March 5, 2008
Federal Reserve Districts
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First District retailers and manufacturers indicate their sales and revenues continue expanding or contracting mostly as in recent reports, but downside risks have become more prominent. Contacts at software and information technology services firms and staffing firms point to slower growth. Real estate markets continue to be soft. Price pressures remain an issue, with only a subset of contacts saying they are able to pass cost increases along to their customers, at least partially. Many respondents express concern about how soon and how smoothly turmoil in credit markets will be resolved.
Inventory levels and employment are generally stable. Capital spending is mixed. A majority of contacted First District retailers mention varying degrees of price pressure, with several respondents pointing specifically to vendor items and their own operating costs related to oil. A few respondents note modest increases are being passed along to consumers where possible, or say they expect to raise prices in the near future.
Overall, First District retailers are cautious in their outlook and expect 2008 to be challenging. At the same time, many are confident in their ability to pull through this period of economic uncertainty.
Manufacturing and Related Services
Manufacturers continue to voice concerns about high, rising, or volatile materials costs, especially metals and petrochemicals; per-unit energy costs also are said to be high. Manufacturers are anticipating that input costs will remain high or increase further in coming months. Respondents generally indicate that their selling prices are either stable or rising to offset cost increases to some degree.
Manufacturers continue to adjust their U.S. headcounts only minimally. However, various firms have become more cautious with respect to hiring. One contact that expanded its headcount in fourth quarter 2007 is planning to hold employment steady in the first half of 2008 because of uncertainty. Another respondent that held its employment constant over the last several months is unlikely to continue to do so in the face of mounting pressures to cut costs. Average pay increases are expected to remain in the range of 3 percent to 4 percent, but several firms are planning somewhat higher pay raises in 2008 than in 2007. On the whole, contacts say their capital spending for 2008 is likely to be normal or steady.
Many manufacturers express growing concerns of one sort or another about financial markets for their own firm or its customers, or in the broader economy. For example, one respondent is concerned about the liquidity of its investments in light of pending payment commitments. Several contacts say they are thankful that their company's capital needs are limited, given current terms and availability.
Software and Information Technology Services
The majority of New England software and information technology firms are projecting revenues to continue growing at current rates. However, several note that downside risks have increased.
Most firms are taking new measures to attract clients, through strategic marketing initiatives, partnerships with other companies, and transitions from print to web advertising. Respondents report stable or increasing costs, with the primary increase being health insurance for employees. The main concern expressed by nearly all respondents is the health of the overall national economy. Contacts fear that instability will lead firms to delay new projects, with "trickle-down effects" in other sectors, including staffing. Despite this concern, respondents are hopeful for growth in upcoming quarters.
Commercial Real Estate
Leasing volume has remained steady or slowed in New England. In the downtown Boston office market, rents appear to be holding. The same goes for Hartford and Providence, but rents continue to fall gradually in Maine. Contacts see retailers eliminating underperforming locations and pulling back on commitments to new stores, but with no dramatic rise in overall retail vacancy or fall in rents. Rhode Island has some of the highest commercial vacancy rates in the region, up sharply from six months ago. Contacts expect absorption to hover around zero or slightly negative in the coming months, leading to gradual increases in vacancy throughout the region. Credit market turmoil is expected to persist into the third or fourth quarter of 2008. Some still characterize Boston as a very desirable market, but others see looming financial sector layoffs taking steam out of its office market in the coming months.
Residential Real Estate
Median home prices have declined modestly in New England markets, with prices down 3 percent to 5 percent in December or January from a year earlier in Massachusetts, New Hampshire, and Maine. Prices dropped 6 percent year-over-year in Rhode Island in the fourth quarter. However, median condo prices have held steady in Massachusetts; a contact says this is because the high end of the condo market has been somewhat insulated from general housing problems.