that their
original plan had been to increase investment by 5%, but now
they plan to keep it at last year’s levels. A contact at an
electrical equipment manufacturer notes that they plan to hold
off on capital expenditures despite their strong balance sheet
and considerable liquidity.
The key word for the overall outlook is uncertainty. In general,
our contacts use phrases such as “sitting on the sidelines” and
“waiting for the uncertainty to play out.” Not everyone is
completely downbeat. One contact, from the toy industry, reports
a “better feeling” than a year ago. There is uncertainty about
domestic policy, including the “fiscal cliff” and health care,
as well as uncertainty about macroeconomic performance in Europe
and China.
Commercial Real Estate
Contacts in the First District report that conditions continue
to slowly improve in the commercial property market. All
contacts, especially those in Boston, note that financing
conditions are very favorable for high quality projects. The
office market in New England remains flat. Contacts in Boston
report difficulty attracting tenants to lower-quality office
space and expect vacancy rates to remain steady in the coming
months. Contacts believe that the office market is unlikely to
improve until the national economy begins to experience robust
growth. Construction activity throughout the First District
continues to gather momentum, but is mostly limited to the
multifamily housing, medical, and higher education sectors.
According to contacts, the retail sector is in a holding pattern
throughout the First District. Overall, contacts believe that
conditions in the New England commercial real estate market are
somewhat improved in the last year and, barring a macroeconomic
disruption, expect this tepid improvement to continue for the
rest of the year.
Residential Real Estate
Home and condo sales in the First District showed significant
year-over-year increases in May, continuing the trend of the
last several months. Contacts attribute the gains to low
interest rates, affordable prices, and pent-up demand. A contact
from the Greater Boston area adds that improving economic
conditions and raising rents in the area have also contributed
to sales activity. The consecutive months of growth have
improved confidence in the market, but contacts note a recent
decrease in momentum compared to previous months. According to
most contacts, the pace of market activity has declined
slightly, which may be revealed by sales figures in the coming
months. Some contacts note that an unseasonably warm winter and
spring provided an early boost to sales in the first half of the
year, which may account for some softening in activity during
the past month. Meanwhile, price changes are mixed across the
region. Maine experienced an increase of approximately 7 percent
relative to last year while the median sale price in Rhode
Island slipped at least 8 percent. Other states in the region
experienced relatively modest changes in price levels from a
year ago. Some contacts express concern over appraisal
practices, claiming banks appraisers are underestimating home
values. Inventory levels declined throughout much of the region,
particularly in the Greater Boston area.
As the number of months of consecutive growth continues,
contacts have become more optimistic about the direction of the
market. Nonetheless, contacts remain cautious about recovery and
believe it could be easily derailed by deterioration in economic
conditions. Contacts predict continued year-over-year growth in
sales for the next several months, but possibly at a slower rate
than in previous months while prices are expected to stabilize.
Selected Business Services
Consulting and advertising contacts in the First District report
a steady but generally positive second quarter of 2012. No firm
had a bad quarter, but few of the contacts are particularly
excited about their results. Contacts report that potential
clients are unwilling to commit to projects and instead choose
to hold their cash and wait for clearer signals regarding the
direction of the economy and the resolution of political and
policy questions. Some contacts report a strong second quarter,
generally due to factors specific to the industries they
primarily serve.
Contacts report little to no inflationary pressure and were
generally not concerned about their rate of cost growth
(primarily salaries). Firms report cost growth ranging from zero
to “in line with inflation,” and only a few firms report any
change in the prices they charge. Of those that did increase
their rates, increases range from 2 to 4 percent relative to
last year.
Employment growth is weak as many firms report wanting to wait
for more demand before hiring, although no firm reports
downsizing. Half of all firms report no change in payrolls,
while the other half report increases ranging from 2 to 5
percent year-over-year. Firms that report hiring during the
second quarter generally expect to continue hiring at a modest
pace, while those that did not hire in the second quarter plan
to leave employment levels unchanged for the remainder of 2012.
Most contacts are cautiously optimistic about the rest of 2012,
and more bullish about 2013. An overarching theme of the
contacts’ comments is uncertainty. Contacts are primarily
concerned with uncertainty regarding general macroeconomic
conditions, the European debt crisis, and politics and the
upcoming election.