October 20, 2010
Federal Reserve Districts
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Economic activity continues to exceed year-earlier levels according to most business contacts in the First District. Retailers cite somewhat more positive results than they did six weeks ago. Manufacturers report continued growth, although some at a slower pace recently than in the first half of the year. Consulting industry contacts also indicate sales are higher than a year ago. Commercial real estate markets remain in the doldrums, while sales of residential properties remain below year-earlier levels, as they have since the expiration of homebuyer tax credits. Hiring among retail, manufacturing, and consulting firms remains limited and these contacts expect continued growth, albeit at a modest pace. Indeed, across all sectors, the outlook appears to be "more of the same."
Inventory levels are in line with expectations and capital spending is generally on target. Headcounts are either stable or growing modestly, with most increases attributed to new store growth. One respondent notes significant cost increases for food commodities, particularly dairy, nuts, and bacon. The majority of contacts believe the recovery will be slow and steady, and even those retailers reporting sales increases characterize themselves as cautiously optimistic.
Manufacturing and Related Services
Inventory levels at most contacted firms remain low, and a few are trying to bring their inventories down further. Many respondents reduced inventories in response to the economic turmoil in 2008 and 2009 and plan to maintain low inventories and lean operations going forward to improve profitability. In contrast, one semiconductor firm has a large backlog of orders and is struggling to keep up with demand from the auto industry. A few firms are facing pricing pressures from rising input costs. In particular, the cost of steel and copper continue to rise as does the cost of wheat, which is used by a food products manufacturer. One responding firm increased prices modestly earlier in the year and anticipates having to raise prices another 1 percent to 3 percent between now and the first quarter of next year to cover rising steel costs. Other companies facing price pressures have strategically increased prices for some of their products and have met little resistance.
Hiring continues to be limited amongst contacted manufacturing firms; the few companies noticeably increasing headcount are doing so overseas. Several companies are hiring to replace workers lost to attrition or retirement, but nearly all respondents are maintaining their existing U.S. headcounts. These firms say they do not plan to do any substantial hiring until the demand environment noticeably improves and current levels of economic and fiscal uncertainty subside.
Capital spending plans at most manufacturers remain moderate. Most contacted firms continue to report that capital expenditures are in line with plans; none anticipates any big changes in capital spending heading into 2011, although nearly all report that their current financial position and ability to invest are excellent.
Overall, the firms contacted are slightly less optimistic about growth in 2011 than in the last few conversations. This softer outlook reflects both the recent softening of demand relative to earlier in 2010 and continued uncertainty surrounding consumer demand and the regulatory and tax environments.
Selected Business Services
Prices are stable for most consulting contacts, with the exception of one firm that raised prices 5 percent. While not raising list prices, contacts have been able to eliminate discounts they offered to maintain business throughout 2008 and 2009. While most consulting respondents are only replacing workers leaving through natural attrition, some added a small number of new employees, increasing headcounts by 5 percent to 10 percent; one firm, by contrast, expects to downsize slightly next year.
Based on improved demand seen in September and early October, all the consulting contacts are optimistic about the last quarter of 2010 as well as about next year's performance. Most expect about 10 percent annual growth for 2011.
Commercial Real Estate
In positive news from the sales market, Boston's Hancock Tower sold recently at a markup of 40 percent over its foreclosure auction price in March 2009. In contrast, a downtown Boston office building with high vacancies is being sold for less than half of its 2007 price. Despite uneven performance and limited volume in the big-ticket property market, a Boston-based bank that targets smaller-ticket properties is having one of its best years ever in terms of commercial real estate loans booked, although most of its lending activity involves refinancing rather than new acquisitions. The bank also reports that a previously non-performing retail-property loan resumed payment.
Boston contacts do not expect significant commercial real estate improvements in the near future unless the labor market heats up considerably. A Providence contact is optimistic that leasing volume will hold up in the coming months, but also noted some risks on the horizon. A Portland contact expects his firm's brokerage volume to improve in 2011 over 2010 and sees potential expansion in some (but not all) sectors of Portland's economy.
Residential Real Estate
Pending sales figures for Massachusetts suggest that September's final sales will also be below a year ago. Contacts around the region forecast flat sales or continued year-over-year declines for the rest of 2010. As of August, all six New England states report year-to-date home sales above last year, but most contacts expect that by the end of the year the total number of sales will be about even with 2009.