October 17, 2007
Federal Reserve Districts
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Business conditions in the First District continue to be mixed. Manufacturers generally report solid demand growth, except for housing-related items. Retail results continue to be varied. The consulting industry cites good revenue growth but some signs of caution among its U.S. customers. Residential real estate markets remain soft, while commercial real estate markets continue to improve on the rental side, but soften on the investment side, at least partly as a result of turmoil in credit markets. Contacts mention price increases for selected inputs. The outlook remains uncertain, but not downbeat.
Inventory levels are mixed, with several contacts reporting programs to reduce inventory. Headcounts are also mixed; some respondents report increasing headcount in line with company growth or seasonal hiring, while others report layoffs. Contacts cite price increases in metal-related products, chicken, beef, and dairy. Excess supply has kept lumber prices at record lows. Selling prices are generally stable, with a few companies passing small price increases along to consumers.
Retail respondents are cautious in their outlook. Most express concern about the current upheaval in financial markets as well as the potential impact on consumer sentiment; some respondents expect an economic slowdown and say they are uncertain whether it will turn into a recession, while others feel that it is not a matter of underlying economic weakness so much as consumer confidence. Several retailers anticipate no improvement for another one to two years. However, others remain optimistic in their outlook; as one noted, "for the right deal, people are still buying."
Manufacturing and Related Services
Most contacts describe materials and energy costs as rising somewhat or remaining stable at high levels. They express concern about actual or anticipated increases in prices paid for metals, nonmetallic minerals, rubber, energy, transportation, and corrugated cardboard. Most firms say that their average selling prices are up between 1 percent and 6 percent over year-earlier levels, and some plan to raise prices further in early 2008 in order to recoup higher materials costs. Respondents note that prices have eroded for some products, such as consumer electronics and automotive and industrial parts.
Contacts generally are adjusting their U.S. headcounts only minimally (up or down), and average wage and salary increases are remaining in the range of 3 percent to 4 percent. Manufacturers report that labor markets remain very tight for scientific, technical, and finance professionals, resulting in hiring delays and signing bonuses. Respondents mostly say that domestic capital spending is likely to be flat to up in coming months; only a couple indicate they recently scaled back their investment plans.
Most manufacturers and related services providers say they are either upbeat or at least reasonably positive about their business prospects. While citing continued weakness in housing and possible negative spillovers from tight credit, they point to export growth, new product development, and positive trends in their industry as reasons for expecting increased revenues in 2008.
Selected Business Services
Several firms have put through modest price increases, while others have left bill rates unchanged. Input costs are relatively stable, although a few firms note rising rents. Headcounts are growing in response to demand, but at a slightly slower pace than revenues. Most respondents plan to increase wages by between 3 percent and 7 percent in 2008.
Business services respondents have a mixed outlook; those with softer incoming orders are cautious about the rest of the year, while others are more positive. However, firms with clients in the financial services industry say they expect that segment to have a tough fourth quarter.
Commercial Real Estate
Rental rates for class A office space in Boston have remained high, but contacts predict slower rent increases moving forward, claiming some of the bargaining power has shifted back to tenants. Office vacancy rates remain in the single digits; absorption is positive but expected to slow in coming months. Rents are stable in the class B market, where vacancies are higher than for Class A space, but also stable or falling. Suburban Boston, most notably Waltham, continues to be in high demand among biotech and other industrial firms. In Hartford, rents for new industrial space outside downtown are also reported to be on the rise, but the rest of the Hartford market remains stable. Contacts say the industrial market has been "surprisingly strong" in Providence and northern Rhode Island, and office rents in downtown Providence are expected to continue to rise due to declining vacancies and strong job growth.
A risk moving forward is that projects in the planning stages, such as large mixed-use developments, may be delayed or shelved due to the unfavorable financing climate. Some respondents report that property valuations have changed and expect commercial real estate prices to fall even though not much softening has been observed yet. Contacts expect modest economic growth throughout the region, but some see a risk that hiring may become more conservative as managers wait to see what, if any, fallout may occur from financial market disturbances.
Residential Real Estate
The other New England residential markets are mostly trending downward. Second quarter sales in Connecticut decreased compared to last year, although single-family home prices increased 10.7 percent, with the price increase concentrated among homes with four or more bedrooms. In New Hampshire, home sales declined 8 percent, and prices decreased 1 percent in August 2007 compared to August 2006. A Rhode Island contact also says that prices and sales are dropping.
Respondents express concern about the impact of negative housing-related news stories on buyers and about unrealistic pricing as sellers try to get more for their house than market conditions allow. In addition, contacts acknowledge that lending standards are tightening.