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Federal Reserve Districts

First District--Boston

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Economic conditions continue to show improvement in the First District. Respondents in the manufacturing, software and IT services, staffing, and residential real estate sectors indicate that demand continues to strengthen, with several manufacturing contacts citing better-than-anticipated increases. Commercial real estate markets remain very weak, but respondents say they may be stabilizing. Recession-imposed hiring and pay freezes are being removed and prices are largely steady.

Contacted retailers in the First District report mixed sales results for the early months of 2010. Year-over-year same-store sales vary from negative mid single-digits to positive low double-digits. Respondents reporting growth attribute it in part to consumers who continue to seek value-priced products, while contacts with softer sales attribute them in part to recent inclement weather. All retail respondents are cautious in their outlook.

Contacts continue to manage inventory levels carefully, with several retailers reporting decreases from a year earlier. Capital spending remains cautious; a few contacts are considering favorable expansion opportunities and others report plans for store remodels or IT spending. First District retailers tell of increasing headcount in line with new store openings as well as opportunistic hiring of talent. Wages remain mostly steady, although one respondent reports restoring bonuses and merit increases. Vendor and selling prices are said to be stable.

Manufacturing and Related Services
Most manufacturing and related services contacts headquartered in the First District report that demand continued to strengthen in early 2010, in some cases by more than they had anticipated just a few months earlier. Manufacturers of semiconductors and related equipment report sharp snap-backs in orders, resulting in dramatic increases in backlogs, as well as some component shortages and production bottlenecks. An IT equipment maker indicates that demand continues to be strong in the first quarter, resulting in an ample backlog. A food processing firm also says that it is scrambling to meet customer demands for higher volumes and faster deliveries, while at another consumer goods company, European sales in particular are "racing back up" to healthier levels. Biopharmaceutical makers continue to report solid growth in sales. Some other respondents note that their customers remain cautious, but that sales are at least stabilizing after a period of considerable declines.

According to most responding manufacturers, input costs are largely holding steady. Metals prices are the main exception, with some rising and others decreasing. Most contacts are holding selling prices unchanged, except for a few that implemented increases of 2 percent to 3 percent at the beginning of the year. Some respondents note that they or their customers are applying less pressure on vendors to make price concessions as a consequence of a growing emphasis on ensuring reliable deliveries.

Most contacts plan to hold domestic headcounts relatively steady or increase them somewhat in coming months. Only a few firms are planning staffing reductions in 2010. Net hiring is concentrated on scientific, engineering, and other technical occupations. Manufacturers that had implemented pay cuts have now mostly restored wages and salaries to their previous levels. Almost all respondents that had suspended 401(k) plan matches have resumed making matches or expect to do so shortly. 2010 merit pay increases are expected to be in the range of 3 percent to 3.5 percent at most contacted companies.

Most manufacturing respondents are planning to increase capital spending in 2010. Many mention that they will be expanding their capacity to perform R&D or produce new products.

Manufacturers and related services providers describe themselves as either hopeful or optimistic about business conditions over the coming six to 12 months. However, contacts in the semiconductor industry express some concern that sales trends could weaken in the second half of 2010, given the unexpectedly vigorous pace of recovery in recent months.

Software and Information Technology Services
First District contacts in the software and information technology sectors largely report increased activity--ranging from slight upticks to significant growth--through the end of Q4 2009 and into Q1 2010; however, a few respondents caution that business conditions remain fragile and unpredictable. Contacts generally report increased demand across the board, including the financial, medical, and government sectors, although some corporate clients remain hesitant to spend money. One contact also notes that pricing pressure from competitors remains aggressive. While some firms have reduced headcount in recent months, others continue to add personnel; however, salary freezes from 2009 have been lifted, with anticipated merit increases generally in the 3-percent to 5-percent range. The outlook among New England software and IT contacts is more positive than in prior months, with 2010 largely expected to be a growth year. Despite these improved expectations, the possibility of a double-dip recession or a slow recovery remains a major concern.

