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Federal Reserve Districts

First District--Boston

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Revenue reports from First District business contacts suggest some softening since the last Beige Book. Most contacted retailers say revenues are down from a year ago. Manufacturers� results are mixed, and so are those of staffing firms. Software and IT services companies report demand increases, while real estate respondents say New England commercial markets continue to firm. Labor markets remain tight for skilled and technical workers.

Retail contacts in the First District, with little exception, report declining sales for the months of January and February. The negative report partly reflects the respondent group, which lacks any big-box or department stores. Same-store sales ranged from low to high double-digit decreases from a year earlier. The only exception was a pharmacy chain, which reported that same-store sales had increased around 8 percent.

A surplus and salvage store reports that sales have �not been good at all,� with January being one of the worst months in the last five years. Same-store sales are down almost 9 percent, and customer count has dropped by about 6 percent. Fuel prices and the weather are cited as possible contributing factors. An auto-dealership association says sales continue to be �absolutely awful,� as many dealerships are �trying to hold on.� A home entertainment contact reports that total sales are down because of a sales fall off in the projection television category, partly attributed to losing market share to national discount chains.

Inventory levels are generally up because of the unexpected downturn in sales. Several retailers report reducing headcounts, and one contact notes �enormous� wage pressure. Capital spending is mixed.

A tourism contact reports that tourism and travel in the Boston metropolitan area has not been as strong as expected, particularly with regards to leisure travel. Business travel remains strong. Hotel occupancy is about 2 percent below expectations, and revenue per available room has decreased a little over 1 percent; room rates, however, continue to rise. The respondent was enthusiastic about the upcoming baseball season, and forecast that the recent signing of several new players to the Red Sox will boost tourism and travel, particularly foreign. Another tourism contact reports that the lack of snow has caused a �really tough winter� for the northern New England states. The new ownership of several major ski mountains in the region is expected to bring fresh management approaches.

Overall, most contacted retailers do not have a bright outlook. The tourism and travel outlook is mixed, with business travel expected to remain strong.

Manufacturing and Related Services
First District manufacturers and related services providers report mixed results for late 2006 and early 2007. Contacts report that weakness in the residential construction, automotive, and semiconductor sectors is causing sales and orders for plastics, home equipment and furnishings, and certain other equipment categories to be flat or down from year-ago levels. With some exceptions, makers of aviation, industrial and commercial construction equipment continue to experience strong or growing demand for their products.

Manufacturers indicate that metals and energy costs generally have stabilized or come down from their recent peaks. Some firms remain concerned, however, that energy price levels remain high, causing continued surcharges. With input cost pressures abating, respondents mostly expect their selling prices to remain stable or rise modestly in 2007.

Most manufacturing respondents expect their U.S. employment levels to hold steady or decrease in 2007. Firms are adding product development and sales positions while continuing to cut back on production and back office positions through outsourcing or relocation offshore. Finance, supply management, and machinist slots reportedly remain hard to fill. Average merit pay increases are expected to be typically in the range of 3.5 percent to 4 percent, the same as or slightly greater than in 2006. Very few contacted manufacturers plan to undertake significant domestic capital spending projects this year.

On the whole, manufacturers continue to expect their sales to increase in 2007, but some express concerns about the economy or their competitive position. Several contacts now warn that the weakness in housing markets may linger longer than they and others had anticipated.

Software and Information Technology Services
The majority of software and IT services contacts in the First District report high single-digit to low double-digit year-over-year revenue increases, with particularly strong growth in the health care segment. However, software firms serving New England�s public sector are concerned that pressure on state and local governments� budgets will adversely affect that part of their business in the upcoming fiscal year. Most responding New England software companies have left selling prices unchanged as a result of a competitive market environment.

Contacted companies are generally adding technology workers, with companies serving the healthcare sector reporting that they are hiring aggressively in order to keep pace with demand. All of the firms with plans to hire report that the labor market remains tight, especially for specialized technical positions. Respondents report annual wage increases for most employees between 3 percent and 7 percent, with many firms increasing the wages of software engineers and software developers by more.

New England software and information technology firms are generally positive in their outlook, with most respondents anticipating steady growth for the first half of the year.

Staffing Services
Most responding New-England based staffing firms experienced a slower-than-usual holiday season in 2006, with business picking up again in early 2007. However, reports are mixed regarding demand levels and growth rates. One contact reports 40 percent top-line revenue growth in 2006, and states that business has been robust since the holidays. Another is less upbeat, reporting that business is �very, very slow� in the Boston area, and estimating that revenues for his firm are down about 7 percent since November. Reports from two other respondents fall between these two extremes.

According to New England respondents, demand for staffing services is highest in the high-end sectors including finance, biopharmaceuticals, engineering, and information technology (IT). This is consistent with the report from a contact at a large national staffing firm, who cites low single-digit revenue declines, both within New England and nationally, in the current period, but notes that the firm�s professional business, which includes IT and engineering, is experiencing double-digit revenue growth.

Supply of skilled labor remains tight, but there has been no significant change since last quarter. Bill rates and pay rates are steady or up slightly, with most contacts suggesting that increases are a result of more high-end placements as well as short supplies of skilled workers. Contacts are fairly optimistic about the remainder of 2007, expecting business to either pick up slightly or hold steady.

Commercial Real Estate
Commercial real estate investment in Boston doubled from 2005 to nearly $8 billion in 2006 according to one regional real estate contact. Other regional markets have also seen considerable increases in commercial investment. Contacts note that real estate yields continue to decline as prices increase faster than leasing fundamentals.

Rents across the region remain steady to increasing while vacancies trend downwards. Boston�s core business district features vacancy rates around 8 percent, with rents about $43 per square foot. Both Hartford and Providence exhibit stable rents and stable to decreasing vacancies. Contacts cite overall job creation and industrial growth for life science and biotechnology sectors as sources for improved leasing fundamentals. Selected suburban office markets around Boston and Hartford enjoy particularly low vacancies and increasing rents.

Contacts expect rents to continue to increase and vacancies to decline. Key concerns remain job creation and declining real estate yields.

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Last update: March 7, 2007