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Federal Reserve Districts

First District--Boston

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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."

First District retailers report mixed sales results for September and early October. Year-over-year same-store sales range from decreases in the low single digits to increases in the mid single digits. Contacts note that consumers are increasingly responsive to "getting a good deal;" those with increases attribute the uptick in sales to strong marketing, promotional activity, or stocking "the right mix of products" at discounted prices.

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
Nearly all contacted manufacturing firms report continued sales growth in the second half of the year after very strong first-half results. One semiconductor firm reports record sales and profitability in the third quarter and other firms selling into semiconductor-related markets also report robust growth. Some of this growth is fueled by strong demand overseas, but some is also coming domestically from the auto industry. Business also remains very strong at a technology services firm. However, a number of firms note that even as sales continue to increase on a year-over-year basis, demand has slowed relative to the first half of 2010. One firm, which manufactures products for the residential real estate market, attributes this deceleration to some of its customers destocking after buying in anticipation of second half demand that never fully materialized; this firm expects sluggish demand going forward. Overall sentiment amongst responding manufacturers is that demand will continue to be subdued for the rest of the year and into 2011, although few, if any, expect conditions to worsen.

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
Consulting contacts in the First District all agree that demand improved significantly in the third quarter compared to a year ago. Most saw a slight decline in demand during July and August due to seasonality and a modest increase in demand during September. By exception, a healthcare consulting firm saw revenues rise 10 percent in the third quarter and 25 percent year-over-year; this contact explains that businesses are still responding to regulatory changes following healthcare reform, which keeps demand for healthcare consulting services strong. Another contact cites increased activity from IT companies and the private equity sector, but notes demand from the construction industry is still lagging.

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
Reports from commercial real estate contacts are mixed. In Boston, office leasing volume remains limited, with activity flat since August and weaker than during the first half of 2010. Boston's net absorption for office space is perceived as negative, while apartment vacancy rates are falling. In Portland, leasing volume has been flat since the last report but is up year-over-year, while competition for tenants remains aggressive. A Providence contact is more upbeat, describing net absorption as positive.

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
Sales figures for single-family homes and condos continued to come in below their year-earlier levels in August. Contacts throughout New England say the expiration of the tax credit coupled with a weak economy has slowed the housing market. Meanwhile, the median prices of homes and condos rose in August compared to last year, except in New Hampshire where the median home price slipped 2.7 percent. Inventory continues to rise throughout the region; most contacts interpret the increasing number of listings as a sign of confidence among sellers. Contacts in Massachusetts and Rhode Island believe the greater choice of inventory may help draw buyers into the market; by contrast, very high levels of inventory in New Hampshire are causing concern.

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.

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Last update: October 20, 2010