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Most First District business contacts report ongoing declines in sales or orders from a year earlier. Aside from biopharmaceuticals, manufacturers say business continues to drop off and they are cutting capital spending, employment or hours, and compensation. Software and information technology services firms are also seeing revenues fall from a year ago, as are staffing firms. However, a few manufacturers and staffing firms cite some stabilization or positive signs recently. Residential and commercial real estate markets remain in the doldrums, with declines in prices and sales (or rents and occupancy) continuing into March and April. Retailers are the exception, with a majority of respondents reporting modest sales increases from a year ago. Manufacturers say input costs are roughly flat, while their selling prices are flat to down. Retailers' and software firms' prices are holding steady, while temp firms' bill rates and pay rates are declining. "Uncertain" continues to be the operative word regarding the outlook, although contacts in several sectors see more reason for optimism now than six weeks or three months ago.
With one exception, contacted retailers in the First District report modest year-over-year sales changes for April and early May. By contrast, a housing-related respondent reports that sales are running more than 30 percent below a year ago, partly because of "overly restrictive" lending. Another retailer is concerned about an observed increase in credit card "declines" as customers hit their credit limits.
Respondents continue to tightly manage inventory levels. Capital spending reports are mixed, with some contacts taking advantage of improving expansion opportunities and others still curtailing 2009 capital spending. The majority of contacted retailers say their headcounts are currently stable, although generally below year-earlier levels, with hiring occurring only where necessary. Most have frozen wages in their corporate headquarters; one respondent indicated they had "offset" the wage freeze by giving all affected employees an additional week of paid vacation. Prices remain stable.
Overall, most First District retailers expect sales growth to remain modest, but they are cautiously optimistic about seeing "the green sprouts of recovery."
Manufacturing and Related Services
Almost all manufacturing and related services contacts headquartered in the First District report that, to date, 2009 sales or orders have fallen below year-ago levels, in most cases by double-digit percentages. Respondents say that consumers and businesses remain especially wary of spending for big-ticket items or in bulk, and many note that demand is off more sharply in foreign markets than domestically. Most manufacturers expect sales declines in the second quarter to be at least as pronounced as they were in the first quarter, but a few are beginning to cite modest improvements. For example, contacts indicate that production of semiconductors for selected consumer products picked up in the second quarter compared to first-quarter levels. Another sees opportunities in the fiscal stimulus package for alternative energy and other infrastructure projects. By contrast with other manufacturing segments, biopharmaceutical sales continue to increase strongly.
Costs of materials and other inputs have decreased for some manufacturers but increased for others. On average, they appear fairly stable. Selling prices are generally said to be flat to down. Almost all the contacted manufacturers and related services providers have reduced employment and/or hours this year. Many expect to implement further layoffs, temporary plant shutdowns, or voluntary or involuntary furloughs in the months ahead. Nearly one-half of respondents have taken steps to rein in employee compensation through measures such as pay freezes or benefit reductions.
Almost all respondents have cut capital spending from last year's levels. Many describe their investment plans in terms such as "the very minimum," but some say they may undertake projects related to development or manufacture of new products or to cost-cutting.
Manufacturers and related services providers are mixed in their outlook. Some describe themselves as becoming slightly more optimistic on the basis of their own business or broader developments in financial markets or consumer confidence. Others remain guarded about their sales prospects through the end of 2009 and into 2010. To the extent that they express confidence, it is primarily because they have succeeded in reducing costs and managing accounts receivable.
Software and Information Technology Services
New England software and information technology firms report a continued slowdown in the second quarter of 2009. Revenues have dropped year-over-year for nearly all contacted firms, generally driven by sharp declines in new software license revenues, while maintenance contracts have remained steady or shown slight weakness. Respondents continue to talk with prospective clients wanting to invest in new technology, but those customers are unwilling to finalize deals in the current economic environment. Some contacts say their clients are also delaying orders out of uncertainty about possible restrictions on the allocation of money from the federal stimulus package. Some First District software and IT firms have reduced their workforces, while others continue to hire selectively for critical positions and replacements. Selling prices have held up, although some clients are asking to revisit their payment terms. Software and IT firms in New England have revised downwards their revenue forecasts, with expectations for the remainder of the year varying from a prolonged softening to moderate growth.
