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Federal Reserve Districts

First District--Boston

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Reports from business contacts in the First District continue to be varied. Both manufacturers and retailers cited mixed results when contacted in the first half of July. However, retailers are somewhat more upbeat now than in the last Beige Book report, while manufacturers seem marginally less positive. Consulting and advertising firms report strong demand. By contrast, residential real estate markets remain soft; although median sales prices are rising in some areas, sales volumes continue to decline.

Retail respondents in the First District report mixed results for the early summer months. Same-store sales range from low double-digit decreases to low double-digit increases year-to-date. Sales of men's apparel, footwear, sporting goods, air conditioners, pool-care and gardening items were strong, while women's apparel sales were soft. One restaurant chain reports a positive uptick in sales in the Boston region. Another restaurant company reports that while same-store sales are still down slightly from a year earlier, sales are turning around. A lumber company reports that sales continue to be off from last year because of the weak local housing market.

Inventory levels remain in line with expectations. Most respondents report energy-related price pressure, with several retailers passing along small price increases to their customers. In addition, dairy, beef, chicken, and liquid sugar prices are all expected to rise. Capital spending plans are mixed, with several retailers putting plans on hold while sales remain soft.

A tourism contact reports that international tourism is weaker than in previous periods, possibly due to rising international tensions and increased security measures. Nonetheless, employment remains strong in the hotel industry.

Overall, most retailers remain cautiously optimistic.

Manufacturing and Related Services
Manufacturers and related services providers headquartered in the First District report that sales and orders were mixed in the second quarter. About one-half of the contacts say business was off from year-ago levels, mostly as a result of weak demand for home construction and renovation products, automotive parts, and consumer goods. In addition, some firms have dropped business lines with weak margins. Most of the remaining manufacturing respondents report that sales are growing at "normal" rates, the same as in recent quarters.

Manufacturers indicate that overall materials costs are stable or rising less than they did in 2006, but they express concern that metals costs remain high or volatile. Some companies foresee possible increases in utility rates as contracts expire. About one-half of contacts say their selling prices are holding stable or decreasing in line with prior trends. The remaining firms mostly indicate that selling prices are up about 2 percent to 5 percent from year-earlier levels, or that they plan such increases by yearend.

Manufacturers and related services providers expect their U.S. headcounts to be little changed in 2007. Average wage and salary increases are remaining in the range of 3 percent to 4 percent, but pay raises typically are higher for skilled personnel in areas such as finance and IT. For the most part, contacts continue to report that labor markets for skilled workers are tight but not problematic. Domestic capital spending plans vary, depending on factors such as product and technology cycles.

Manufacturers express guardedly positive views concerning the outlook for the coming year. For the most part, they expect demand to hold steady or increase at a subdued pace.

Selected Business Services
Most responding First District advertising and consulting firms enjoyed robust demand for their products and services in the second quarter of 2007, with several contacts reporting double-digit year-over-year revenue growth for the quarter. Only one marketing firm has been experiencing "soft" demand over the past three months, with revenues growing more slowly than they expected. Respondents attribute strong growth to expansion in many of the sectors they serve, including healthcare, pharmaceuticals, financial services, technology, and private equity. Consulting contacts observe that demand for services related to operational effectiveness and cost rationalization remains strong. One marketing contact reports rising demand for the interactive aspects of branding, while another notes an increase in demand for the creation and placement of online campaigns.

While two firms are facing downward pricing pressure from clients, two others have been able to increase their selling prices by 5 percent to 10 percent over the last year. The rest have kept their prices relatively constant. With the majority of responding firms either "reengineering" or expanding their workforce, the primary cost concern among respondents is labor. Companies are finding it increasingly difficult to attract and retain quality employees and are seeing upward pressure on wages. Despite these concerns, most contacts are optimistic in their outlook, expecting growth to continue at its current pace for the rest of the year.

Residential Real Estate
Price appreciation may be returning to several New England housing markets. Following flat to declining year-on-year prices in previous months, the median price for single family homes sold in Massachusetts increased 0.7 percent from May 2006 to May 2007. Condominium prices in Massachusetts remained above year-earlier levels, with appreciation of 1.4 percent in the median selling price from May 2006 to May 2007. Connecticut contacts also report increased overall prices, while the New Hampshire market features stable to declining prices versus year-before levels.

News of higher selling prices is tempered by lower transaction volumes and lengthening times on the market across the region. The volume of single family homes sold in Massachusetts decreased 7.5 percent from May 2006 to May 2007 while average days on the market increased from around 120 to nearly 140 days over this same period. Contacts in Rhode Island, Connecticut, and New Hampshire all cite declining year-on-year transaction volumes and some report specific locations and price segments with markedly reduced activity. Despite lower transaction volumes and increased days on the market, much lower total listings have led contacts to report that supply is returning to more normal levels. Supply in the Massachusetts single family market declined from 11 months' supply at current sales rates to 9.5 months between May 2006 and May 2007, as condominium supply fell from 10.4 months to 7.8 months.

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Last update: July 25, 2007