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Federal Reserve Districts

First District--Boston

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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
Contacted retailers in the First District report mixed sales results for the early fall months, with year-over-year percentage changes in same-store sales ranging from negative to positive mid single-digits. Those contacts reporting softer sales express concern about the effect on demand of rising unemployment and consumer concerns about winter heating bills.

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
Manufacturing and related services contacts headquartered in the First District report that the pace of business remains abnormally low but, in many cases, has stabilized or showed modest improvement in the third quarter relative to the first half of 2009. Makers of housing-related products indicate that year-over-year rates of decline in sales and orders are abating somewhat. An equipment firm selling to the semiconductor industry says revenues remain far lower than a year ago but quarterly growth was stronger than previously expected. Health-related manufacturing activity continues to grow, boosted in part by higher demand for flu vaccines. However, makers of products related to commercial construction cite sharp drop-offs in business. Contacts in a range of industries note that sales to Europe are exceptionally weak.

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
First District advertising and consulting contacts report mixed results in the third quarter of 2009. The majority of contacted firms report demand in the third quarter either stabilized or increased by 4 percent to 25 percent year-over-year and by 3 percent to 15 percent quarter-over-quarter. By contrast, several contacts cite slower-than-anticipated demand in the third quarter. Demand from private equity firms and businesses related to real estate continues to be extremely weak. Conversely, the healthcare sector is strong and has increased demand for services as the health care reform debate takes place.

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
Commercial real estate contacts remain decidedly downbeat. Rents for Boston office properties are continuing to fall and are down sharply--by an estimated 23 percent for class A downtown space--from a year ago. Leasing velocity remains slow, but increased modestly from the summer as tenants sought to upgrade space at bargain prices. Tenants are demanding significant concessions--including space improvements and one- to two-year leasing commitments--along with low rental rates. In Hartford, leasing volume and sales volume for office and industrial properties were described as practically non-existent. Hartford office rents have fallen modestly since a year ago, and margins are currently so narrow that owners are expected to face difficulty in marking them down further. In Providence, leasing volume has seen a seasonal uptick since Labor Day, but the activity is "not robust." Suburban office rents in Rhode Island are down roughly 20 percent from a year ago and downtown Providence office rents are down 10 percent or slightly more, with a looming glut of class B office space downtown, based on pending relocations. As in Hartford, there is little room for Providence's rents to fall further, given costs. An uptick in office-building foreclosures was reported for both Providence and greater Boston, and foreclosure activity is expected to remain significant in coming months.

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
Following increases in June and July, residential real estate markets in New England saw moderate year-over-year increases in home sales in August as well. Much of the recent activity is said to be related to the first-time homebuyer tax credit. Its scheduled December 1 expiration date has led to an increase in pending sales in the Boston area. Contacts are very uncertain about what will happen to home sales once the tax credit expires; while groups in the real estate industry are pushing to extend the tax credit to next year and to expand its impact, the legislative prognosis is unclear.

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.

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Last update: October 21, 2009