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Federal Reserve Districts

First District--Boston

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Many business contacts in the First District report improving economic conditions. Firms in manufacturing, software and information technology, and staffing services cite ongoing increases in demand, with manufacturers reporting the most strength. Commercial real estate markets are improving modestly, retail reports are mixed, and residential real estate markets remain weak. Both retailers and manufacturers report input cost increases, which they are generally passing along to customers. Labor markets, by contrast, are seeing some net hiring, but wage increases remain subdued. Outlooks remain generally optimistic, although cautious.

First District retailers report mixed sales results for the period from late March through mid May, with comparable same-store sales ranging from low double-digit decreases to low single-digit increases. A few contacted retailers mention decreases in demand, and all express concern about the negative impact of rising fuel prices on their own costs, especially shipping, and on consumers' shopping habits.

Inventory levels are mixed, with one retailer explaining inventory has been temporarily increased due to global supply concerns, such as output disruptions in Japan. Contacts note steep price increases for commodities, including cotton, dairy, grains, meat, produce, and nuts; they are passing along price increases where possible. Headcount changes are mixed, as some firms add people in line with new store openings and select hiring opportunities, while one has cut jobs and anticipates outsourcing select positions. Capital spending is mixed. Outlooks range from concerned to cautiously optimistic.

Manufacturing and Related Services
Business conditions continue to be good at surveyed manufacturers. A parts manufacturer for autos and other vehicles reports that it is struggling to keep up with increased demand. A firm in the semiconductor industry also cites very strong sales growth in the first quarter of this year continuing into the second quarter. Reports from local pharmaceutical manufacturers are also favorable, especially compared with the end of last year, and a company in the medical devices business notes improving sales of its traditional product line after a lengthy period of very sluggish growth. Overall, contacted manufacturers are cautiously optimistic that growth will continue at a reasonable pace for the rest of the second quarter and into the second half of the year. Some firms, however, expect sales growth to moderate somewhat, in part because the second half of 2010 was strong for many respondents.

Commodity prices continue to be a concern for manufacturers whose production inputs include petroleum or gas-related products and/or firms that use a lot of metals such as steel. Most of the affected companies have already raised prices with little push-back from their customers, and a number of them plan to implement further price hikes this summer. By contrast, a pharmaceutical company with overseas sales notes downward pressure on their selling prices to government health care systems in Europe, which they attribute to ongoing fiscal imbalances across the Euro-area and related interventions to reduce costs and government debt. Some firms still report modest supply chain disruptions because of the earthquake in Japan (mostly semiconductor-related and other high tech inputs) or worldwide demand-related shortages of selected petroleum-related products. However, one affected firm notes that supply conditions have improved slightly recently and others say they continue to make adjustments to avoid a big impact on their production or sales.

The employment situation at surveyed manufacturers continues to be relatively stable, as many continue to try to increase output using existing workers. A semiconductor firm notes that the cost of this year's merit raises will be offset through other productivity gains, so the overall cost impact is negligible. Those firms that are hiring are doing so at a relatively moderate rate to meet increased demand for existing or new products. In particular, some pharmaceutical companies plan to meet increased demand by increasing their headcounts between 5 percent and 10 percent. Much of the hiring and investment at contacted firms is occurring overseas as they look to expand their operations, especially in Asia. Most respondents have already or plan to institute merit increases for their employees in 2011, ranging between 2 percent and 5 percent, which they note are a little lower than before the recent recession.

Capital spending at most contacted manufacturers continues to be in line with previous years. A few companies, however, are investing more in order to adjust their capacity to meet increased demand. Overall, the outlook for the contacted firms is favorable and most respondents seem somewhat more upbeat than at the beginning of this year.

Software and Information Technology Services
New England software and information technology firms report modest increases in activity through May. Year-over-year revenue increases, ranging from 4 percent to 20 percent, were generally driven by increases in software license revenues, while maintenance contracts grew at a slower rate. Contacts report pick-ups in demand across sectors, including manufacturing, financial, and medical. Increased activity has led to increasing headcounts, many by more than 5 percent from a year ago. Contacts generally cite a tightening labor market, especially for specialized technical positions, but note that it has not resulted in upward pressure on wages. Selling prices are holding steady, although half of responding firms observe less discounting pressure currently than in Q4 2010; in fact, two contacts plan to raise prices modestly later this year. Capital and technology spending is mostly steady, with only two contacts reporting an increase in outlays. The outlook among software and IT services firms remains positive, with most expecting their current rate of growth to continue through the end of 2011.

Staffing Services
The majority of New England staffing contacts report that business conditions continue to improve, although a few have experienced stagnant or volatile activity over the past three months. Revenues are flat to increasing year-over-year, with increases from 3 percent to 35 percent. Labor demand continues to strengthen, with notable improvements in the information technology, medical, manufacturing, and legal sectors. However, a few contacts lament an elongated hiring cycle, with employers "still waiting for the perfect candidate." Demand for permanent and temporary-to-permanent hiring continues to trend upwards-a sign that "things are heading in the right direction." Labor supply, at least at the high end, continues to be tight in the region. Bill rates and pay rates are steady, with most contacts reporting only modest changes. Looking forward, most New England staffing contacts are more positive than they were three and six months ago, predicting strong growth in the rest of 2011.

Commercial Real Estate
Across the region, contacts report that commercial leasing activity remains modest, especially in the office sector where job growth has been tepid. The Hartford office market shows very light leasing activity and negligible absorption. In Providence, office leasing volume was also very light, but rents are said to be firming up. Office leasing activity in Boston is described as slow-to-moderate, and some say recent activity is slower than in the first quarter. Boston deals consist largely of tenant renewals, resulting in little net absorption. The biotechnology and pharmaceuticals sector in Boston is seen as comparatively dynamic, generating strong demand for office space in Cambridge and planned new construction in Boston's waterfront area. In Portland, activity is flat for the most part, although at least one significant office leasing deal was signed. Investor interest in apartments remains strong in Boston, with some contacts expressing concern that sales prices are getting too high; interest in prime office properties also strengthened in Boston. The lending environment for commercial real estate is described as increasingly favorable to borrowers. The outlook among contacts is cautiously optimistic. All expect at least slow growth in office and retail demand for the remainder of 2011 and some see potential for significant improvement in market conditions by early 2012, although a few mention risks posed by fiscal conditions and related political uncertainty at both the state and national levels.

Residential Real Estate
Residential real estate markets throughout New England experienced significant declines in sales and median prices in April compared to a year earlier. Contacts attribute the sales declines to the homebuyer tax credit, which boosted sales for the first half of last year. Condominium sales fell during the same period, and the median price of condos slipped across much of the region. Most contacts see job security as a significant hurdle in the recovery of the residential real estate market. Several contacts also note that stricter lending requirements among large banks have shrunk the potential pool of homebuyers. In general, contacts report that potential buyers are anticipating further price declines and sellers continue to price homes competitively in order to find a buyer quickly. While overall market activity remains weak, respondents see some improvement in the medium to high-end segments of the market.

Contacts throughout the region expect year-over-year declines to continue for the next few months because of last year's homebuyer tax credit. Although several contacts believe that much of the New England real estate market has begun stabilizing, they caution that a lengthy recovery still remains.

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Last update: June 8, 2011