November 28, 2007
Federal Reserve Districts
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First District businesses contacted in mid-November mostly report continuing revenue gains, but rising caution. Staffing firms cite steady growth and particular strength in the Boston area, while software and information technology services firms report a slowdown in revenue growth. Residential real estate markets remain weak and commercial markets continue to soften. Manufacturers are raising selling prices to pass along cost increases; they are more upbeat than retailers about 2008.
Retail and Tourism
Inventory levels are mixed. Headcounts are also mixed, with some respondents reporting increased headcount in line with company growth or seasonal hiring, while another reports a modest layoff. One retailer reports intentionally hiring significantly fewer seasonal employees than usual, while another notes that finding seasonal employees has been difficult because more people have fulltime jobs. Several contacts cite price pressures, especially for dairy products. Some respondents say they are starting to feel the effect of rising oil and gasoline prices, including increased surcharges and sharply higher prices for plastics. Selling prices remain mostly stable.
A tourism contact reports that 2007 has been a banner year in the Boston metropolitan area for leisure, business, and convention travel. International travel has been particularly strong because of the weak dollar, and is expected to continue to be robust. However, there is a growing sense of uncertainty about how the increasing price of home heating oil and gasoline will affect domestic leisure travel and tourism in 2008.
Overall, First District retail respondents are cautious in their outlook for early 2008, although some are still cautiously optimistic. Most respondents are worried about the impact of rising energy costs and the recent volatility in financial markets on both consumer confidence and disposable income. Several retailers express more concern about early 2008 than about the upcoming holiday period.
Manufacturing and Related Services
Most manufacturers report that materials costs are rising, especially for metals and oil derivatives, as well as for items priced in currencies that have appreciated against the dollar. Only a few respondents have experienced rising energy prices in recent months; a couple of firms indicate they are shifting to natural gas or wind power to reduce their dependence on oil. Over three-quarters of the manufacturing contacts have responded to higher input costs by raising their selling prices.
Manufacturers continue to adjust their U.S. headcounts only minimally, but they report somewhat more new restructuring efforts or caution in hiring than earlier in 2007. Average wage and salary increases remain in the range of 3 percent to 4 percent. Domestic capital spending plans are mixed, but generally moderate; U.S. spending will largely reflect whether and where firms need to add production and product development capacity.
Manufacturers and related services providers are mostly cautiously optimistic about their business prospects over the coming year. Even those that have a positive sales forecast for 2008 cite downside risks from factors such as weak consumer confidence, depressed housing markets, higher oil and commodity prices, and constrained credit availability.
Software and Information Technology Services
New England software and information technology firms generally project that revenues will continue growing at current rates. However, several note that the downside risks have increased.
Commercial Real Estate
Conditions in the office leasing market are mixed, but overall the mood has turned more pessimistic. Rental rate increases appear to be slowing in Boston, where absorption and lease renewals have slowed. Despite increases in "face rents," lessors have begun offering building improvements and other concessions in order to retain or attract tenants. Such deals, together with rising energy and construction costs, are squeezing owners' profit margins. Office rents and vacancy rates have been flat in Hartford and Providence, but rents have reportedly fallen 10 percent in Portland year over year, where absorption is zero or negative. In Rhode Island, the industrial market remains strong, with declining vacancy and rising rents, but the retail sector has been mostly "quiet."
Lender reluctance to finance speculative development is expected to continue over the next 6 to 12 months. Construction projects in progress or in the planning stages are likely to be delayed or downsized (especially if they include condominiums), and "build-to-suit" structures are expected to be the only new construction. European demand for office investment is expected to remain active. Contacts now seem less likely than earlier to believe that liquidity will return to the CMBS/conduit market in force by Q1 2008, although activity is expected to pick up eventually. Some contacts (in Boston, Providence, and W. Hartford) expect commercial vacancy rates to continue falling, while others expect absorption to slow and rent growth to stall or become negative. Still, most contacts do not predict a glut of commercial space, because supply growth has been restrained over the past few years.
Residential Real Estate
Residential markets in the rest of New England similarly show large sales declines and modest price declines in September. Comprehensive September data from Connecticut (including foreclosure sales, etc.) show a 3 percent decline year-over-year in median home prices, along with a 22 percent drop in home sales, after relatively small changes in July and August. Similar data from Rhode Island show home sales dropping 27 percent year-over-year in September and prices decreasing 7 percent, but Rhode Island realtors' data show more modest declines, with home sales down 9 percent and prices down 2 percent. Realtors' data for New Hampshire and Maine show year-over-year home sales declines of 16 to 18 percent and median price declines under 3 percent.