WASHINGTON (MNI) – The following is the latest Beige Book survey of
economic conditions in the Federal Reserve’s First District,
published Wednesday:
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 eight firms contacted in this round, two report an actual
fall in sales relative to year-ago levels, two 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
years 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 percent 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.
** MNI Washington Bureau: 202-371-2121 **
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