April 14, 2010
Federal Reserve Districts
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Business conditions continue to improve in the First District. Contacted retailers cite sales increases, manufacturers say demand continues to grow, and advertising and consulting firms report modest revenue increases. Home prices appear to be improving along with sales in most of the region's residential markets, while commercial real estate appears to be stabilizing although potential defaults remain a concern. Most New England employers are no longer shedding workers, and many are restoring recession-induced cuts in wages and benefits. Both input and selling prices are mostly said to be stable.
Inventory levels are primarily on target, although one contact notes a decrease because of unexpectedly strong sales. Capital spending is more robust than in previous reports, with contacts spending on new store openings, store remodels, IT systems and other technology. Several respondents report slight increases in headcount and the reinstatement of prior wage cuts. Vendor and selling prices are said to be stable, although one contact notes an increase in food-related commodity prices.
Manufacturing and Related Services
Input costs for manufacturers are generally unchanged, with the exception of most metals, for which prices are rising. Many companies report that they are holding selling prices steady, although a few have managed (or plan) to implement modest increases this year; they face limited pressure to reduce their selling prices.
The employment situation in the manufacturing sector remains relatively unchanged. Two notable exceptions are a metals fabrication firm that has increased its workforce about 15 percent relative to a year ago and a large diversified equipment and technology manufacturer that expects to continue layoffs through this year. At most of the remaining firms, hiring in the U.S. is expected to remain relatively flat or increase only slightly for 2010. Manufacturers continue to try to restore wage cuts and/or unfreeze wages. Most firms report instituting or planning to institute modest wage increases of 2 percent to 3 percent this year. Virtually all contacts continue to express concerns regarding rising health care costs.
Most manufacturing respondents report that their planned capital expenditures for 2010 are level with or slightly greater than their expenditures in 2009. Most of the firms' domestic capital expenditures will go toward expanding IT investment and/or their research and development functions. Respondents commenting on financing conditions say they have improved.
Virtually all the contacted manufacturing firms remain cautiously optimistic that business conditions will continue to improve as the year progresses. The consensus, however, is that it may take a while for underlying demand to pick up substantially, and 2010 may turn out to be a transition year.
Selected Business Services
Most respondents made large price cuts in 2009, in the range of 10 percent to 20 percent, with only a few holding their prices steady. Now prices are being raised, but they remain below their pre-recession levels. Regarding compensation; some contacts have kept and plan to keep base salaries steady, while others have raised salaries from 2 percent to 10 percent. Performance bonuses are generally down. Most respondents intend to maintain current staff sizes, with only replacement hiring, but a few firms expect to increase headcounts by 2 percent to 15 percent by the end of the year, and one firm plans to further downsize by 5 percent.
Advertising and consulting contacts generally say they are cautiously optimistic about the rest of the year, as some uncertainties remain. Most respondents forecast a slow recovery for their industry and project annual revenue growth for their firms between 5 percent and 10 percent, although some expect flat growth. They express concern about the availability of credit and the possibility of a double dip.
Commercial Real Estate
In the investment sales market, contacts report growing demand for commercial properties by institutional investors and life insurance companies searching for higher yields. In line with this trend, a commercial real estate lender in Boston has seen significant sales activity for fully-leased, low-risk properties, and his bank has lost bids to other, more aggressive lenders. A local asset management firm recently purchased a prime, mixed-use property in Boston among competition from multiple bidders. At the same time, investor sentiment is reportedly mixed as to whether prices have hit bottom, and significant gaps remain between bidding and asking prices in the riskier segments of the market.
Looking forward, a few contacts express renewed concern about looming commercial mortgage defaults, as operating incomes and debt-service reserves continue to fall and equity in many properties remains weak. Defaults are expected to rise over the next 12 months and possibly beyond. While most contacts expect leasing volume to rise in the later part of 2010, none expect rents to increase significantly in the near term and one sees little upside risk to rents for at least five years, in Boston at least.
Residential Real Estate
While Massachusetts contacts are still concerned about low inventory, the 3 percent year-over-year decline in home listings was actually the smallest decrease in 23 months. These contacts hope that sellers will come back to the market as prices rise. Furthermore, the average number of days on market fell sharply across the region. Real estate brokers have been kept busy by the strong demand from buyers encouraged by the tax credit and low prices. Unfortunately, recent flooding in several areas has been a problem for some deals.