Staffing Services
The majority of New England staffing contacts report that business continues to strengthen, although a few have experienced stagnant or volatile activity over the past three months. Yearly revenues for 2009 were generally 10 percent to 30 percent below 2008 revenues; however revenues continue to rise over-the-quarter. Labor demand has generally increased across industries, with notable improvements in the financial and manufacturing sectors. Increased activity is also reported in the medical, aerospace, and semiconductor industries. While the demand for direct hires remains depressed, several contacts noted increased conversion of temporary workers to permanent status. Labor supply remains plentiful, although candidate skills do not always meet client demand and an elongation of the hiring cycle persists. The downward pressure on bill rates throughout 2009 has lessened, and some applicants are no longer willing to accept lower pay rates. All First District staffing respondents anticipate improvement during 2010, with most expecting growth for the year to be in the 10-percent to 20-percent range.

Commercial Real Estate
Contacts report modest signs of improvement in commercial real estate markets across the region. In Boston, leasing activity in January and early February, while still light, was up from the preceding quarter as well as year-over-year. However, recent activity has typically involved renewal of existing leases, and renewing tenants, in many cases, gave back space. Net absorption remains slightly negative as increases in vacancy have moderated. Boston's downtown vacancy rate was described as "a soft 16 percent" in the fourth quarter, while the Route-495 corridor is faring much worse, with vacancy rates between 25 and 30 percent. In Boston and Providence alike, renewing tenants have pushed to lock in currently low rental rates over the leasing term. Providence saw a moderate uptick in leasing activity in recent weeks, including activity occasioned by relocation and expansion of health and educational institutions. The class A downtown office market has held up relatively well, with a current vacancy rate of 9.5 percent, while class B downtown office space has a vacancy rate of 15 percent. In Hartford, leasing activity remains "very light" and absorption is still slightly negative, but the retail market has fared better than expected and our contact saw a bit more enthusiasm in the local economy overall in recent weeks.

Sales transactions in greater Boston, also up on a year-over-year basis, remain limited to the highest-quality properties, for which there is brisk demand from investors seeking to add real estate back into their portfolios without taking on excess risk. Investment sales have been "few and far between" in Rhode Island. While contacts report that credit conditions for commercial real estate have eased on a year-over-year basis, they remain watchful of rising commercial defaults both regionally and nationally and expect significant further write-downs of commercial real estate portfolios. A Boston banker reports that his bank's balance sheet remains in excellent shape, however, and that the bank has sought aggressively to make new commercial loans in recent weeks.

One contact remained pessimistic concerning the outlook for the next six to 12 months, and the rest were cautiously optimistic. The caution came from concerns that recent upticks in leasing activity may prove unsustainable, especially if weak job growth (if not job losses) persists; one Boston contact thinks that rents in the city have further to fall.

Residential Real Estate
Home and condo sales continued to show significant year-over-year increases in December 2009, belying concerns that year-over-year declines would recur after the huge sales increases in November that were mainly attributed to the first-time homebuyer tax credit. Part of the continued strength may be due to the extension of the tax credit through April 2010 and expansion of the tax credit to include some existing homebuyers. Contacts report year-over-year home sales increases between 15 percent and 36 percent across the six New England states; condo sales increased between 29 percent and 66 percent year-over-year. January data from the Boston area show these home and condo sales trends continuing into 2010. While foreclosure sales and short sales made up 33 percent of sales in December in Rhode Island, this represents an improvement from 43 percent in December 2008.

Home prices also showed signs of improvement in December. While the median home price declined slightly year-over-year in December in New Hampshire, it increased modestly in Connecticut, Rhode Island, and Maine, and rose more substantially in Massachusetts (11 percent) and the Boston area (20 percent, and then 6 percent in January year-over-year). The median condo price fell year-over-year in December in Rhode Island but increased in Massachusetts, Connecticut, and New Hampshire. The median condo price in the Boston area increased 27 percent year-over-year in January.

Several contacts believe that sales will continue to increase year-over-year for the next few months while the expanded tax credit is still available. A Boston contact reports that traffic at open houses has been steady. Pending sales numbers for Massachusetts were strong in January.

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Last update: March 3, 2010