The Beige Book – First District The Beige Book – First District

Business shows signs of slowing, though software and IT services, real estate remain solid Business shows signs of slowing, though software and IT services, real estate remain solid

October 17, 2019

The Beige Book

The Beige Book is published eight times per year. Each Federal Reserve Bank gathers anecdotal information on current economic conditions in its District through reports from Bank and Branch directors and interviews with key business contacts, economists, market experts, and other sources. The Beige Book summarizes this information by District and sector.

Boston (First District) Beige Book Report, Oct. 16, 2019

Summary of Economic Activity

Business activity showed signs of slowing in the First District. Retail results were mixed, while restaurants and tourism contacts cited recent signs of softening. Few manufacturers provided positive reports. By contrast, software and information technology services firms said revenues were up, some strongly. Commercial real estate activity remained strong in the Boston and Portland metro areas and picked up in Providence. Housing prices across the region continued to rise. Except for software and IT services, most responding firms had downgraded their outlooks since the last round.

Employment and Wages

Labor markets remained tight even as a couple of firms began layoffs. Retailers said the labor market was tight. Among manufacturers, however, no contact reported increasing headcount and two – which supply industrial customers – reported significant layoffs, about 5 percent of their staff. One also instituted furloughs and shortened workweeks; another respondent reported a marked increase in unsolicited resumes for skilled machinists. By contrast, two manufacturing contacts reported that they still have difficulty finding qualified employees. Software and IT services contacts indicated that while headcount and turnover were largely unchanged, most planned to hire more front-facing sales roles in addition to technical and R&D staff.


Diverse influences across markets led to varied price pressures. Retailers reported prices were fairly steady while Massachusetts restaurants cited an average 3 percent increase in menu prices year-over-year. Manufacturers indicated that price changes were mixed. On one hand, declines in activity have reduced pricing pressure. Two contacts noted significant drops in paper and pulp pricing due to reduced demand from China. Three contacts said that price and availability of trucking services improved considerably since last year. On the other hand, tariffs have raised costs for several manufacturers. A producer of frozen fish said that tariffs had driven up prices. Software and IT services respondents reported no price increases and no plans to raise prices in the near future.

Retail and Tourism

Responding retailers reported sales ranging from down about 6 percent to up about 2 percent year-over-year; the outlook was less optimistic than in the last few rounds. One retailer noted that while the upcoming holiday season may provide a boost, expectations were that sales growth for 2019 and into 2020 would be pretty flat.

Massachusetts restaurant sales were up 5.5 percent for the year ending June 30. Much of the overall increase was driven by sales in the last half of 2018. The slower first-half trend continued into July and August, as sales in both months were down year-over-year. A surge in home delivery services reportedly ate into restaurant profit margins already under pressure from ongoing increases in operating costs and more competition from an over-supply of restaurants relative to the customer base. These factors combined to make the outlook uncertain.

Cape Cod had an unexpectedly challenging summer tourist season. Bookings for overnight accommodations were down, though day travel to the Cape was up, judged by an increase in passenger traffic on the bridges and weekend train service. One theory was that the strong US dollar prompted more Americans to vacation abroad this summer. Media attention was "overly" focused on increased shark sightings and (rare) tornados. Autumn business on Cape Cod was shaping up to be good, but a contact worried that tourism may be entering a slower pattern compared to 2017 and 2018, when tourist activity reached historic highs.

Manufacturing and Related Services

Reports from manufacturers were mostly negative. Four of the seven respondents reported lower sales versus the same period last year, two reported flat sales and only one firm, a defense contractor, reported higher sales. Several contacts attributed declines to trade issues; a manufacturer of filtration membranes said that chip manufacturers were delaying new plant construction due to uncertainty about trade policy. The farm-sector recession reduced demand for heavy equipment.

No contacts reported positive revisions to capital spending plans and two reported significant cuts. An industrial supplier planned to cut capital expenditures versus last year by as much as 25 percent versus a previously-planned 5 percent increase.

Five of seven contacts reported downward revisions to their 2020 outlook. Three of those remained positive but less positive than earlier. One industrial firm expected a recovery to start in the second half of 2020. Several compared now to 2015 when industrial demand slowed markedly but the economy as a whole did not.

Software and Information Technology Services

Growth in demand in the past quarter exceeded expectations for the majority of New England software and IT services sector respondents. All three contacts experienced positive demand growth. Two noted that market interest in subscription and cloud-based offerings had picked up month-to-month. Revenue growth remained positive and ranged from 2 percent to 24 percent year-over-year. For most firms, capital expenditures were unchanged, but one mentioned considering a switch from housing their own servers to migrating their operations onto the cloud, which would significantly change the structure of their capital expenses. All in all, contacts were upbeat in light of a third quarter that exceeded expectations, but many remained wary of political and macroeconomic uncertainty in the longer-term.

Commercial Real Estate

Commercial real estate activity in the First District continued to strengthen overall, but with inconsistencies in performance across geographic submarkets. Boston's leasing market continued to be strong as all contacts described low vacancy and high absorption. Asking rents in prime Boston locations increased by 20 percent in the last 9 to 12 months according to one contact. Construction activity in Boston was robust. The investment sales market in Boston was also strong, with high loan volume and low interest rates. In the Greater Portland area, both construction and leasing activity in office, industrial, and retail markets were up. In the leasing market, vacancies were low and the average rent rose about 5 percent over the past year. The investment sales market was also strong. The outlook remained positive for Boston and was optimistic for Portland.

In the Providence area, the office leasing market picked up as the summer season ended, but demand still remained tepid. Demand for buying industrial buildings was strong, but supply was limited. As a result, office rents increased moderately, while industrial rents rose faster. Market activity was expected to grow in October and early November. Transaction volume in the Providence investment sales market was limited. According to a contact, people were hesitant to commit to new construction and investment projects because of uncertainty about the next recession. In Greater Hartford, leasing activity as well as construction activity stayed low. The industrial leasing market flattened as companies gave up space, and the investment sales market slowed slightly. The outlook for Connecticut was less upbeat than outlooks for other New England states.

Residential Real Estate

Residential real estate markets in the First District continued to moderate in August. For single family homes, closed sales decreased moderately from August 2018 to August 2019 in Rhode Island, Massachusetts, Boston, and New Hampshire. Median sales prices rose in all four reporting areas. Massachusetts, Boston, and New Hampshire experienced double-digit drops in inventory. For condos, sales were down in Massachusetts, Boston, and New Hampshire and up in Rhode Island. Median sales prices for condos were up in all reporting areas but Boston. Vermont and Maine – reporting combined statistics for single family homes and condos – cited moderate price increases, slight drops in closed sales in Vermont, and modest sales increases in Maine.

The ongoing shortage of active listings drew attention from many respondents. According to the Rhode Island contact, "Regardless of what happens to interest rates over the next year, we can't sell what we don't have available for sale."

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