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
Reports from business contacts in the First District reflect a
growing economy, although the pace of growth appears to be
somewhat slower than in the last round. Retailers cite mixed
sales results, manufacturers note slow growth, and software and
IT services firms report disappointing results. By contrast,
staffing firms are seeing a pick-up in growth. Commercial real
estate contacts indicate that fundamentals remain flat, and
sentiment has soured somewhat in recent weeks; residential real
estate respondents say growth in home sales has slowed but home
prices are rising modestly in some areas. Hurricane Sandy
reportedly had very modest effects on economic activity in New
England. Prices are said to be level in general, with minimal
inflationary pressures. While some firms cite shortages of
specialized workers, few are hiring, none extensively, and no
one mentions upward wage pressures.

Retail and Tourism

First District retailers contacted for this round report that
year-over-year October sales changes ranged from single-digit
decreases to single-digit increases. A durable goods retailer
reported a large single-digit decrease which they attributed to
a decline in customer traffic related to preparations for and
the aftermath of Hurricane Sandy. Sales of adult apparel and
home furnishings continue to be strong. Some retailers have
increased their hiring in anticipation of the holiday season.

Respondents say that prices are holding steady and they do not
see inflationary pressures. Many contacts are actively managing
inventories to remain nimble and some are undertaking multi-year
plans to better position their businesses for the future in
which the Internet will account for an increasing share of
sales. Because of the so-called fiscal cliff, there is some
uncertainty about what to expect in terms of tax policy; this is
viewed as particularly affecting planning by small businesses.

Manufacturing and Related Services

Manufacturing respondents give a general picture of weak growth.
Of the 10 firms contacted this cycle, all but one report growth
versus the period a year earlier but only four report higher
year-on-year growth versus the previous quarter. Similarly mixed
numbers appear across other measures, with three firms reporting
an improved outlook, four reporting higher employment and four
reporting higher capital expenditures.

Firms that are growing attribute growth to idiosyncratic factors
and not to the economy. A pet healthcare firm plans for 7.5
percent growth in 2012 but says it is all the result of
“innovation” and not the economy. A manufacturer of medical
equipment said government spending on VA hospitals had led to a
large increase in demand for its products. A semiconductor
equipment manufacturing firm reported a dramatic reduction in
its expected sales in the fourth quarter. As in recent Beige
Book rounds, they blame this on the semiconductor equipment
“cycle.”

We continue to hear occasional complaints of difficulty finding
qualified workers. A pharmaceutical manufacturer reports hiring
75 new people this year but still having 58 openings which they
have been trying to fill “for a long time” and which “they do
not anticipate to be able to fill this
year…” They attribute the difficulty to their need for “highly
qualified scientists with specific sets of skills.” A
manufacturer of analytical laboratory equipment finds it
“increasingly difficult to find qualified people in China.”

In general, manufacturing contacts’ recent weakness has not yet
led them to revise substantially their capital expenditure
plans. That said, many of these plans involve spending outside
the United States. For example, a manufacturer of lab equipment
is spending almost 50 percent more this year than is typical,
but all that increment involves a new plant in England; capital
expenditure in the U.S. is entirely on maintenance.

Software and Information Technology Services

New England software and information technology services
contacts generally report weaker-than-expected activity through
October, with revenues in the third quarter roughly on par with
year-earlier levels. The downtick in activity reportedly
reflects heightened political and economic uncertainty, which
has rendered many potential clients unwilling to commit to
projects. Many contacts report increasing difficulty in
executing large license agreements, particularly in Europe,
where one contact says sluggishness in the manufacturing sector
led to a year-over-year decline in license revenue of nearly 40
percent. Delays in contract signings and project starts have led
many respondent firms to slow the pace at which they are hiring;
one contact may reduce headcount modestly in coming months,
after hiring “in advance of anticipated need” earlier this year.
Capital and technology spending and selling prices have gone
largely unchanged since February.

Looking forward, New England software and IT contacts are
generally less upbeat than they were three and six months ago,
with many expressing growing concerns regarding the “fiscal
cliff” and macroeconomic conditions in Europe. Most expect only
modest growth through Q1 2013.

Staffing Services

New England staffing firms generally report improved business
conditions, with most describing business since Labor Day as
“pretty good.” Year-over-year revenue changes in the third
quarter varied widely, from down slightly to up by about 20
percent. Labor demand is up slightly in the IT and engineering
sectors, and one contact reports renewed activity in the
manufacturing sector. However, demand for office and clerical
assistants and accountants remains weak. In terms of labor
supply, candidates with high-end skill sets such as nurses,
mechanical and electric engineers, and software developers
remain hard to find. In addition, one contact reports that
turnover has recently decreased, as those with jobs are
hunkering down for the holiday season. Nevertheless, bill rates
and pay rates have gone largely unchanged since August. The
outlook among New England staffing contacts is generally
consistent with that of three months ago, with most expecting
more robust growth in 2013.

Commercial Real Estate

According to contacts across the First District, commercial real
estate fundamentals were roughly flat in recent weeks amid light
leasing activity. In Hartford, downtown office vacancy rates (as
percentages) remain in the mid-20s, although absorption could
improve in the coming months if pending lease deals go through.
A Providence contact also sees some chance of significant
absorption in the downtown office market but noted downside
risks linked to macroeconomic conditions. In Portland, leasing
activity in recent months remained light and fell below
expectations, resulting in flat rental rates. In Boston, office
fundamentals showed modest improvements in the third quarter,
but leasing inquiries have reportedly fallen off recently amid
concern over the fiscal cliff. Sales activity in Boston also
softened, despite prior expectations that property owners would
rush to take capital gains at current tax rates in light of
pending 2013 rate increases. The multifamily sector remains
strong in Hartford and Boston, with rents rising as much as 10
percent over the year for some properties in greater Boston.
Loan terms remain highly favorable for high-quality properties
and a regional lender to commercial real estate continues to
experience record loan volume.

A majority of contacts note that business sentiment soured
recently, with the national election results and the fiscal
situation cited as key factors. The outlook for commercial real
estate among our contacts turned more pessimistic on balance in
light of these same factors and also, according to some, risks
to growth stemming from Europe and other parts of the world.
While contacts report no immediate impacts of Hurricane Sandy on
the commercial real estate markets in their respective cities,
two contacts point out that insurance rates for commercial
structures along the Eastern seaboard are likely to rise going
forward, restraining development in some areas.

Residential Real Estate

Sales growth slowed in September throughout much of the First
District among both the condominium and single-family home
markets. In the Greater Boston area, single-family home sales
actually declined, representing the first decrease in 15
consecutive months. By contrast, condominium sales in Greater
Boston rose, reaching historic levels for the month of
September. Slowing growth across much of the region was
attributed to the dwindling number of properties in the market
and damped confidence in the local economy. Most contacts note
modest price appreciation. However, in Rhode Island and
Connecticut, prices declined compared to a year ago, but
consistent growth in sales is expected to place upward pressure
on prices. First District contacts remain fearful that ongoing
declines in inventory levels will hurt the selection of homes on
the market and discourage buyers in the market. Some contacts
say homeowners interested in selling have been reluctant to list
their homes in anticipation of greater future price
appreciation.

Outlooks for the coming month remain similar to previous reports
in spite of less robust growth recently. Contacts generally say
the housing market continues to recover and expect positive
year-over-year growth in sales in the coming months because of
low interest rates and affordable prices; they also expect
modest appreciation in prices. Inventory levels are not expected
to increase until the Spring. Overall, contacts remain
optimistic about the recovery in the housing market, but caution
that gains could be undermined by worsening economic conditions.

SOURCE: Federal Reserve Board

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