Boston Fed: Winter weather curbs New England business growth

ACCORDING TO THE BEIGE BOOK REPORT released by the Federal Reserve Bank of Boston, businesses in New England were negatively affected by the severe winter storms in January and February. / BLOOMBERG FILE PHOTO/BRENT LEWIN
ACCORDING TO THE BEIGE BOOK REPORT released by the Federal Reserve Bank of Boston, businesses in New England were negatively affected by the severe winter storms in January and February. / BLOOMBERG FILE PHOTO/BRENT LEWIN

BOSTON – Despite severe winter weather during the first months of 2014 that put pressure on New England business owners in several industries, the overall economic outlook remains cautiously optimistic, according to the Federal Reserve Board’s Beige Book released Wednesday.

Retailers generally reported year-over-year sales increases ranging from 3 percent to the mid-single digits for all of 2013, with one Fed contact citing an increase in the mid-teens. And while several retail contacts indicated strong results during the last six weeks, others said sales have slowed due to weather-related issues. Others said that recent sales look slow due to poor year-over-year comparisons with the post-Hurricane Sandy rebound in early 2013.

Prices remain steady overall, but some retailers expect a modest increase in apparel prices, reflecting a rise in raw material costs and overseas labor costs. The majority of retail respondents anticipate continued overall improvement in U.S. economic conditions and consumer sentiment in 2014.

Boston-area hotels achieved record occupancy rates and revenue in 2013, building on strong records set in 2012. The Fed’s contacts expect strong growth to continue through 2014. While severe weather in January and February gave a boost to hotels, other venues such as restaurants and museums saw declines in revenue due to exceptionally harsh conditions.

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New England staffing firms also were affected by adverse weather conditions, reporting “softened” business conditions in recent months. Although the Fed’s staffing contacts generally reported year-over-year revenue increases, revenue is down on a quarter-over-quarter basis.

However, labor demand remains strong across most industries – particularly in the software, engineering, legal, specialty manufacturing and health care sectors. Staffing firms cited a shortage of candidates to fill nursing, specialty manufacturing and IT roles, reflecting a skills mismatch “amplified by the holidays and severe weather.”

In response, firms have continued to invest in social media initiatives to reach a broader range of candidates, and most reported that temporary-to-permanent conversion rates remain strong. Looking forward, staffing contacts said they are optimistic that growth will accelerate as weather conditions improve, although several expressed concerns about continued uncertainty regarding how health care reform will affect the staffing industry.

Manufacturers showed continued improvement in the Beige Book report, with nine of the Fed’s 13 industry contacts citing increased sales volume during the last six weeks compared with the same period a year earlier. Two reported flat sales and two said sales have dropped due to the loss of several days of production during snowstorms in February.

While several manufacturing companies have made efforts to reduce their inventories, others reported building inventory on the assumption that the drop in sales caused by bad weather would lead to increased demand in the second quarter to compensate. None of the 13 manufacturers queried reported any major pricing pressure, up or down, either from suppliers or customers.

Four manufacturing contacts said they were hiring during the last six weeks, four cited reduced staffing and five reported flat employment. Respondents said recruiting engineering staff remains difficult, but otherwise indicated no complaints about the labor market. Eleven of the 13 contacts reported positive or very positive outlooks for 2014.

Although software and IT services firms performed well through February – with most reporting stronger-than-expected business activity and revenue growth exceeding earlier forecasts – the majority are not actively hiring, and wages remain steady.

“The outlook among software and IT contacts is cautious optimism, with expectations of modest revenue growth through the end of the quarter,” the Fed report said. “Contacts remain concerned about general macroeconomic conditions and uncertainty surrounding health care reform.”

Commercial real estate leasing activity was mixed throughout the Greater Boston area, with some contacts reporting that severe weather reduced office leasing inquiries and investment sales activity slowed following a year-end surge in transactions.

However, most indicated that investment demand for commercial real estate remains strong, despite the recent slowdown in construction, and the bank-lending environment remains highly competitive, with solid loan demand across a number of sectors.

“In Providence, demand for multifamily housing remains strong downtown, while industrial leasing activity is still weak,” the report stated.

Aside from select factors causing some concern in the market – including, specifically, “political stagnation” in Rhode island stemming from the impending gubernatorial election – most of the Fed’s commercial real estate contacts are optimistic in the new year.

In the residential market, Rhode Island contacts cited declines in single-family home sales, while sales in Massachusetts were mostly flat. Beige Book respondents suggested scarce inventory was the primary reason for constrained sales growth, while uncertainty from new qualified mortgage rules and flood insurance reforms have also caused buyers to remain cautious about making offers.

“Pending sales suggest the market for single-family houses and condos is off to a good start in 2014, increasing in all states except Rhode Island,” the Fed wrote. “Contacts express optimism about local housing markets looking forward but say they expect the snowy winter to depress sales in the near term.”

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