October 12, 2006
Federal Reserve Districts
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Business results in the First District are somewhat mixed in the late summer-early fall. Manufacturers generally report revenue gains compared with a year earlier, while retailers and selected business services firms are mostly flat to up, but some cite losses. Manufacturers indicate that costs have stabilized or eased in recent months, but remain higher than a year ago; as a result, they have not raised their prices recently. Retailers say input prices are level except for energy, while advertisers and consulting firms report continuing cost pressures; both sectors continue to raise their selling prices. Headcounts are mostly stable in manufacturing and retailing, but consulting firms plan increases; most sectors cite recruiting difficulties for professional and technical positions. Residential real estate markets across New England are softening further, with inventories and time to sale increasing while prices and sales decline.
Inventory levels are generally in line with plans. Input prices appear to be stabilizing, although several contacts still observe energy-related price increases. Most respondents report being able to pass price increases on to the consumer. With the exception of automobile dealers, most retailers note that headcount is fairly steady with most hiring occurring as replacements or for new stores. Excluding already planned new store openings, many contacts report tightening up capital spending plans.
Overall, retail respondents are cautious, but optimistic for the fall. However, many retailers are wary about the effect of the real estate market downturn and high energy prices on consumers as winter approaches.
Manufacturing and Related Services
Most manufacturers note that materials, energy, and transportation costs have stabilized or eased in recent months but remain higher than they were a year ago. Some firms have managed to reduce costs by consolidating suppliers or shifting to foreign vendors. Most contacts indicate that they have not raised their product prices since mid-year, and they anticipate making little or no adjustments in pricing in coming months. Some note that they are charging more or reducing discounts for services.
Except for some consumer goods manufacturers that are curtailing production, most contacts report that their U.S. headcounts are fairly stable. Firms are continuing to increase their technical, scientific, and sales staffing while cutting factory jobs. A couple of contacts report that high housing costs are hindering recruitment for their New England locations. Base pay increases continue to be mostly in the range of 2-3/4 percent to 4 percent. Despite tight white-collar labor markets, only a couple of firms are budgeting for higher average pay raises in 2007 than in 2006.
The majority of companies are increasing their domestic capital spending modestly in order to produce new products or modernize production processes. Several are in the midst of large projects to expand or relocate capacity or integrate newly acquired businesses. These respondents expect capital spending to return to normal levels once these projects are completed.
Manufacturers tend to have a positive sales outlook for late 2006 and early 2007. Many indicate a growing sense of confidence as a result of moderation in energy prices and stabilized interest rates. Others express ongoing concerns related to cost containment and foreign competition.
Selected Business Services
Business costs have increased, especially for airfare and hotel accommodations. Two contacts note that their project mix is changing, leading them to purchase more subscription and data resources; they are able to pass along only a fraction of the added costs. Most responding firms either have implemented moderate price increases over year-ago levels, or plan to in the fourth quarter.
Nearly all New England consulting contacts plan to increase their headcounts in the fourth quarter. They report that the labor market for experienced consultants continues to tighten, and several respondents say that turnover rates have increased. A few contacted companies note that they are experiencing difficulties recruiting personnel with integrated marketing and interactive services backgrounds. Advertising and marketing firms report no plans to change headcount. Wage increases range from 3.5 percent to 10 percent, with consulting firms at the higher end of the range.
Most advertising and consulting contacts expect revenue growth to be flat or accelerate slightly in the final quarter of 2006.
Residential Real Estate
Contacts indicate that as sellers have become more attuned to supply conditions in recent months, they have become more willing to reduce prices. Correspondingly, many New England markets feature declining prices. The median price of single-family homes sold in Massachusetts in August was about 6 percent below its August 2005 level; the corresponding decline for condominiums was 3 percent.
Contacts expect that the pace of sales will remain slow in the near term and that markets will continue to show prices below year-earlier levels. Inventory may decline in the near term as properties are de-listed for the holiday season.