September 7, 2005
Federal Reserve Districts
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Contacts in the First District report that recent changes in business activity are mixed. Most retailers say overall sales in the summer months were higher than a year earlier, but month-to-month changes were erratic. Manufacturers' results vary by sector, with companies supplying consumer goods seeing weaker sales and orders than makers of aircraft components, computer hardware, and biopharmaceuticals. Staffing firms say labor demand continues to grow. Respondents across the board express concern about high energy prices. With the exception of commercial real estate, the outlook is generally positive, with contacts expecting continued growth in the remainder of 2005.
Retail and Tourism
Inventory levels are generally satisfactory. The majority of retail contacts report cost increases for petroleum-based products. Changes in selling prices are mixed; several respondents are uneasy about passing along cost increases to price-sensitive consumers. For the most part, employment is steady.
Travel and tourism contacts report that results improved in June and July after inclement weather discouraged travel in April and May. Revenue per available room in the first half of 2005 was up 7 percent year-over-year in the Boston and Cambridge areas, with single-digit increases in occupancy and little or no rise in room rates. Increasing gas prices are cited as a major industry-wide concern, but contacts primarily attribute weaker-than-expected results to more frugal travelers and overly optimistic forecasts following a very strong 2004. Some large resorts note continued employee shortages because many foreign workers were denied seasonal employment visas, and student employees are now returning to school. Tourism contacts are optimistic about the fall, citing an increase in the number of last minute bookings, a full convention schedule, and the usual seasonal boost from both fall foliage and the return of Boston students. International travel has started to increase but remains below expectation.
Overall, retail and tourism respondents are upbeat about the remainder of 2005, with expected growth ranging from flat to double-digit increases.
Manufacturing and Related Services
Most respondents complain of higher costs for oil and gas, petrochemicals, and metals. Although some contacts have managed to increase their selling prices as much as 8 percent to 10 percent this year, many are concerned about their inability to raise selling prices enough to offset margin pressures fully. Technology-oriented companies tend to be exceptions to the general pattern: Most are not materials-intensive and have not felt the need to increase selling prices.
Companies generally are making only minimal adjustments to domestic headcounts, except those in high-growth industries or making significant acquisitions. Typical wage and salary increases are in the range of 2.5 percent to 4 percent, although several firms report higher raises.
Capital spending is reported to be mostly flat, or up slightly because of specific needs. A couple of companies indicate that they are being cautious in their capital spending because escalating materials costs tie up cash or create uncertainty about profitability. Another expresses concern that appreciation of the yuan could lower the returns to their recent investments in China.
Manufacturers are varied in their outlook. On the optimistic side, some feel confident that their markets will continue to grow. About the same number of respondents on the pessimistic side believe energy and materials price increases will continue to exert a drag or diminish their margins. A third camp is either "cautiously optimistic" or awaiting clarification of future trends.
Bill rates are holding steady for the most part, while pay rates are steady or rising. Contacts express concern about rising costs for unemployment insurance, health insurance, commercial insurance, and workers' compensation. Rising fuel costs are also worrisome, particularly for staffing firms that provide transportation or compensate workers for travel costs. Despite these concerns, respondents are confident that the coming quarter will bring continued growth for their own firms and for the staffing industry.
Software and Information Technology Services
Contacted software and IT services firms are cautiously optimistic looking forward. With strong orders in the pipeline, they expect more of the same over the next quarter--revenues and profits are generally projected to continue growing at current rates.
Commercial Real Estate
Observers' expectations for commercial real estate remain flat for the time being. A small up-tick in rents may occur as seasons change and utility costs increase; net rents received by landlords, however, are not expected to increase. Office construction is not on the horizon, as rents in most New England markets are said to remain well below the estimated construction construct threshold.