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

Business expands modestly, inflation worries dim outlook as prices continue steady rise Business expands modestly, inflation worries dim outlook as prices continue steady rise

July 14, 2022

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, July 13, 2022

Summary of Economic Activity

Business activity continued to expand at a modest pace in recent weeks. Employment was flat as turnover remained high and wages grew at an above-average rate. Prices continued to rise at a stable but above-average pace. Retailers enjoyed stSrong sales growth, while travel-related activity rebounded sharply to near pre-pandemic levels. Manufacturers had mixed results that yielded modest revenue gains on average, and software and IT services firms reported moderate growth that mostly exceeded expectations. Commercial real estate contacts described activity as roughly steady, but expressed growing concerns related to high borrowing and construction costs. Higher mortgage rates led to slightly softer demand for homes, boosting inventories in some markets. With some exceptions, the outlook turned more cautious or even pessimistic. Many saw ongoing inflation (and efforts to control it) as posing significant threats to activity moving forward.

Labor Markets

Employment was roughly flat on average among First District contacts as wages continued to grow at an above-average pace. Retailers experienced somewhat greater ease in hiring, but others faced ongoing challenges in finding and/or retaining workers. One IT firm raised its headcount considerably year-to-date, but among other contacts employment was either stable or, in the case of one manufacturer, down moderately. The majority of contacts reported either above-average or robust recent wage increases. Some others planned to enact significant increases in the near future and a small minority held wages fixed, citing previous wage increases or enhancements to nonwage incentives. Looking ahead, IT services contacts and one retailer planned to increase staffing levels by slight to moderate margins, while manufacturers expressed no major hiring plans or, in one case, planned on further layoffs to compensate for ongoing demand weakness.


Prices increased at an above-average pace on balance. Several firms enacted large or very large price increases and some others were planning to impose new mark-ups soon. Others raised or planned to raise effective prices via reduced discounts, and a minority held prices firm or (one case only) lowered them slightly. Notable price increases included an 87 percent increase in Boston hotel room rates between February and May of 2022, far exceeding typical seasonal gains, and year-over-year price increases of 25-30 percent for frozen fish products. Cost pressures intensified further for fuel and freight, food commodities, and labor. Nonetheless, pass-through was described as incomplete because of anticipated consumer pushback, and some ruled out further price increases moving forward. The risk of ongoing high inflation was a central concern among many contacts, who worried about its implications for consumer demand and for their own profit margins.

Retail and Tourism

First District retail and tourism contacts enjoyed strong sales growth recently. For both a clothing retailer and a furniture seller, sales increased at a brisk pace, exceeding year-to-date expectations, as supply chain issues eased. Despite that recent strength, retailers' optimism looking ahead was somewhat tempered by concerns about inflation and a possible recession. Tourism contacts also reported accelerated growth in sales. Airline passenger traffic through Boston rose at a rapid pace, and as of June 2022 had reached 90 percent of its June 2019 level. Advance bookings for July and August showed further gains, with improvements in all types of travel. The number of travelers by cruise ship increased sharply, but as of May 2022 passenger volume was still less than half of its 2019 benchmark. The Greater Boston hotel occupancy rate in May 2022 rose 30 percentage points from its February 2022 level, and more than doubled from a year earlier, to land at over 77 percent. Convention activity accelerated, with recent attendance at roughly 80 percent of pre-pandemic levels and advance bookings poised to meet or exceed 2019 levels. Tourism contacts were resoundingly optimistic for the rest of 2022.

Manufacturing and Related Services

Sales volume was flat or somewhat softer among most manufacturers contacted this round, while one reported robust sales growth. However, two firms that experienced weaker demand nonetheless had modest revenue gains owing to output price increases. One contact with stable recent sales noted that year-over-year sales were still down significantly. In addition, a furniture manufacturer said that while April and May were very strong, sales growth slowed considerably in June, coinciding with the FOMC rate increase announcement. Contacts faced intense input pricing pressures and some raised prices further in recent months, but pass-through was incomplete. Logistics remained a major problem for some. Two contacts reported downward revisions to capital expenditure plans due to long lead times for new equipment and construction delays. Most contacts (with one exception) held an optimistic outlook, but several said they were more cautious than they had been earlier in the year. In particular, inflation presented downside risks for some and another faced uncertainty over future sources of demand.

Software and IT Services

Software and IT contacts experienced stable to moderately higher sales in the second quarter and reported robust sales increases from a year earlier. Recent results exceeded expectations at two of three firms contacted, one of which benefited indirectly from the recent rebound in elective surgeries. Operating margins increased modestly on average as conditions normalized following pandemic-related disruptions. Capital and technology spending was unchanged and was expected to hold steady in the coming months. The overall economic outlook turned less optimistic this quarter due to concerns about inflation and a possible recession. Nonetheless, all expected demand at their respective firms to remain stable for at least the third quarter of 2022, barring significant changes to the macroeconomic environment.

Commercial Real Estate

First District commercial real estate leasing activity was roughly steady in recent weeks, but investment activity fell and the outlook worsened. Contacts reported that office tenants approached leasing decisions with greater clarity. In Connecticut, office downsizing led to substantial negative absorption. Elsewhere, changes in office space requirements were mixed, but occupancy rates remained well below pre-pandemic levels in downtown areas. While office asking rents and vacancy rates were flat, pressure for costly tenant improvements was significant and shorter-term leases were the norm. Industrial leasing activity persisted at a solid pace amid historically low vacancy rates, and industrial rents edged even higher. Retail leasing was stable. Two contacts noted a significant slowdown in commercial property sales volume, and one noted a moderate decline in nonresidential construction, developments that reflected rising interest rates and sky-high building costs. Life sciences conversions also slowed amid concerns about tenants' creditworthiness and a looming glut of space. The outlook turned decidedly more pessimistic, as contacts expected further declines in investment sales and construction moving forward. Contacts largely expected leasing to slow in the summer months for seasonal reasons, and some saw a chance of weakness in the fall in response to further interest rate increases and potentially worsening macroeconomic conditions.

Residential Real Estate

First District contacts reported that higher mortgage rates had led to somewhat cooler demand for residential real estate, resulting in increased inventories in recent months. (Vermont reported changes to April 2022 and all other areas reported changes to May 2022. Connecticut data were unavailable.) Closed sales declined again significantly on a year-over-year basis in most markets, but the pace of decline moderated from a month earlier for seasonal reasons. However, closed sales increased slightly over-the-year for single-family homes in Boston and for condos in Rhode Island. Boston's results were attributed to seasonal factors as well as a rush to buy before interest rates increased further. Inventories increased in most markets in recent months, reflecting a softening of demand, but remained down on a year-over-year basis in several markets. The price of single-family homes continued to rise at about the same year-over-year pace as a month earlier. However, condo markets experienced downward price pressures. Going into the summer, contacts were optimistic that residential inventories would increase further and that prices would level off, developments that should offer some relief to potential buyers.


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