Fed: Regional economic outlook is ‘fairly positive’

ACCORDING TO THE BEIGE BOOK REPORT released by the Federal Reserve Bank of Boston, New England's economic outlook was
ACCORDING TO THE BEIGE BOOK REPORT released by the Federal Reserve Bank of Boston, New England's economic outlook was "fairly positive," with the majority of contacts reporting year-over-year increases in economic activity. / BLOOMBERG FILE PHOTO/BRENT LEWIN

BOSTON – The economic outlook in New England is “fairly positive,” according to the Beige Book report released by the Federal Reserve Wednesday afternoon.
Generally, Federal Reserve business contacts reported year-over-year increases in economic activity and said they expect the current pace to continue to increase.
The report mentioned, however, that respondents in the software and information technology services, and staffing sectors said they believed the pace of growth was slowing.
In all sectors and “with few exceptions, businesses are not hiring much beyond replacement,” said the report.

Retail, manufacturing

The retail sector appeared to be bouncing back from the negative impact of a “harsh and prolonged winter,” but the late arrival of warmer weather has affected the sales of some seasonal items.

Retail respondents added that consumer sentiment seems “a bit more positive, especially over the last month or so, yet overall expectations remain cautious.” Overall in the retail sector, survey respondents predicted low, single-digit sales increases for the full year.

- Advertisement -

Through the first quarter, hotel revenue in the greater Boston area increased 2 percent year over year, as did occupancy rates. Restaurant revenue is 1.5 percent higher than a year ago. Much of the increase in tourism revenue was attributed to strong domestic and foreign business travel.

Three-quarters of manufacturers contacted by the Federal Reserve reported higher sales levels compared with the same period in 2012. “Geographically, firms say that Europe remains weak and that both the U.S. and Asia are growing, but slightly below expectations,” said the report. Several respondents reportedly added “unusually volatile” month-to-month readings.

Five of the Fed’s eight manufacturing contacts are hiring, although the report added that only one is hiring in “any significant way and their hiring is outside the U.S.” Furthermore, one of the contacts plans to lay off workers by 2 to 3 percent over the next six months.

Still, three-quarters of manufacturing contacts said they were “reasonably optimistic” about the region’s economic outlook.

IT services, staffing

In the software and information technology services industry, contacts reported “continued sluggishness” through May, with year-over-year revenue increases moderating to the low or middle single-digits during the most-recent quarter.

Two contracts reportedly attributed the slowdown to economic uncertainties in both the U.S. and in Europe and added that this has led many manufacturers to delay the execution of long-term licensing agreements.

“Lackluster activity has led the majority of contacts to slow the pace at which they are hiring; many now plan to maintain their current headcounts through the end of the year,” said the report, which added that the majority of firms still remained “cautiously optimistic, with most expecting more robust growth in the second half of 2013.”

Overall, staffing services in the First District reported weaker-than-expected demand in recent weeks, pointing toward a levling off in the IT sector and downticks in hiring in the light industrial and manufacturing sectors.

The report added that there appeared to be renewed activity in the health care sector, with one contact reporting a “substantial increase” in the demand for ambulatory nurses.

“In terms of labor supply, candidates with high-end skill sets, such as mechanical and electrical engineers, and software developers remain hard to find,” said the report. “Nevertheless, bill rates and pay rates have gone largely unchanged in 2012.”

The reported added that, looking forward, the staffing services industry is “generally less upbeat that they were three months ago,” and they expect only modest growth through the end of 2013.

Real estate

Commercial real estate leasing and sales activity held steady or showed slight improvement as, in the residential real estate market, the median sales price of single-family homes and condos rose year-over-year in March and April.

In the commercial market in Rhode Island, leasing volume dipped slightly in downtown Providence and mostly improved in suburban Rhode Island, with rent rates mostly unchanged.

“Defense-industry tenants in southern Rhode Island are reducing their space needs in response to federal spending cuts, moves that are likely to put downward pressure on rents in the local submarket in coming months,” said the report.

Contacts in the commercial real estate market were “mostly optimistic” that commercial leasing fundamentals would improve, at least slowly, in coming months. The outlook includes upside potential for absorption in Providence, Hartford and Boston based on deals-in-progress and current employment trends. “In Rhode Island, however, the upcoming gubernatorial election, and state and local budget deficits – as well as [defense cutbacks] – present downside risks,” said the report.

In the residential real estate market, contacts reported that demand for homes remains strong due to low interest rates, relatively low prices and “improving confidence among buyers.” Contacts, however, reported that shrinking inventory levels are slowing sales and placing upward pressure on prices.

Contacts reported that they expected single-family home and condo prices to continue to rise over the next several months, with inventory levels a “significant factor” in determining the degree to which sales can grow.

Overall, respondents said they felt “optimistic about the trajectory of the housing market,” and believe that the market will continue to recover as economic conditions improve both in the region and in the U.S. as a whole.

The First District, which is overseen by the Federal Reserve Bank of Boston, includes the six New England states. The Federal Reserve publishes the Beige Book eight times each year. The report is considered an informal gauge of the regional economies in the United States. U.S. economy
The economy expanded at a “modest to moderate” pace in 11 of 12 Federal Reserve districts, with broad-based gains ranging from business services to construction and manufacturing.
“Hiring increased at a measured pace in several districts, with some contacts noting difficulty finding qualified workers,” the Fed said in its Beige Book business survey, which is based on reports from its regional banks.
Fed officials will consider the report as they continue a debate on when to start curtailing the pace of bond purchases known as quantitative easing. Officials, who next meet June 18-19 in Washington, are weighing whether gains in employment are substantial enough to warrant reduced stimulus, and how much the economy is being held back by federal budget cuts.
“They pretty much say in the top line thought that the economy needs further strengthening,” said Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York. “Growth is modest, it’s just not there, and monetary policy can play a continued role, so it’s not clear why you would dial it back at this stage. There’s just not enough oomph in the economy.”
Stocks and Treasury yields extended declines after the report. The Standard & Poor’s 500 Index retreated 1.4 percent to close at a one-month low of 1,608.90. The yield on the benchmark 10-year Treasury note fell six basis points, or 0.06 percentage point, to 2.09 percent. Yields have declined from a one-year high of 2.17 percent on May 28.
Consumers, autos
“Most districts noted slight to moderate gains in consumer spending and a moderate increase in vehicle sales,” according to the Fed report.
Manufacturing increased across most regions as residential construction “was a boon” to suppliers, and four districts reported increased demand for lumber or wood products, the Fed report showed.
Vehicle sales “generally increased” across the nation while tourism showed “signs of strength” in several areas, the Fed said today. Nonfinancial business activity increased amid rising demand for technology, architecture, accounting and legal services.
Budget cuts
Government spending cuts were a drag on the economy in some districts. Defense contractors noted “weakening activity” in the Cleveland region, and a military supplier in Richmond’s district reported that orders were being canceled or delayed.
The previous Beige Book report, released April 17, said that “overall economic activity expanded at a moderate pace.” That report showed gains in manufacturing, housing and autos that offset weakness in defense-related industries in some regions.
Consumer spending in the U.S. unexpectedly declined in April for the first time in almost a year as incomes stagnated, indicating that the largest part of the economy will struggle to pick up without bigger job gains.

To view the full report, visit: www.federalreserve.org

Bloomberg News contributed to this report.

No posts to display