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Beige Book logo links to Beige Book home page for year currently displayed November 28, 2007

Federal Reserve Districts

First District--Boston

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First District businesses contacted in mid-November mostly report continuing revenue gains, but rising caution. Staffing firms cite steady growth and particular strength in the Boston area, while software and information technology services firms report a slowdown in revenue growth. Residential real estate markets remain weak and commercial markets continue to soften. Manufacturers are raising selling prices to pass along cost increases; they are more upbeat than retailers about 2008.

Retail and Tourism
Although First District retailers contacted this time mostly report modest year-over-year increases with some volatility in September and October, the overall sentiment is generally cautious.

Inventory levels are mixed. Headcounts are also mixed, with some respondents reporting increased headcount in line with company growth or seasonal hiring, while another reports a modest layoff. One retailer reports intentionally hiring significantly fewer seasonal employees than usual, while another notes that finding seasonal employees has been difficult because more people have fulltime jobs. Several contacts cite price pressures, especially for dairy products. Some respondents say they are starting to feel the effect of rising oil and gasoline prices, including increased surcharges and sharply higher prices for plastics. Selling prices remain mostly stable.

A tourism contact reports that 2007 has been a banner year in the Boston metropolitan area for leisure, business, and convention travel. International travel has been particularly strong because of the weak dollar, and is expected to continue to be robust. However, there is a growing sense of uncertainty about how the increasing price of home heating oil and gasoline will affect domestic leisure travel and tourism in 2008.

Overall, First District retail respondents are cautious in their outlook for early 2008, although some are still cautiously optimistic. Most respondents are worried about the impact of rising energy costs and the recent volatility in financial markets on both consumer confidence and disposable income. Several retailers express more concern about early 2008 than about the upcoming holiday period.

Manufacturing and Related Services
Manufacturers and related services providers headquartered in the First District report mixed revenue trends since midyear. Sales of many types of capital goods continue to show strong gains from year-earlier levels, boosted in part by robust demand from Asia and Europe, as well as by surging spending on energy, power, and non-automotive transportation equipment. However, some capital goods manufacturers are experiencing a slowdown in sales to semiconductor fabricators, financial services firms, and retailers. For the most part, sales of housing-related and construction products and automotive components remain sluggish.

Most manufacturers report that materials costs are rising, especially for metals and oil derivatives, as well as for items priced in currencies that have appreciated against the dollar. Only a few respondents have experienced rising energy prices in recent months; a couple of firms indicate they are shifting to natural gas or wind power to reduce their dependence on oil. Over three-quarters of the manufacturing contacts have responded to higher input costs by raising their selling prices.

Manufacturers continue to adjust their U.S. headcounts only minimally, but they report somewhat more new restructuring efforts or caution in hiring than earlier in 2007. Average wage and salary increases remain in the range of 3 percent to 4 percent. Domestic capital spending plans are mixed, but generally moderate; U.S. spending will largely reflect whether and where firms need to add production and product development capacity.

Manufacturers and related services providers are mostly cautiously optimistic about their business prospects over the coming year. Even those that have a positive sales forecast for 2008 cite downside risks from factors such as weak consumer confidence, depressed housing markets, higher oil and commodity prices, and constrained credit availability.

Software and Information Technology Services
The majority of software and IT services contacts in the First District report modest revenue growth for the most recent quarter. While demand from the health care industry continues to be robust, demand from the financial services sector is mixed; one contact reports no impact from the credit crunch, another notes that small to mid-sized financial services firms have curtailed spending, although "the bigger players" are continuing to buy. The majority of respondents are adding headcount in revenue-generating positions such as sales and consulting, although at a slower pace than last quarter. Firms continue to say the labor market is tight for software engineers. All contacted firms have raised pay, generally between 3 percent and 5 percent.

New England software and information technology firms generally project that revenues will continue growing at current rates. However, several note that the downside risks have increased.