First District contacts suggest the temporary services industry has stabilized during recent weeks, with some even reporting slight upticks in activity. Despite the improvement over prior months, there is still a marked decline from the previous year, with yearly revenues down 10 percent to 50 percent. Overall labor demand remains soft, specifically in the manufacturing, light industrial, and financial services sectors, although companies in the biotechnology and pharmaceutical industries continue to hire. The supply of job seekers is abundant; however, a few respondents indicate that applicants are often ill-qualified for open positions. In addition, certain specialized skill sets remain difficult to find, including medical billers, engineers, programmers, and skilled electricians. Also, the recruiting process is lengthening, as employers are "waiting for ideal candidates." Clients continue to put pressure on prices, but bill rate reductions are translated proportionately to pay rates without dispute from employees. Several contacts express concern over expected increases in state unemployment taxes, with one respondent noting that the tax generally rises by 50 percent in the year following a recession. First District staffing contacts believe that the New England labor market, excluding the manufacturing sector, is performing better than that of the nation as a whole, and respondents are generally hopeful for an improved 2010.
Commercial Real Estate
A Boston-based savings bank reports that financing volume for smaller commercial deals (priced below $10 million) slowed considerably through April and May, to a pace roughly half that observed in the first three months of 2009. This development is noteworthy, as this contact and others had previously reported that the demand for loans for small commercial properties remained robust despite very slow volume in the market for higher-priced properties. A broker for larger deals reports that transactions remain extremely scarce, with little price discovery.
Contacts across the region report that office vacancy rates continued to rise in recent months, exerting ongoing downward pressure on rents. In both Providence and Boston, the exit, consolidation, and shrinkage of large employers has pushed up office vacancy rates, including a significant increase in space available for sublease in Boston; similar forces are operating in Hartford, although causing more modest changes. While office rental rates are reportedly falling in Boston and Providence, asking rents for Hartford office space have held steady in recent weeks despite the increases in vacancy. The industrial sector remains relatively robust in Rhode Island, with steady deal volume and vacancy rates hovering just above 10 percent. One contact reports that rents for suburban Boston retail space have declined by 10 percent to 15 percent, with minimal new leasing activity.
Contacts expect a delayed recovery for the commercial sector, with vacancy rates continuing to rise in the office and retail sectors, following further expected increases in the unemployment rate. One Boston contact repeated his previously expressed concern regarding Boston properties that risk foreclosure in light of declining property values and loan maturities one to three years out.
Residential Real Estate
New England residential real estate markets continue to be weak, with only a couple of exceptions. Most states in the region experienced 10 percent to 20 percent year-over-year declines in home sales in March or April. Despite favorable interest rates, low prices, and the first-time homebuyer tax credit, contacts say concerns about employment and the overall economy are still holding back the market. Median home prices declined 10 percent or more year-over-year in every state in the region, with Rhode Island's prices falling 27 percent in March. One exception was home sales in New Hampshire, which actually increased about 10 percent year-over-year in March and April; bank-owned properties were reportedly a significant part of this sales increase. Another positive sign came from Massachusetts, where the median home price increased a substantial (and non-seasonal) 8 percent from March to April. Additionally, several contacts continue to report increased activity, partly due to the tax credit, but they are uncertain about the degree to which it will translate into increased sales. Most contacts are reluctant to predict when prices will stabilize.
Condo markets continue to soften in New England, with sales volumes and median prices declining on a year-over-year basis. In Massachusetts in April, condo sales dropped 29 percent year-over-year, while the median condo price declined 14 percent. The upper end of the market, including vacation homes, is said to be quite stagnant. Overall, however, contacts seem a bit more optimistic than the last few months.