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, Nov. 30, 2022

Summary of Economic Activity

Business activity in the First District softened slightly amid mixed results. Employment was stable on balance, but labor demand weakened for some positions. Some pricing pressures eased, and others intensified, but most prices were about the same as in the last report. Wage growth was steady at a moderate pace, but competition for specialized workers remained intense in some cases. Restaurant owners in Massachusetts enjoyed robust demand despite having raised their prices in the past year. Office vacancies ticked up slightly amid very weak demand, and rising interest rates deterred new commercial construction and acquisitions. First District home sales declined further, and home prices declined in Massachusetts (but were stable elsewhere). Most contacts remained optimistic for their own results but expected some degree of economic downturn at the regional and national levels in 2023.

Labor Markets

Employment was roughly steady, and wage growth stabilized at a moderate pace. Although headcounts were steady or up somewhat at most firms, one retailer recently enacted significant layoffs in response to weaker-than-expected results so far in 2022, and some manufacturers demanded fewer hours. At the same time, one manufacturer desired more workers but couldn't find them, and another hoped to raise headcounts significantly in 2023. Staffing firms reported that labor demand continued to exceed supply for many positions, but not across the board. They also reported that wage pressures remained intense for some positions but at least one employer cut its wage offers. Retailers and restaurant owners said that, although turnover had declined somewhat in recent months, hiring to offset attrition remained highly competitive. At least in the near term, contacts did not expect to make significant layoffs. Planned wage increases for 2023 ranged from 2 to 5 percent, slightly lower than 2022 rates. Nonetheless, labor costs were seen by several contacts as a bigger source of inflationary pressure for 2023 than nonlabor costs.

Prices

Output prices among our contacts were about flat on balance since last report, and input price movements were mixed. Restaurant menu prices were up 8 percent from a year ago but mostly unchanged since last quarter, as contacts noted that food prices levelled off after an earlier period of steep increases. Restaurants faced a fresh hit to profits from increases in credit card fees. Used car prices fell rather abruptly in response to slumping consumer demand. Some auto dealers were caught short by the change, as they had acquired stock earlier at relatively high prices. An online retailer put renewed emphasis on cost-containment in order to keep prices low and improve profitability. Staffing firms complained of cost increases for recruiting software and database licenses. Most manufacturers held their output prices firm, but two enacted moderate price increases in August. Contacts in both manufacturing and retail reported that materials and other input costs remained high, but that input price growth had moderated recently or had even turned negative. For example, two contacts said that vendors had removed earlier surcharges and that energy and freight costs had declined a bit. Most contacts expected nonlabor input pricing pressures to ease further in 2023.

Retail and Tourism

Among First District contacts, retail and restaurant sales were mixed in recent weeks. An online retailer experienced a slight reduction in sales volume from last quarter but said that increased promotions remained an effective way of boosting sales. A salvage store enjoyed a slight increase in sales and attributed a portion of the gains to increased cross-border commerce with Canada. A Massachusetts restaurant industry contact said that sales increased modestly throughout the state, including most of Boston, but that the downtown area continued to underperform relative to other neighborhoods. Demand was surprisingly resilient in response to the 8 percent average menu price increase of the past year, and restaurant meal tax collections in the state surpassed their 2019 levels, even after adjusting for inflation. A contact representing automotive dealers in the District said that higher borrowing costs had not yet impacted demand for new vehicles but that used car sales (and prices) had begun to return to more normal (pre-pandemic) levels after an extended period in which they were historically elevated. Contacts were optimistic on balance, especially those in the restaurant industry, but an online retailer faced near-term pressure to cut costs and automotive dealers faced potentially steep adjustment costs to accommodate increasing numbers of electric vehicles.

Manufacturing and Related Services

Contacts painted a mixed picture of the manufacturing economy in the First District this cycle. The widest variation in experiences occurred in the semiconductor industry, as one contact in that field said that demand was incredibly strong while another perceived that the industry had entered a recession. A furniture manufacturer reported that sales were down substantially both month-over-month and year-over-year. Employment was either stable or up for all our contacts. Although no contacts reported major revisions to their capital expenditure plans, one was considering pulling forward some capital expenditures due to concerns about higher future interest rates. The outlook ranged from extremely optimistic (for one semiconductor manufacturer) to very nervous (the furniture maker).

Staffing Services

First District staffing contacts experienced strong demand for their services, but revenue performance was mixed: two firms reported slight and moderate revenue declines in the third quarter, respectively, and a third enjoyed a moderate surge in revenues. Cases of weak results were attributed to shortages of qualified workers. Contacts also noted that the composition of labor demand shifted somewhat in recent months, as for example software developers were no longer in such high demand, while other specialized roles such as mechanical and electrical engineers remained highly sought after. Flu season has created an increasing number of positions for nurses, and the return of convention activity to Boston has generated more entry-level openings. Staffing firms and their clients competed intensely to hire and retain recruiting talent. In some cases, more flexible work arrangements were used as inducements to lure recruiters away from other firms. Contacts were neutral to optimistic regarding their own business prospects despite expressing concerns about the macroeconomic outlook. Nonetheless, none perceived a high risk of a severe recession in 2023.

Commercial Real Estate

Commercial real estate activity in the First District slowed slightly in recent weeks. In the office market, leasing was stable at a low level, vacancies edged up as tenants gave back space, and rents were nonetheless flat. In the industrial market, rent growth slowed somewhat, as leasing activity was held back by the lack of available space. The retail market was stable, with flat rents and vacancy rates, although demand for smaller retail spaces (such as restaurants) reportedly outpaced that for larger units. Few investment acquisitions were reported in any market, and large bid-ask spreads were common. Loans for new construction looked increasingly unfavorable and existing loans faced greater stress. The outlook turned slightly more negative on balance, and one contact perceived a recession in 2023 as a near certainty. Contacts were relatively optimistic about the industrial market and still quite pessimistic about the office market, while retail leasing activity was expected to mirror consumer demand.

Residential Real Estate

The First District's residential real estate market continued to weaken in September and October, as sales slowed further, and prices fell considerably in some places. Closed sales were down over-the-year in all reporting markets (which exclude Connecticut), representing a moderate deceleration in sales for single-family homes and a substantial deceleration for condos. Contacts continued to cite sharply higher mortgage rates, inflation, and recession fears as the key factors holding back home demand. Massachusetts' home prices (including those in greater Boston specifically) declined by moderate to above-average margins in recent months. Outside of Massachusetts, single-family prices were roughly stable. On a year-over-year basis, condo price appreciation slowed in New Hampshire and Maine and increased in Rhode Island. Inventories fell again on a year-over-year basis in most markets, but selected markets, such as New Hampshire (both single-family and condos) and Boston (condos only) saw increasingly rapid gains in inventories.

For more information about District economic conditions visit: www.bostonfed.org/regional-economy.

All Beige Book content going back to 1996 can be found at the Board of Governors website.

The Minneapolis Fed hosts the Beige Book archives by district, going back to 1970.