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Federal Reserve Districts

First District--Boston

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Business contacts in the First District report improving economic conditions. Most responding retailers, manufacturers, staffing firms, and software and information technology services companies cite increases in sales or revenue compared with a year ago, and in some cases, strong increases. Commercial real estate markets across New England are stable to improving, while residential markets remain weak. Both retailers and manufacturers mention price pressures from specific commodities, including copper and oil, with some pass-through to customers. Firms in several sectors are doing or planning some hiring, generally at a modest pace. Outlooks are positive, with firms in most sectors expecting either steady or improved growth in demand for their products and services.

First District retailers report positive sales results for the months of December through early February, with comparable same-store sales increases ranging from low single-digit percentages to low double digits. Respondents are generally pleased with holiday shopping results; however, while a hardware contact benefited greatly from repeated snowstorms, others speculate that the inclement weather had a negative impact on their stores' sales.

Retailers say they are tightly managing inventory levels. Contacts note cost increases for commodities, including cotton, copper, and plastics, and they expect vendor price pressure to continue or increase in the future. Reflecting those pressures, most respondents report they are implementing more increases in selling price than three or six months ago. They continue to raise headcounts in line with new store openings and report that capital spending plans are in line with expectations for the year. Outlooks are generally cautiously optimistic, with most contacts continuing to forecast slow and steady improvement in 2011.

Manufacturing and Related Services
The vast majority of responding manufacturers finished 2010 with strong sales and have a positive outlook about current business conditions. A manufacturer that sells automobile and other components reports that sales in 2010 were its "best ever" and that sales growth has returned to its pre-recession pace partly because of strong demand from Asia. In addition, a number of firms in the semiconductor and pharmaceutical industries report better than expected growth in Q4; one semiconductor firm, in particular, indicates that sales were well above their pre-recession levels.

Most contacted firms note that business has stabilized and appears to be continuing on a favorable trend in early 2011. This includes a few manufacturers whose outlooks were more negative three or four months ago. In contrast, a business equipment supplier's report was more subdued, as its clients continue to extend leases on existing products rather than upgrade to newer ones. Firms that produce products for the housing market also report some continued weakness, as does a manufacturer of retail goods catering to lower income consumers. This firm notes that the weakness in demand has continued into the first part of 2011, but it does not anticipate a prolonged slowdown.

Many manufacturers report concerns over the rising cost of raw materials such as steel, copper, and rare earth metals, as well as oil and plastic resins. A defense contractor contact says he is much more concerned about rising raw material costs now than three months ago, especially since most of the firm's selling prices are fixed by long term contracts. Other manufacturers report raising their selling prices 3 percent to 6 percent in early 2011 in response to higher costs, although one is unsure whether the increases will stick. A number of contacts worry that raw material prices are headed back to their early 2008 levels. Firms with limited raw material exposure, however, continue to report stable prices.

Some manufacturers report higher inventories than a year ago or plan to increase their current inventory levels somewhat. Some of this restocking is in response to higher demand, while other firms are hedging against supply chain disruptions and/or higher expected input costs. The pickup in demand has resulted in plans for additional hiring at some firms; other firms also plan to add workers as part of ongoing hiring plans or to better position themselves for expected future demand. Hiring rates remain relatively low, however, and two contacted companies plan modest layoffs as part of ongoing restructuring. In addition, most responding firms plan to increase wages 2 percent to 3 percent in 2011--a lower rate of increase than in the pre-recession years; a few firms, however, plan slightly higher wage increases for more skilled workers to address increasing recruitment and retention difficulties.

Capital spending plans are reportedly on par or somewhat higher this year than last year. In general, firms that plan to increase investment said that they need to upgrade or expand existing structures and systems; some of this increased investment will be directed toward production facilities overseas. Overall, contacted manufacturers seem more upbeat now about current and future economic conditions than in recent months.

Software and Information Technology Services
New England software and information technology firms report increased activity through the end of Q4 2010 and into Q1 2011. Year-over-year revenue increases range from 3 percent to 25 percent in the most recent quarter, with most in the double digits. Contacts report increased demand for software and IT services from the industrial, medical, and education sectors, although some corporate clients remain unwilling to finalize deals. Increased activity has led most respondents to increase their headcounts; indeed, two plan to grow their staff by 10 percent in 2011. Wages continue to trend upward, with most respondents awarding annual increases in the 3 percent to 5 percent range. Selling prices are steady, and two contacts observe less discounting pressure than a year ago. Capital and technology spending at contacted firms is relatively unchanged. The outlook among software and IT services respondents is generally positive, with most expecting steady or faster revenue growth in 2011.

Staffing Services
New England staffing contacts report that the upward trends of 2010 are continuing. Revenues are flat to increasing year-over-year, with increases in the range of 5 percent to 20 percent. Labor demand has generally increased, with notable improvements in the manufacturing, information technology, and medical sectors. Higher activity is also reported in the legal sector, with increased demand for paralegals and business support personnel. Conversions from temporary to permanent hires continue to strengthen, and a few contacts report an uptick in permanent placements. Labor supply is tightening somewhat in the region, especially at the high end, with most contacts reporting increasing difficulty finding qualified candidates for high-skill jobs. The downward pressure on bill rates seen throughout the first half of 2010 has lessened and pay rates are holding steady. Looking forward, First District staffing contacts are generally optimistic, predicting that the rest of 2011 will bring continued growth.

Commercial Real Estate
The latest reports indicate that commercial real estate fundamentals in New England are either stable or moderately improving, depending on the location. In Hartford, vacancy rates and rents are roughly unchanged since the last report; job growth and associated office demand are currently sluggish, but are expected to improve by summer 2011. In greater Boston, vacancy rates were little changed, leasing volume held steady, and office rents edged up slightly, bouncing back from the trough of the recent downturn. Loan terms for greater Boston properties loosened slightly amid increased competition by lenders. The outlook among Boston contacts is for modest, if not rapid, growth and improvement in office and retail fundamentals in the coming months. In Providence and Portland, limited leasing activity in January was attributed to bad weather and contacts expect slow yet positive absorption of commercial space in 2011. Construction activity is limited across the region, with the exception of the multifamily sector and various small-scale rehab projects in the Boston area.

Residential Real Estate
Residential real estate results were mixed across New England in December, with some states experiencing year-over-year sales declines while others saw modest increases. Home sales continued to decline significantly in Rhode Island, Connecticut, and Maine, while Massachusetts and New Hampshire posted modest increases in sales volume compared with a year ago. Contacts in Massachusetts and New Hampshire note that part of the increase in year-over-year sales stems from especially weak sales in December 2009, attributable to the (initial) expiration of the homebuyer tax credit in November 2009. Nonetheless, contacts throughout the region note an increase in activity in the past month and express cautious optimism about 2011.

Compared with a year earlier, the median price of homes moved upward in December throughout the region except in Massachusetts, where the median price decline was the first in over a year. Contacts anticipate sales declines for the early months of 2011 as a result of recent snowstorms. Pending sales of homes and condos in Massachusetts fell in January compared with a year ago.

Contacts throughout the region expect modest increases or flat sales in 2011. However, some note that 2011 comparisons with sales in the first six months of 2010 may be misleading, as home sales in that period were boosted by the homebuyer tax credit.

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Last update: March 2, 2011