April 16, 2008
Federal Reserve Districts
|Skip to content
Reports from business contacts in the First District continue to be mixed, with most expressing concern about the near-term outlook. Retail respondents are seeing activity slow, although some remain ahead of year-earlier sales levels; tourism is fairly robust in the region. Contacted manufacturers mostly report revenue growth and say they are uneasy with high costs and a slowing U.S. economy; they are raising their prices where possible. Real estate markets remain soft.
Retail and Tourism
Inventory levels and employment are generally stable. Capital spending is mixed, with the majority of retailers not planning to cut back. One retailer said, "you can start a negative trend by pulling back, and we don't want to do that." A majority of First District respondents cite varying degrees of price pressure, with several specifically mentioning rising commodities prices as well as fuel-related costs. Selling prices are mostly steady, with modest increases passed along where possible.
Tourism and travel in the First District is strong, with particular emphasis on international tourism. Due to the favorable exchange rate and pent up demand, there has been a large increase in international travelers, particularly from the UK, Ireland, Germany, and Japan. However, there is concern about the impact on domestic travel of the unsettled economy, weak consumer confidence, high fuel costs, and the rising price of food. Business and conference travel is expected to remain strong in the near term. New England hotels and resorts do not seem to be scaling back on capital spending plans as new properties come online and many existing properties expand throughout the District.
Overall, First District retailers are cautious yet hopeful in their outlook. One contact notes that "the recession probably started in December for retailers," yet most respondents say that if the economy is in a recession, they expect it to be shallow and anticipate that sales will start to pick up by the end of the year. One retailer said that "it's just a question of the consumer getting through the next few months."
Many manufacturers continue to voice concerns about high or rising materials costs, especially metals, plastics and other petroleum derivatives, chemicals, vegetable oils, and grains. Some also mention elevated fuel and transportation costs. Most of the affected respondents have raised prices since the beginning of the year, usually in the range of 4 percent to 8 percent, and some envision further price hikes. Manufacturers generally report that customers are not resisting paying higher prices. However, some firms are experiencing margin pressures because they sell into sectors accustomed to long-term pricing contracts or with cheaper supply alternatives.
Most contacted manufacturers are holding their U.S. headcounts steady or making gradual cutbacks as they implement efficiencies. Biotech firms are continuing to add U.S. jobs, however. Average pay increases generally are in the range of 3.5 percent to 4 percent. More than one-half of the manufacturing respondents are planning to increase U.S. capital spending in 2008. Projects include capacity expansions and product or service enhancements. Regardless of their investment plans, contacts say that access to capital is not a binding constraint on their spending.
Almost all firms mention that they are assessing how the weakness in the U.S. economy will affect their business for the remainder of the year. They particularly express concerns about deterioration in consumer spending and the financial services industry.
Selected Business Services
The majority of contacted firms are increasing prices modestly, while the remainder are not changing bill rates, citing competitive pressures. Several respondents note increased travel costs and one reports a number of their foreign vendors are increasing Euro prices. Headcounts at the majority of responding New England firms are growing, but at a slightly slower rate than revenues. One contact recently scaled back hiring plans. Most respondents are increasing wages 5 percent on average in 2008.
While all New England business services respondents express concern about the economy, the majority are cautiously optimistic, expecting steady revenue growth in the first half of 2008.
Commercial Real Estate
The leasing market is holding steady in most parts of the region. The vacancy rate for prime downtown Boston office space is estimated to be 10 percent. The vacancy rate edged up from 8 percent to 9 percent in downtown Providence, and remained stable in Portland. Asking rents continue to rise in Boston, but contacts warn that contracted rents may be below asking rates. Rents are flat or slightly down in the rest of the region. The outlook is mixed, but biased toward the negative side. As last time, the main concerns are that leasing fundamentals will deteriorate--some contacts mention an impending recession--and that credit will remain scarce.
Residential Real Estate
Median home prices in Massachusetts decreased about 5 percent year-over-year in February while median condo prices decreased almost 7 percent; Connecticut and New Hampshire's price declines were similar. Rhode Island home prices dropped 13 percent in January, while Maine home prices decreased 2 percent in February from a year earlier.
Several contacts say that lack of consumer confidence continues to be the main factor keeping a damper on the market, as many potential buyers wait to see if prices will decline further. However, contacts in Massachusetts report a recent increase in traffic, especially at open houses.