June 11, 2008 Federal Reserve Districts First District--Boston

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Sales and revenue results at First District retailers and manufacturers continue to be mixed, but contacts indicate that business activity is generally softening.  Respondents cite ongoing cost pressures; many manufacturers say they have raised or plan to raise prices.  Revenue growth rates have slowed for software and information technology services firms in the region, and most staffing firms report little growth.  Contacts in residential real estate cite some positive signs, but ongoing declines in home sales and prices.  According to most respondents, the outlook remains uncertain.  Retail Retail contacts in the First District report mixed sales results for the months of April and May. Retailers say they see clear evidence that consumers are scaling back their spending, and the majority of respondents complain that the media's "doom and gloom" portrayal of the economy contributes to such cutbacks.  One retailer is concerned about the squeeze that credit market turmoil is putting on customers. Inventory levels and employment are generally stable, with several respondents scrutinizing the need for future hiring. Capital spending is largely on plan. A majority of contacted First District retailers mention cost pressures, mostly related to oil. Overall, First District retailers are cautious in their outlook and expect the next few months to be a continued challenge.  However, most are confident they will pull through this period of economic uncertainty; they expect conditions to improve by early to mid-2009. Manufacturing and Related Services Many manufacturers and related services providers headquartered in the First District see signs that business trends are deteriorating in the current quarter.  Contacts say that demand has started to weaken for nonresidential building equipment and for non-automotive transportation equipment and services.  Two manufacturers of health-related equipment indicate that orders have slowed, and a machinery maker reports that business "has fallen off a cliff" in the second quarter.  In contrast to the general picture, demand for energy-related equipment and scientific and analytical instruments continues to grow in line with recent trends.  Contacts from various industries report that overseas markets remain relatively strong, although some say their Western European sales have been sluggish in recent months. Many manufacturers continue to voice concerns about sharply rising materials costs, especially metals, plastics and other petroleum derivatives, and chemicals.  They also mention that energy and transport costs have increased substantially. Most of the affected respondents have raised prices or expect to do so shortly.  However, some firms are experiencing margin pressures because of competition in specific product markets or deteriorating finances on the part of their business customers. A majority of manufacturing respondents have implemented restructuring programs to reduce their U.S. headcounts.  The remaining firms are mostly holding domestic employment steady.  Average pay increases are in the range of 3 percent to 4 percent.  Contacts generally describe their 2008 U.S. capital spending plans as normal and say their domestic investments focus on reducing operating costs or developing new products.  Roughly one-half of the sample point to lingering problems in capital markets; they mention high costs or stringent conditions, or they worry that funding may not be available for large, lumpy projects such as acquisitions. Almost all firms express concerns about the U.S. economy, especially consumer spending, housing markets, and energy costs.  Many expect that the impact on their business will be most notable between now and the end of the summer.  A few mention likely or potential vulnerabilities in 2009. Software and Information Technology Services First District software and IT services contacts report mixed results for the first quarter of 2008, with a couple showing negative revenue growth from a year ago, but the majority experiencing gains. A few firms cite delays in signing contracts, which they take as a sign that their clients are uncertain about the economy.  Two software companies note that domestic licensing revenue has been harder to come by in recent months.  One-half of respondents are adding technology workers and sales staff, although at a much slower pace than during the previous quarter; among the other half, one firm has increased employment significantly, while the remaining firms are holding headcount stable.  Respondents report that the labor market for technical talent remains tight.  All contacted firms have raised pay, generally around 4 percent.  The majority of New England software and information technology respondents are projecting revenues to continue growing at current rates.  Staffing Services New England staffing firms experienced a wide range of business conditions this quarter, with one contact reporting that business is "the worst I have ever seen," while another posted a revenue increase of nearly 20 percent compared to a year earlier.  For the majority of respondents, however, business activity is either flat or changing only slightly.  Contacts indicate high labor demand from the pharmaceutical, engineering, semiconductor, and aerospace industries, as well as specific needs for web developers, CAD programmers, and project managers.  Reports on labor supply conditions vary across firms, with one contact seeing as many as ten new applicants per day, while another reports a dearth of applicants, partly resulting from caution about giving up existing jobs. Several staffing executives report a change in hiring procedures among client companies.  One contact says, "Clients are holding out for the A candidate, when in the past, they took the A and B candidate."  Another complains about "intense scrutiny on resumes," which is putting applicants for temporary positions through a rigorous process akin to that used for permanent hires.  One contact believes recent economic uncertainty has augmented business, with client companies increasingly turning to temporary staffing to avoid long-term obligations.  On the other hand, some clients are hesitant to undertake new projects, thus lowering their need for job applicants.  Despite their concern over economic instability, respondents in the staffing industry voice optimism regarding the second half of the year.  Commercial Real Estate Commercial real estate contacts report that the Boston office building market, which was largely dormant in the first quarter, has seen a number of properties come up for sale in recent weeks; however, one contact notes that the number of closed transactions has not yet edged up significantly.  Respondents indicate that commercial mortgage originations are still being made only by traditional portfolio lenders--life insurance companies and commercial banks--and not by Wall Street investment banks, and lending standards remain relatively stringent.  A small mutual bank in Boston continues to enjoy increased demand for its loans, but expects competition from Wall Street dealers to return by year's end.  Contacts indicate that commercial leasing activity has slowed further in recent weeks, but not dramatically so.  Many say that maintenance and construction costs are up sharply, putting pressure on net operating incomes.  In greater Boston, contracted rents for prime office space are falling short of original asking rents.  Existing tenants are cutting back on space.  Absorption is negative and vacancies continue to edge up.  Downtown buildings appear to be doing fine, with about 10 percent vacancy, but activity is slower in the suburbs, where vacancy is estimated at 14 percent or higher.  Leasing activity has been slow throughout other parts of New England but, as in Boston, office vacancy rates are still low or average by historical standards.  Retail leasing activity has been strong among tourist-oriented shops in Maine, but slower in strip-mall developments across the region, where vacancy appears to be up slightly.  A Providence contact reports that commercial real estate in Rhode Island is currently "in a recession."  Despite the downbeat reports, commercial real estate contacts throughout the District indicate that layoffs have been minimal so far.  Expectations are that market conditions will get slightly worse before getting better, with the turnaround expected by the fourth quarter of 2008 or the first quarter of 2009.  Residential Real Estate Residential real estate markets in New England again saw declines in home sales and prices compared to year-earlier periods.  Massachusetts home sales decreased 16 percent year-over-year in April--somewhat less than in previous months--while condo sales decreased 27 percent.  Connecticut and New Hampshire experienced year-to-date home sales declines of 28 percent and 24 percent, respectively, compared to 2007.  Rhode Island home sales decreased 18 percent year-over-year in March, and Maine home sales decreased 23 percent year-over-year in April.  Meanwhile, median home prices are down 8 percent to 11 percent from a year earlier across the states. Contacts in Massachusetts continue to report increased activity at open houses, and April's pending home sales numbers in the Boston area are said to look promising.  However, one contact notes that financing issues could still prevent increased activity from translating into increased sales.  Return to top Summary New York