Fed: Business sentiment in New England continues to improve

Overcoming economic uncertainty following October’s partial shutdown of the federal government, New England business owners reported greater optimism in the past six weeks and expect to see continued growth through the first quarter of 2014, according to the Federal Reserve Board’s Beige Book released Wednesday. More

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Fed: Business sentiment in New England continues to improve

BLOOMBERG FILE PHOTO/BRENT LEWIN
ACCORDING TO THE BEIGE BOOK REPORT released by the Federal Reserve Bank of Boston, more New England business owners displayed optimism about the economic outlook in November than they did in October.
Posted 12/5/13

BOSTON – Overcoming economic uncertainty following October’s partial shutdown of the federal government, New England business owners reported greater optimism in the past six weeks and expect to see continued growth through the first quarter of 2014, according to the Federal Reserve Board’s Beige Book released Wednesday.

“Many firms are cautiously optimistic about the outlook, a more upbeat tally than in the October round of calls,” the report stated.

Boston-area hotel and restaurant activity exceeded expectations in October, due in part to the World Series appearance of the Red Sox. Hotel revenue rose 7.5 percent year over year, supported by a bump in occupancy rates, and transportation services also benefited from the higher demand.

The effects of the 16-day shutdown of the federal government were felt most strongly at tourist attractions, notably those run by the National Park Service. Meanwhile, New England museums and tourist attractions continue to experience declining attendance, with revenue down 6 percent compared with last year.

Most of the Fed’s retail contacts reported year-over-year sales increases between 7 percent and 25 percent, and one-third of contacts raised their expectations for overall 2013 sales in light of their third-quarter results. However, one individual pointed out that holiday sales will be a better gauge of what appears to be a trend of general improvement in the sector.

In New England commercial real estate, the Fed reported that speculative office construction has begun to pick up in the Boston area for the first time since the 2008 recession. Investment capital continued to flow into commercial properties across the region, the Fed’s contacts said, while leases maintained a slow pace of improvement consistent with minimal-to-slow employment growth.

“In Rhode Island, tenants are showing an increased willingness to commit to longer-term lease renewals (5-10 years), following an extended period during which shorter-term renewals were favored,” the report stated. “At the same time, projected state budget deficits for Rhode Island, and political uncertainty over how such budget gaps will be closed, are seen as a crimp on business expansion in the state.”

Current and planned construction activity is reportedly on the rise in Boston and the surrounding suburbs, particularly in the hotel and retail sectors, while construction in the health-care sector has been restrained due to uncertainty over the implications of the Affordable Care Act.

Residential real-estate contacts in New England showed strong sentiment that the recovery of the housing market is well underway, though sales activity will likely slow in the months ahead during the winter off-season. While some contacts cited consumers upgrading homes, others said sales growth has been driven primarily by first-time home buyers.

“New federal flood insurance legislation and new flood maps drawn by FEMA continue to generate concern across the region as insurance rates are expected to rise and make houses located in potential flood areas more expensive to own,” the report stated.

In the manufacturing industry, respondents across the board reported difficulty raising product prices. Some contacts cited falling input prices and attempts by major firms to drive costs down, which in the case of one company has forced more subcontracting work.

Of the Fed’s 10 manufacturing contacts, one contact reported falling sales, while two – a computer-software firm that services the defense industry and a manufacturer of electrical distribution equipment – reported stagnant sales growth.

In general, defense contractors said federal budget cuts have not yet affected their businesses significantly, but declined to offer forecasts about the future due to the pending congressional budget battle in February.

Four of the 10 manufacturers said they are not planning to increase staff, and none reported staff cuts.

Increased consumer demand boosted software and IT services firms through November, with modest improvements in revenue and earnings since August. Most contacts maintained payrolls or slightly increased hiring, and said they expected to report positive year-over-year earnings growth by the end of 2013.

With the shrinking of the labor force across all industries, and particularly in the software/IT and engineering sectors, the Fed’s staffing firm contacts reported strong business in the most recent survey, with year-over-year revenue growth between 3 percent and 10 percent.

Firm strategies to attract more job candidates included improved marketing tactics, and an exchange program to bring in IT professionals from abroad.

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