Staffing Services
Staffing respondents in New England report steady growth throughout the third quarter. Companies with Boston locations continue to experience marked increases in revenues from the area, often citing it as their strongest location. Contacts say demand for staffing services is greatest in high-end sectors including biopharmaceutical, engineering, accounting, and legal. Demand from financial services firms remains soft and one contact reports that demand from the IT sector has fallen in the last two months. Supply of skilled labor, which was tight in the second quarter, has become even more limited. Bill rates and pay rates are steady or up slightly, with most contacts suggesting that the rise reflects both an increasing proportion of high-end placements and limited supply. Respondents report stabilizing costs; however, there is upward pressure in healthcare costs and a few contacts express concern over rising gasoline prices. Contacts expect current trends to continue through the end of 2007; however, they are more cautious about 2008. Those with clients in the financial services sector express concern that firms will hold back on hiring into next year, while contacts with ties to the IT sector expect further slowing. All are confident that biopharmaceuticals will continue to be "red-hot" into next year.

Commercial Real Estate
Tighter credit conditions remain in place in New England's commercial real estate markets. Investors have not returned to the commercial mortgage-backed securities (CMBS) market in significant numbers, and trust in the ratings agencies is reportedly very low. Since these other credit sources have dried up, banks and life insurance companies are picking up a considerable amount of commercial mortgage business. However, their willingness to add commercial mortgages to their balance sheets is said to be limited by portfolio allocation considerations. Credit tightening continues to have the biggest impact on loans for speculative construction. Sales activity and planned construction have continued to decline in both Boston and Hartford since the last report; sales transactions have held steady in Maine and Rhode Island, but new construction is expected to decline in those states as well. For Portland, office-building prices are said to be down 5 percent to 10 percent from their asking levels since mid-summer, but retail-space prices are holding steady. In other markets, average prices are not falling, but word is that properties are being withheld from the market to avoid potential losses. One bright spot is that foreign investor demand for prime Boston properties remains strong, reinforced by the weakening dollar.

Conditions in the office leasing market are mixed, but overall the mood has turned more pessimistic. Rental rate increases appear to be slowing in Boston, where absorption and lease renewals have slowed. Despite increases in "face rents," lessors have begun offering building improvements and other concessions in order to retain or attract tenants. Such deals, together with rising energy and construction costs, are squeezing owners' profit margins. Office rents and vacancy rates have been flat in Hartford and Providence, but rents have reportedly fallen 10 percent in Portland year over year, where absorption is zero or negative. In Rhode Island, the industrial market remains strong, with declining vacancy and rising rents, but the retail sector has been mostly "quiet."

Lender reluctance to finance speculative development is expected to continue over the next 6 to 12 months. Construction projects in progress or in the planning stages are likely to be delayed or downsized (especially if they include condominiums), and "build-to-suit" structures are expected to be the only new construction. European demand for office investment is expected to remain active. Contacts now seem less likely than earlier to believe that liquidity will return to the CMBS/conduit market in force by Q1 2008, although activity is expected to pick up eventually. Some contacts (in Boston, Providence, and W. Hartford) expect commercial vacancy rates to continue falling, while others expect absorption to slow and rent growth to stall or become negative. Still, most contacts do not predict a glut of commercial space, because supply growth has been restrained over the past few years.

Residential Real Estate
Reports on New England residential real estate markets are mostly negative. In Massachusetts, available data show double-digit declines (in the mid to high teens) in sales of single family homes and condos in September compared with a year earlier. Data from the state realtors' group show steady median home prices in September and a slight increase in condo prices over the year, while more comprehensive data (including foreclosure sales and other non-realtor sales as well as sales through realtors) show 3 percent to 4 percent year-over-year declines in median prices of homes and condos. Contacts hint that October data will look no better.

Residential markets in the rest of New England similarly show large sales declines and modest price declines in September. Comprehensive September data from Connecticut (including foreclosure sales, etc.) show a 3 percent decline year-over-year in median home prices, along with a 22 percent drop in home sales, after relatively small changes in July and August. Similar data from Rhode Island show home sales dropping 27 percent year-over-year in September and prices decreasing 7 percent, but Rhode Island realtors' data show more modest declines, with home sales down 9 percent and prices down 2 percent. Realtors' data for New Hampshire and Maine show year-over-year home sales declines of 16 to 18 percent and median price declines under 3 percent.

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Last update: November 28, 2007