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Federal Reserve Districts

First District--Boston

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Business contacts in the First District gave generally positive reports when contacted in late May, with the exception of retail and tourism. Retailers' results are mixed, but other contacted sectors cite continuing solid gains in revenues or sales. While most costs and selling prices are said to be relatively stable, many retail and tourism respondents express concern about high transportation costs, both for freight and as a possible drain on other consumer purchases.

Retail and Tourism
Retail respondents in the First District report mixed sales results for the months of April and May. Same-store sales ranged from low double-digit decreases to middle single-digit increases year-over-year.

A lumber company reports that sales are down almost 15 percent year-to-date, although same-store sales were up sharply in May. The contact is hopeful that the recent uptick in sales is a sign that business is finally starting to rebound. A surplus and salvage store reports that business is "absolutely terrible," with same-store sales down 10 percent from last year. The respondent notes that sales of furniture and flooring, as well as big ticket items, are weak, although food sales continue to do well. By contrast, a drugstore chain reports that same-store sales are up more than 6 percent year-to-date; nonetheless, this represents a slight slowdown from its previous pace. A respondent in the clothing and sporting goods business indicates that although sales have been mixed over the last few months, same-store sales are still up more than 5 percent year-to-date. The contact comments that despite increasing fuel costs, "you can't divorce people from their spending habits."

Inventory levels are mixed, but mostly in line with expectations. All respondents express concern over the rising cost of fuel, with several reporting large increases in transportation and freight costs. Some retailers are passing along small price increases to their customers. Employment has been mostly steady, while capital spending plans are mixed. One contact reports the largest capital spending year in the company's history; another says capital spending plans are on hold while sales remain weak. Overall, retail respondents are cautious in their outlook.

A tourism contact reports that business, convention, and leisure travel were all strong for the months of April and May. In the Boston metropolitan area, revenue per available room is reported to be up 7.8 percent, the average room rate up 4.6 percent, and occupancy rates are up about 1 percent compared to year-ago levels. Hiring is increasing, and several major new hotels are slated to open in the next year. Looking forward, gas prices are a concern, especially for leisure travel.

Manufacturing and Related Services
Manufacturers and related services providers headquartered in the First District generally report that sales and orders continue to run higher than a year ago. Most machinery and equipment manufacturing contacts indicate that, to date, their 2007 revenues are up at double-digit rates from a year ago. They are experiencing particularly strong growth in demand for transportation equipment and alternative energy generation equipment, as well as from various export markets. Domestic demand for residential HVAC equipment continues to slump.

Manufacturers generally indicate that their materials and energy costs are stable overall, although some express concern that metals costs remain either high or volatile. In addition, a food manufacturer is facing rising costs for grain and a paper goods manufacturer has stocked up on paper in anticipation of higher costs by year-end. Most contacts say their selling prices are holding stable or decreasing in line with prior trends. However, a couple of firms in strong niches report that they are able to increase their prices with little pushback on the part of customers.

Manufacturers and related services providers mostly expect their U.S. headcounts to remain fairly steady or edge down in 2007. Average wage and salary increases remain in the range of 3 percent to 4 percent. For the most part, contacts continue to report that labor markets for skilled workers are tight, and about one-quarter of respondents indicate that turnover rates have worsened or that labor market competition has heated up recently. Domestic capital spending plans vary widely, depending on factors such as sales trends, IT implementation cycles, and decisions concerning whether to upgrade manufacturing facilities or rely more on outsourcing and offshoring.

Manufacturers mention a range of positive and negative forces operating on their business and the general economy. For the most part, however, their outlook for the coming six to twelve months remains little changed from earlier this year.

Software and Information Technology Services
The majority of software and IT services contacts in the First District report double-digit year-over-year revenue increases. Most responding New England software companies have left selling prices unchanged as a result of a competitive market environment. Headcounts are increasing, generally modestly, with selective hiring of technology workers. All contacted firms have raised pay, generally between 3 percent and 5 percent. Approximately half of respondents indicate that they have increased capital and technology spending relative to last year in order to expand or upgrade equipment; the remaining contacts are holding capital and technology expenditures stable.

New England software and IT services firms are generally positive in their outlook. With strong orders in the pipeline, revenues and profits are generally projected to continue growing at current rates.

Staffing Services
Staffing respondents in the New England region are extremely upbeat this quarter. Business is "very solid" for some firms, and picking up significantly for others. Demand for staffing services is growing in the medical, software and IT, biopharmaceutical, academic, and finance industries. Contacts also indicate that demand for direct-hire services continues to increase. While they are still struggling to find enough skilled applicants to fill open positions, staffing respondents are not as concerned about the problem as they were a year ago. Both bill rates and pay rates are steady or increasing, with several contacts noting that the increases have been significant.

Staffing respondents are concerned about potential cost increases associated with the implementation of new healthcare laws in Massachusetts and Vermont, but remain uncertain about how the laws will affect their businesses when they go into effect in July. Despite these questions, however, contacts are optimistic about the near future, expecting solid growth to continue through the end of the year.

Commercial Real Estate
Commercial real estate markets in New England remain solid. Vacancy rates have been steady or declining, and contacts report stable or slightly higher rents. The Boston office market is reportedly strong, with vacancy rates at or below 10 percent downtown and in the mid-teens in the suburbs, and small positive absorption of office space in the first quarter. High-quality space is filling up quickly and inventory is declining. Rents continue to rise inside Route 128, but remain soft "for now" in the outer suburbs.

In Hartford, the suburban market is strong. In Portland, suburban vacancy rates remained constant over the past year, while they decreased moderately downtown. Similarly, the suburban Providence office market is relatively weak, while downtown Providence lacks inventory of Class A office space. New construction is limited throughout the region, in part due to high costs of construction.

Although rental market conditions are good, contacts continue to be surprised by the extremely strong demand for commercial properties, especially by foreign investors. Office properties tend to receive multiple offers and sell above their asking prices, and according to some respondents, above what underlying market conditions would warrant with typical capitalization rates. Looking forward, contacts expect office rental markets to remain stable throughout the region, with somewhat diminishing vacancy rates over the next quarter.

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Last update: June 13, 2007