The Federal Reserve Board eagle logo links to home page

Beige Book logo links to Beige Book home page for year currently displayed November 30, 2005

Federal Reserve Districts

First District--Boston

Skip to content

New York
St. Louis
Kansas City
San Francisco

Full report

Economic activity continues to expand from year-earlier levels in the First District, but growth rates vary across sectors. Retailers say their sales results are mixed, with consumer purchases showing month-to-month ups and downs during the third quarter and early fourth quarter. Most manufacturers report year-over-year revenue increases; they express concern with intensifying energy-related cost pressures and uncertainty about their ability to increase prices. Firms in the staffing industry and software and information technology services sector also point to higher revenues; both expect revenues to continue rising through the end of the year and into 2006. Commercial real estate markets in Greater Boston remain flat.

First District retailers cite mixed sales results in the fall months. Same-store sales in the third and early fourth quarters of 2005 range from low double-digit decreases to up 5 percent year-over-year, although sales results for individual months varied. Products that sold particularly well include sporting goods, televisions, and some imported furniture sets; by contrast, casual apparel sales were disappointing. A contact in the drugstore industry says that business "feels good right now," and notes that foot traffic is up more than normal, possibly because consumers are less willing to travel to more distant competitors' stores while gas prices remain elevated. Another respondent reports that furniture sales have been flat, with most growth coming from new stores. A casual dining restaurant chain reports an unprecedented slowdown following Hurricane Katrina, with business only recently beginning to improve. Another such chain notes sales below expectations as consumers remain challenged by high energy prices.

Inventory levels are generally satisfactory, with several contacts reporting intentionally raising levels for the upcoming holidays. The majority of retail contacts note price pressures for petroleum-based products, but report that they are generally holding their selling prices stable. For the most part, employment is steady, with increases coming from new store openings.

Contacted retailers expect to finish the year on a positive note, but many remain cautious in their outlook. The effect of gas prices, expected high home heating costs, and the national mood on consumer confidence and spending are primary concerns for most.

Manufacturing and Related Services
Most First District manufacturers and related services providers report that third and fourth quarter sales and orders remain higher than a year ago. The percentage increases are typically in the mid-single-digit to low-double-digit range. Trends for energy and healthcare products and services have been particularly strong. Sales of equipment used in the semiconductor industry are running below year-ago levels but appear to be firming from their levels in early 2005. The furniture industry is said to be in a slump owing to declining consumer confidence and foreign competition.

Most respondents express strong concerns about rising costs of energy and energy-affected materials. For example, one contact reports "raw materials have really ratcheted up in the last three months," while another indicates that "raw materials costs are killing us." Almost all of the affected companies are trying to increase prices currently or have plans to do so in 2006. Some mention that they can no longer offset cost pressures by increasing productivity. By contrast with the norm, several equipment manufacturers remain relatively immune to cost pressures and report that their selling prices are largely holding steady.

Most manufacturers are keeping their domestic headcounts unchanged or are paring back slightly. They do not expect to face pressure for higher wage and salary increases in 2006, but many describe management of health insurance costs as a continuing challenge. Capital spending is said to be largely holding steady at subdued levels, except for additions to overseas capacity.

Manufacturers make frequent mention of downside risks in 2006. Many express concern that high energy prices or rising interest rates will damp consumer spending or squeeze profits. Some point specifically to housing or automotive markets as potential sources of weakness for their business. To the extent companies feel upbeat about the outlook, their optimism relates mostly to their own products or sales strategies.

Temporary Employment
All responding First District staffing firms enjoyed improving business conditions and revenue growth in Q3. However, the reported pace varied greatly among firms, with year-over-year revenue growth for Q3 ranging from low single digits to 50 percent. One firm has merely been "staying in the black," while another is "outperforming industry growth" by an estimated 15 percentage points.

While demand conditions vary, one contact described customer companies' hiring as generally "restrained and cautious." Two contacts note changing business attitudes towards the staffing industry; in particular, increasing numbers of companies are hiring multiple temps for formerly permanent jobs, and converting some to permanent positions after a trial period. Industries with strong demand for temp labor in Q3 and early Q4 include the financial sector, biopharmaceuticals, universities, federal and state governments, light industrial, and office and clerical. Contacts report falling demand from hospitals and the automotive industry. Meanwhile, although the pool of available workers is steady or increasing slightly for responding firms, several report shortages of highly skilled people.

Contacts are positive in their outlook, expressing relief that the New England staffing industry is starting to catch up with the rest of the country. All staffing respondents expect either steady or accelerated growth for their companies in Q4 and into 2006.

Software and Information Technology Services
Several contacts in the First District selling software and information technology services report that software development is showing solid growth, with growth rates in the low double digits from a year ago. However, one firm notes slower demand for its network engineering services as larger corporate clients move work in-house. Rather than pulling back across the board in this market, the firm is focusing its hiring on individuals who can handle specialized projects that are more likely to be contracted out.

Headcounts are flat over last year, although firms looking to hire are finding that, especially in the greater Boston area, the labor market is tightening. Technology wages are on the rise, with respondents reporting annual increases between 3 percent and 10 percent. Capital and technology spending year-to-date is reported at planned levels, with some contacts planning to increase spending early next year. Responding software and IT services companies expect their revenue growth rates to rise in 2006.

Commercial Real Estate
Although the New England region does have pockets of active growth, commercial real estate in the Boston area remains flat. The downtown Boston vacancy rate is estimated by contacts to be about 15 percent, with higher rates in the suburbs; both are steady from last quarter. One contact estimates that it would take five years at historical absorption rates (3 to 4 million square feet per year) to achieve a "balanced" office market in Greater Boston, which he defines as 10 percent vacancy. Rents in downtown and suburban Boston also remain steady. Looking forward, vacancy and rental rates are expected to remain close to their current levels. Contacts note that this flat outlook reflects reduced landlord expectations; as a result, retention efforts are increasing.

Despite the lackluster rental market in Boston, property values there and across New England continue to increase, fueled by an abundance of low cost capital. However, contacts note that currently rising costs of capital and low property yields could lead commercial real estate prices to correct downwards. Another factor buoying property values is rising construction costs. One contact estimated that building replacement costs increased by 10 percent to 15 percent over the past year, making existing buildings relatively more attractive. Nonetheless, increased prices of materials and petroleum have not yet stopped ongoing construction projects.

Return to topReturn to top

Previous Summary New York Next

Home | Monetary Policy | 2005 calendar
Accessibility | Contact Us
Last update: November 30, 2005