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Federal Reserve Districts

First District--Boston

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Business activity continues to expand in the First District, although this growth is not generally translating into increases in employment. Retailers are upbeat about their end-of-year results compared with a year earlier. Manufacturers continue to see solid year-over-year growth in revenues. Advertising and management consulting firms also report healthy growth through the end of the calendar year. Residential real estate markets in New England continue to slow, but as indicated three months ago, contacts say this represents a return to normal, rather than a significant market correction. Business respondents say the outlook is positive, with most of them expecting "more of the same" in 2006.

Retail and Tourism
Retail contacts in the First District report positive results in November and December, as year-over-year sales range from flat to double-digit gains. Products that sold particularly well this holiday period include apparel and accessories, jewelry, wireless products, and other technology items such as personal computers and printers. Sales of big-ticket items were not as strong, and an automobile dealers' group indicates that sales are flat.

Inventory levels are generally in line with plans. Vendor prices and selling prices are mostly stable, although several respondents still cite price pressure on energy-related products. Many contacts report increased seasonal hiring, but note that headcount levels are now returning to pre-holiday numbers. Most contacts plan to increase capital spending in association with new store openings; however, several respondents say they will tighten up capital spending plans this year.

A travel and tourism contact reports a stronger end-of-year season than anticipated, and partly credits a return to holiday and corporate parties at area hotels and restaurants. A robust 2006 is forecast for travel and tourism, with a large number of advance bookings.

Overall, most retail and tourism contacts are cautious, but optimistic about the new year.

Manufacturing and Related Services
First District manufacturers reportedly ended 2005 with good momentum, as most contacts recorded positive year-over-year growth in the fourth quarter. Almost half achieved double-digit gains in revenue and a similar share describe results as "better than expected." While many firms saw strong demand across the board, areas of particular strength included pharmaceuticals, aerospace, and security and monitoring equipment. Demand for textiles, automotive products, and building and other transport equipment is said to be less robust.

While many contacts mention recent moderation in the price of steel, aluminum, energy, and petroleum-based products, some also note that copper and sterling prices continue to rise. Over half say that their selling prices are now above year-ago levels, generally by 1 percent to 3 percent. Still, most manufacturing respondents describe their ability to protect their profit margins by passing commodity price increases on to customers as very limited. Two contacts also mention that the strong dollar has damped sales or reported profits.

A majority of district manufacturing contacts plan to keep employment at current levels in 2006. Several firms indicate that they are restructuring their workforce, with gains in sales and development or engineering offsetting cuts in HR, back office, or production functions. Most contacts raised wages by 3 percent to 3.5 percent in 2005 and are planning the same or slightly higher increases in 2006. Respondents giving above-average increases cite a need to share improved profits or tightening labor markets.

At over half of the respondents, domestic capital spending will be little changed or down from 2005 levels in 2006; a minority plan to increase investment significantly. Firms with conservative spending plans point out that projects started earlier are near completion, much spending is overseas, excess capacity exists, or they are investing more efficiently.

Most manufacturing contacts expect that 2006 will turn out much like 2005, which they describe as "pretty good" and "sweet." A minority see the economy as vulnerable to weak house prices and slower consumer spending or an unexpected event.

Selected Business Services
New England advertising and management consulting companies experienced healthy revenue growth in the final quarter of 2005, with most firms reporting double-digit gains from a year earlier. Some contacts note that their clients' budgets are less constrained than a year ago; in response, the contacts are expanding their product and service offerings.

Responding consulting companies have earned moderate price increases over year-ago levels with no discernible effect on demand, while advertisers' prices have held stable due to a competitive market environment. Business costs are rising moderately for all contacts, most notably for labor, where wages are up between 3 percent and 4 percent from a year ago. Firms report that headcounts are growing to accommodate demand, but at a slightly slower rate than revenues. Most advertising and consulting respondents have a positive outlook, expecting revenue growth to be flat or accelerate over the course of 2006, despite some concerns about a general economic slowdown.

Residential Real Estate
Contacts across New England report declining levels of residential real estate activity in the fourth quarter of 2005. In Massachusetts, the October volume of single family sales was down 8.7 percent from the previous year, while November sales were down 9.2 percent. Condominium sales were up 7.5 percent and 0.8 percent for the same two periods; one in three properties sold in Massachusetts is a condominium. Declining activity is at least partly attributable to rising mortgage rates pushing some buyers from the market, along with sellers who are attempting to maintain current asking prices.

Inventories and market times are moving up to what contacts characterize as more normal or healthy levels. The Massachusetts market currently features eight months of supply; one contact put market equilibrium at 8.5 months. Buyers, faced with more property choices, are researching more and negotiating harder. Prices are beginning to respond to increased buyer power, though contacts are quick to point out that any talk of declining prices or downward market corrections is premature. Prices are still increasing, though moderately.

Contacts uniformly expect activity to increase in mid-January for spring closings. Growth projections are very moderate, but positive. One contact expects 2006 price appreciation rates of less than 5 percent in Massachusetts.

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Last update: January 18, 2006