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

Slight increase in business activity marked by stable prices, small employment gains Slight increase in business activity marked by stable prices, small employment gains

July 13, 2023

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 12, 2023

Summary of Economic Activity

Business activity expanded at a slight pace in recent weeks, with modest increases in employment and roughly even prices. Consumer spending increased by a small margin, as retail sales increased modestly and tourism was flat. Manufacturers reported mixed results but sales growth was moderate on average. Software and IT services firms enjoyed stable demand and modest revenue gains. Residential home sales increased slightly in May from the previous month but remained below seasonal norms. Commercial real estate markets weakened further, with abrupt declines in life sciences leasing and financial distress showing up for office properties. The outlook was mostly optimistic among contacts outside of real estate. Residential real estate contacts expected sales to remain muted and commercial real estate contacts braced for declines in activity and property values moving forward.

Labor Markets

Employment increased modestly and wage growth continued to moderate as labor market imbalances eased further. Among retail and tourism contacts, labor demand remained healthy but showed signs of moderating, and there were modest improvements in the available labor supply. Some airline contacts continued to struggle to fill positions but said that hiring and training were underway to improve the situation. A clothing retailer noted that it had taken several months to fill 200 warehouse jobs, but they were nonetheless able to fill all positions. Following two summers of worker shortages on Cape Cod, some restaurant and hotel owners there have achieved efficiencies enabling them to operate with a smaller staff. In manufacturing, the labor market remained tight, although contacts said that it had improved over last year, and headcounts increased modestly. Headcounts at software and IT firms were up slightly, and hiring plans were mixed. Contacts noted that turnover had either stabilized (albeit at above-average rates) or decreased in recent months, and reductions in turnover and absenteeism reduced the need for hiring at some firms. Wage pressures were described as stable or, in most cases, declining, as wage growth rates continued to fall back to more moderate levels.


Prices were mostly stable, with some exceptions, as cost pressures abated further. A clothing retailer said that input cost growth had ceased altogether and that their output prices were flat. Manufacturing contacts reported a very benign pricing environment, with one even mentioning the possibility of deflation. Prices were slightly higher among IT contacts, but with no further price increases anticipated. Hotel room rates in Greater Boston increased in excess of seasonal patterns, rising 12 percent on a year-over-year basis. Cape Cod rental prices increased yet again, but at a much more modest pace than in recent years. The outlook called for further moderation of pricing pressures moving forward.

Retail and Tourism

First District retail contacts reported a modest uptick in sales relative to earlier this year, while tourism contacts saw mixed results that were about flat on average. A clothing retailer enjoyed a slight uptick in demand this spring after a soft first quarter. Mainstreet retailers on Cape Cod experienced a strong start to the high season, but hospitality contacts on the Cape said that occupancy rates for hotels and especially short-term rentals were down by modest to large margins from their record highs of the past two years, though still above 2019 levels. Airline passenger traffic through Boston further increased in recent months, reaching 96 percent of pre-pandemic levels in the first quarter of 2023, and international passenger traffic alone reached 99 percent of pre-pandemic levels, although travel to and from Asian markets remained depressed. The Greater Boston hotel occupancy rate increased relative to seasonal trends, with occupancy climbing ever closer to 2019 levels. Scheduled convention activity and cruise bookings for the remainder of the year are set to increase further, exceeding 2019 levels.

Manufacturing and Related Services

Manufacturing contacts were generally positive, reporting moderate gains in sales on balance. A pharmaceutical company reported lower sales that were nonetheless in line with their expectations, owing to increased competition from generics. A frozen fish producer said that sales were down year-on-year due to higher prices. Other contacts reported very strong sales. A furniture producer recorded its best second-quarter results ever, up markedly from a weak first quarter. A semiconductor manufacturer said that, despite an industrywide slump, their own sales were up 12 percent from a year earlier, an outcome attributed to the firm's heavy exposure to the automotive industry and the transition to electric cars. One contact said they had revised their capital expenditure plans to take advantage of tax credits, although this mostly involved moving existing projects forward rather than adding investments. The outlook was positive across the board. The semiconductor manufacturer in particular expected that 2024 would bring demand increases linked to upgrades of phones and PCs as well as from the diffusion of AI products.

IT and Software Services

Contacts in IT and software services posted modest revenue gains on average, and demand was steady over the first two quarters of 2023. Profits and margins were up slightly, although Q2 expenses increased above expectations at one firm. Capital and technology spending was unchanged or down somewhat. One firm expected to slow its capital spending further moving forward amidst an ongoing transition to the cloud. Outlooks were generally optimistic, with expectations of ongoing stability in demand. One contact expressed confidence that their business would hold up well moving forward even if the broader economy turned down. However, one contact was concerned the presidential election might disrupt the stability of the business environment.

Commercial Real Estate

Commercial real estate activity in the First District was moderately weaker in recent months. Office leasing was stable or down slightly, with very few leases signed. Office rents were roughly stable and vacancy rates were said to be either flat or rising slowly. A contact in Connecticut reported a high-quality urban office building being forced into foreclosure due to tenants giving back space upon lease expiration. Life sciences leasing activity slowed dramatically, a fact attributed to the drying up of venture capital and other funding sources to would-be tenants. Contacts reported a somewhat quieter industrial market than in the past two years, although industrial rents remained high and vacancy rates historically low. Grocery-anchored retail continued to perform well, but other retail vacancies ticked up due to the failure of some non-grocery chains. Across sectors, contacts' expectations turned more pessimistic. High borrowing costs are expected to continue to deter investment, sales, and construction. Multiple contacts expected the market to fare better in New England than in other regions of the country, but nonetheless expected activity in the region to slow and property valuations to fall accordingly.

Residential Real Estate

First District home sales increased a bit in May from the previous month on average, and some areas reported a healthy uptick in activity, but May's sales were nonetheless described as weak relative to historical norms. Across markets, home sales continued to post very steep declines on a year-over-year basis, for single-family dwelling as well as condos. According to contacts, activity was held back yet again by further declines in inventory (on a year-over-year basis) and persistently high mortgage interest rates. High rates also exacerbated the low-inventory problem, as current homeowners were reluctant to swap their existing, low-rate mortgages for higher-rate loans, leading to fewer homes going up for sale. Despite tepid sales, the dearth of inventories relative to demand meant that prices continued to rise, even as the pace of appreciation slowed gradually in recent months. Median prices for single-family homes rose modestly relative to May 2022, by six percent or less depending on the area. However, median condo prices increased by double-digit margins in some states, as buyers priced out of the single-family market looked increasingly to condos. Contacts expected no meaningful changes in market dynamics until interest rates declined.


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