October 21, 2009
Federal Reserve Districts
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Business activity remains slow in the First District, notwithstanding some signs of improvement. Results for retailers, manufacturers, and advertising and consulting firms are mixed, but many contacts cite a slower pace of decline, stabilization, or some pickup in activity. Residential real estate markets continue to show positive signs, while commercial real estate remains in the doldrums. Business contacts indicate that selling prices are level or have moved only slightly. Wage increases are very modest or zero; large layoffs appear to have ended, but hiring remains very limited. A slow recovery is expected in 2010.
Retail and Tourism
Respondents continue to manage inventory levels carefully; one contact observes that large-scale retailers seem to have cut inventory due to weak sales. Capital spending remains tightly controlled, although some retailers are increasing capital spending in order to take advantage of favorable real estate opportunities. Contacts note that headcounts are stable, although tight restrictions on hiring seem to have relaxed. Wages remain steady and selling prices are reportedly stable.
Tourism activity in Boston is weak, although the rate of decline has slowed. Business travel is especially soft, and one contact worries that decreased corporate travel and spending will become "the new norm." International leisure travel has also fallen off, while domestic leisure travel is reported to be stronger. Hotels are offering dramatic promotional deals and discounts on local attractions; these draw customers and thereby boost revenue, and also preserve posted room rates.
Manufacturing and Related Services
Manufacturers indicate that costs have fluctuated for metals and have moved somewhat higher for petrochemicals. Some are concerned that the strengthening economy or expiration of long-term contracts will lead to higher materials costs in 2010. Selling prices are mostly flat or up slightly, although product competition and customer clout are leading to downward pressures in some market segments.
Having cut domestic jobs earlier this year, most contacted manufacturers and related services providers plan to hold headcount relatively steady in coming months. Respondents remain cautious in adding to employment costs: some have ongoing hiring freezes, while others remain on the lookout for opportunities to reduce staffing. Many contacted firms expect to lift pay freezes or otherwise increase pay modestly in 2010, but are retaining flexibility in case the need to cut costs turns out to be greater than expected. Some respondents express concern about pension liabilities or other benefit costs. Capital spending plans remain subdued, and center mostly on new product development or cost reduction.
Most manufacturers and related services providers anticipate a slow recovery in sales in 2010. Although reports on the availability and cost of credit vary somewhat, the consensus appears to be that financial market conditions have moved in a positive direction.
Selected Business Services
Costs reportedly held steady or declined in the third quarter. Several companies continue to cite substantial price pressure and are either increasing prices less than planned or offering discounts up to 15 percent. Some will raise prices in 2010. In most firms, wages and salaries increased modestly--by about 3 percent--in 2009. However, steep reductions in bonuses drove overall compensation down. Compensation is expected to grow marginally in 2010. Following layoffs in the first half of the year, some respondents began some hiring in the third quarter. Most will hire in 2010 in order to hold headcounts steady or to increase workforce by 3 percent to 10 percent.
Although all contacted advertising and consulting firms expect business to improve in the fourth quarter, the outlook for next year is mixed. Demand growth is generally projected at 3 percent to 15 percent in 2010, but one firm forecasts business to be down 15 percent next year. Major risks to the outlook are further increases in unemployment rates and uncertainty stemming from healthcare reform.
Commercial Real Estate
A few pieces of good news emerged. A couple of noteworthy office building sales have taken place in Boston in recent weeks, facilitating price discovery and possibly signaling renewed investor confidence. However, property values for class A office space in Boston are estimated to have fallen 40 percent from their peak values. Similarly, industrial properties are selling in Rhode Island, but at discounts of up to 50 percent (for large-scale properties) from peak prices. Financing continues to flow throughout the region for low and mid-priced deals (under $10 million) at favorable interest rates
Vacancy rates are expected to rise further as office employment continues to shrink; all contacts place a turnaround in commercial property fundamentals at least 9 months into the future. A Boston contact continues to worry about default risks over a 1- to-3-year horizon in light of the large share of Boston properties purchased between 2004 and 2007 that are currently "under water."
Residential Real Estate
Although home sales rose in August, home prices continued to decline across New England. Contacts report that median home prices fell between 3 percent and 14 percent year-over-year in August. One contact notes that increased activity related to the first-time homebuyer tax credit is naturally concentrated on entry-level homes; this alters the mix of homes sold and hence reduces the median price.
The inventory of homes for sale continues to decline in Massachusetts and New Hampshire. Contacts report that some potential sellers are still waiting for prices to begin increasing again before listing their homes. Real estate contacts fear that low inventory will hurt sales if potential buyers are unable to find a suitable home.