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Federal Reserve Districts

First District--Boston

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First District contacts indicate that the pace of activity softened in the third quarter, and in some cases deteriorated sharply in September. Retail, manufacturing, and business services revenues decelerated or declined relative to year-earlier and quarter-earlier. Commercial real estate leasing was similar to the prior quarter but starting to weaken. Residential real estate markets continue to slump. Contacts indicate that credit tightness has brought about a halt to nonresidential construction and a scaling back of other investments. Selling price increases were less prevalent than in earlier reports. Most firms express heightened caution or concern about the outlook for the remaining months of 2008 and for 2009.

First District retailers cite mixed sales for August and September, but even the majority of those with positive results on a year-over-year basis report a softening. Retailers say that consumers are scaling back spending for the time being. One respondent observed a shift toward the sale of private label items, possibly indicating a more price-conscious consumer. Another noted that consumers are still willing to buy for the right deal.

Inventory levels continue to be tightly managed. Capital spending reports are mixed, with many retailers scaling back on spending but a few continuing their projects as planned; all contacted retailers cite caution on future spending. Several respondents have invoked a "soft hiring freeze," while others have recently reduced or plan to reduce headcounts.

While several First District retail respondents have not been affected directly by a lack of credit, some report having difficulty financing equipment purchases or other projects, while others report being able to borrow funds only very short-term. Contacts who supply the housing industry note that contractors report having lines of credit pulled, and in some cases are hesitant to start projects because of funding fears. Additionally, a few retailers are facing escalated interest rates on the limited funding available.

Overall, First District retailers are concerned and cautious in their outlook. Many contacts express the view that improvement will not be seen for at least another six to twelve months.

Manufacturing and Related Services
Most manufacturers and related services providers headquartered in the First District say that third quarter sales trends were either in line with or somewhat weaker than earlier in the year. They express heightened concern about the current and upcoming quarters, especially in light of tight credit and what they perceive as deteriorating sentiment in the United States.

Retail- and restaurant-goods manufacturers report that demand is faltering. Producers of housing-related items say their sales remain subdued, with one indicating that business has "hit a brick wall." A firm that makes residential and nonresidential building equipment reports a disappointing response to its September promotional event. Manufacturers of office equipment and a provider of business information note that some of their financial services customers have gone out of business, and that their remaining customers are reducing or postponing purchases. In sharp contrast with other segments, biopharmaceutical firms continue to experience strong double-digit revenue growth.

Many manufacturers continue to voice concerns about elevated materials, transportation, and fuel costs, although several now point to modest retrenchment for selected inputs. About one-third report that they raised selling prices in the third quarter or plan to do so in the fourth quarter. Several firms mention that weaker market conditions are likely to constrain their ability to raise prices in the coming months.

Close to one-half of the manufacturing and related services respondents report they are likely to cut domestic headcounts by the end of 2008. Another one-quarter say they will slow their rate of employment growth. Most contacts note that upward pressures on pay appear to be abating, although one manufacturer reached a wage increase settlement with its union that was higher than anticipated. Firms with largely salaried workforces say that labor turnover has decreased considerably, and that labor availability has improved as a result of layoffs at financial services and small biotech companies.

About one-half of the contacts say they have decided to reduce their capital spending in 2009. Most firms indicate that their operations have not been directly affected by a lack of credit. However, many point to examples of other, mostly smaller firms that have had difficulties, or they express concern about potential future vulnerabilities. For example, one respondent notes that he is tracking cash flow more closely than ever before; another mentions that his company would not be able to count on its foreign parent as a source of capital if conditions deteriorate more broadly; and a third has new doubts about the availability of bank financing for a pending acquisition. Although some manufacturers cite reasons for expecting their own firm to be in a relatively stronger position in 2009 than the sector as a whole, almost all respondents report that they are bracing for a tough U.S. economic environment next year.

Selected Business Services
The majority of First District selected business services contacts--most of whom are consulting firms this time--report weaker demand. Demand from the airline, pharmaceutical, telecommunications, retail, and construction industries is said to have slowed significantly. However, demand for consulting services from the healthcare sector continues to be strong, notwithstanding overall economic conditions. Looking ahead, half of business services respondents were optimistic--when contacted in mid-September--about business growth in the fourth quarter; the other half expected flat demand for their services. One advertising firm anticipated a double-digit year-over-year decrease in demand in 2008. New England consulting firms were expecting to grow next year but were concerned about how economic pressures would affect their clients' discretionary spending.

Most business services contacts are not increasing prices, although consulting firms feel upward pressure in compensation costs, especially for specialized researchers and consultants. Headcounts are mostly stable or down among contacted firms. Looking forward as of mid-September, the majority of respondents planned either to increase headcounts slightly or keep them stable next year, but one firm expected to continue its significant downsizing.

Commercial Real Estate
All commercial real estate contacts report further credit tightening. They indicate that even the most creditworthy borrowers have been unable to obtain funding for profitable properties. Respondents also report that construction loans are non-existent and construction activity has ground to a near halt. A mutual bank has capped loan size in order to conserve capital, and is restricting funding to refinancing and acquisitions of properties with reliable income streams by borrowers who put in significant equity. A contact at an asset management firm reports that the commercial real estate sales and development market is non-existent and not coming back any time soon, until the credit crisis can be resolved.

Leasing market conditions in the major urban centers of New England remain relatively stable, but the mood is one of extreme caution and nervousness. Reports from the Boston, Providence, and Hartford office markets all indicate that tenants are delaying lease renewals to the extent possible. Landlords are looking to cut deals to secure tenants and minimize losses. While some landowners continue to offer building improvements in lieu of rent discounts to lure tenants, contacts now say that some can no longer borrow enough money to take on such projects. Therefore, contacts predict that pressure on rents will become more severe as landlords' options diminish. Office absorption in Greater Boston was negative in the latest quarter, and vacancy ticked up "a notch." A Hartford contact expects the supply of subleases to rise in the coming quarter. A southern Maine contact sees tenants downsizing. Absorption also appeared negative in Rhode Island, albeit more so in the suburbs than downtown.

The outlook was characterized as either "grim" or "extremely uncertain." Most contacts expect commercial property markets to get worse before they get better.

Residential Real Estate
The residential real estate sector continues to struggle across New England, and contacts venturing a prediction said they anticipate no noteworthy improvements in the next year. August home sales fell 14 percent and 17 percent year-over-year in Massachusetts and Rhode Island, respectively, and over 30 percent in Connecticut and Maine. This was the largest decrease in Connecticut since 1989. Condo sales dropped 19 percent year-over-year in August in Massachusetts, over 30 percent in Rhode Island and Connecticut, but only 4 percent in New Hampshire. Contacts report a few cases of realtors trying to convince homebuyers not to back out of nearly completed deals.

In August, median home prices decreased 8 or 9 percent year-over-year in Massachusetts, Connecticut, and Maine, and 15 percent in Rhode Island. Inventories in Massachusetts are said to have come down to a more balanced level. Median condo prices remained flat year-over-year in Massachusetts, while falling 4 percent and 7 percent in Rhode Island and Connecticut, respectively.

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Last update: October 15, 2008