January 11, 2012 Federal Reserve Districts First District--Boston

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Most business contacts in the First District report modest revenue growth from a year earlier. Retailers are somewhat more positive than in preceding months, with 2011 sales projected to come in higher than 2010. Manufacturers' reports are similar to the last round; most firms cite somewhat slower sales growth than earlier in the year, while a couple of semiconductor-related firms saw sales fall off (they believe temporarily). Commercial and residential real estate markets remain weak, but are not expected to deteriorate further. Advertising and consulting firms, by contrast, say business improved noticeably between the third and the fourth quarters, bringing a strong 2011 to a close. Some firms are hiring, but modestly; wage increases, if occurring, remain moderate. Price pressures continue to ease. Most contacts expect a continuation of current modest growth trends, notwithstanding uncertainties related to Europe and U.S. budget deliberations. Retail and Tourism As in mid-November, retail contacts for this round report a slight improvement in business conditions from earlier in the year. Comparable-store sales in the fourth quarter for most contacts range from flat to up 2 percent from a year earlier; one retailer saw a drop in in-store foot traffic for December but a tripling in Internet sales. One is projecting annual sales for 2011 will be down about 5 percent, but this represents an improvement compared with sales declines of 10 percent in the first half of the year. Contacts with a web-based presence report sales strength in this area, and some are adding staff and making investments to better service customers buying online. Planned salary increases for 2012 range from 2 percent to 3 percent for merit-related raises; none of the retail contacts is planning to offer a cost-of-living adjustment. The travel and tourism sector continues to project a 5 percent to 8 percent increase for 2011 over 2010. Data from the first week of December show strong performance. The industry foresees a robust 2012, taking heart from Q1 projections based on advance bookings. Preliminary predictions are that 2012 hotel revenue per available room will increase 10 percent to 12 percent over 2011. Restaurant sales, while much harder to project, are estimated to grow 3 percent in 2012 over 2011, an improvement over the 1.5 percent estimated for 2011 over 2010. Manufacturing and Related Services Not much has changed since our last manufacturing report in mid-November. Most contacts report growing sales and some are hiring, albeit in small numbers. Two contacts in the semiconductor industry report a substantial weakening of business in the summer and fall but both seem optimistic that the decline is transitory. Overall, the mood remains cautious. Of the 13 manufacturing contacts in this cycle, nine report higher sales, two cite flat sales and two declining sales. The two firms with falls in sales are in the semiconductor business and both depend heavily on Asia for demand. Of these two, a manufacturer of analog semiconductors says orders peaked in the June quarter and bottomed out in September; since sales follow orders with a lag, sales declined in the fourth quarter, ending an 11-quarter streak of quarter-on-quarter sales growth. The two contacts differ on the source of the problem, with one attributing it to China-specific issues and the other arguing that the underlying causes are broad-based. For contacts reporting higher sales, growth recently is moderate compared to the rapid growth they experienced in the last few years. One firm said that while sales were likely to be up about 15 percent for the year, the fourth quarter would clock in at only about 5 percent. Europe is cited as a problem, although two contacts say that they have yet to see evidence of a recession in northern Europe. One contact at a medical equipment supplier says that debt problems in Europe do not appear to have affected the health care sector; another contact at a large diversified manufacturing firm argues that there is an incipient credit crunch in Europe. On pricing, the complaints about escalating input prices have more or less stopped; contacts say even food prices have ceased rising. A year ago, virtually every contact talked about high commodity prices and, in some cases, shortages, but now the only comments relate to limited pricing pressure. Five contacts report that they are hiring, eight report flat to maybe a small decline and none reports any significant staff reductions. Several contacts mention that they are having trouble finding qualified staff, but some have come up with more creative ways to bring in the right people. Firms continue to devote resources to capital expenditures. None reports any problems raising money to pay for needed investment and, in fact, many are able to finance all capital spending with retained earnings. The outlook remains guarded; general concerns about "macroeconomic uncertainty" remain. The two firms reporting lower sales are fairly optimistic that the dip is transitory. In general, firms with greater exposure to Europe are more concerned than firms focused on the domestic market. Selected Business Services Consulting and advertising contacts in the First District report strong growth in the fourth quarter after a generally weaker third quarter. Marketing and advertising contacts indicate that 2011 growth has averaged 8 percent to 9 percent (annual rate), driven largely by an increase in large orders from large clients. Strategy and business consulting contacts report low double-digit annualized growth, driven by strong private equity business, mergers and acquisitions, and corporate consulting. Contacts note that many clients have a lot of cash and are becoming more confident that--despite risks--the U.S. economy will "muddle through" and thus are willing to spend. In addition, consulting firms have seen a shift in demand towards services that can be directly tied to the bottom line such as sales and process efficiency rather than strategy and management. The majority of consulting and advertising contacts reports minimal increases in the prices they charge, held down by both competitive pressures and modest cost increases. Compensation increases are generally in the mid single digits and contacts report steady or growing profit margins. By exception, two contacts raised prices by 5 percent to 10 percent because of strong demand for their services. Hiring activity continues to be mixed. Two consulting contacts report strong 2011 employment growth, while three firms kept employment flat and one continued a year-long downsizing process. The two firms reporting job growth expect hiring to remain strong (about 10 percent) in 2012, while a marketing firm plans to increase employment modestly, and the other firms expect flat 2012 employment. Firms that increased employment did so to keep up with a growing workload, while firms downsizing in the third or fourth quarter emphasized cost controls. All respondents are more optimistic now than when contacted in the third quarter, with the exception of one firm that has done exceptionally well all year. The improved outlook is mostly due to the strong fourth quarter indicating that the third quarter was only a temporary rough patch. Commercial Real Estate Commercial leasing activity across the First District was flat to down in recent weeks, in line with typical seasonal patterns. In Hartford, leasing activity saw a modest seasonal slowdown in December and business sentiment held steady. Activity slowed modestly in Providence as well, also in line with year-end expectations, but deals in the works as of the previous report moved forward as expected and pending deals are set to boost absorption of Class A office space in the first quarter of 2012. Greater Portland also registered a modest seasonal leasing slowdown in December, but saw a decline in the office vacancy rate on a year-over-year basis, to 10.8 percent from 11.2 percent. Boston's leasing market held roughly steady, with modest positive absorption in suburban corridors as well as in the sought-after neighborhoods of Back Bay and East Cambridge. Rents remain flat for downtown office space on lower floors of buildings but are rising for upper-floor space in prime high-rise structures. Despite positive absorption in 2011, one contact says Boston's downtown office vacancy rate remains undesirably high at about 16 percent. Construction activity remains limited across the region, with the ongoing exception of multifamily construction in greater Boston. The lack of speculative office construction is attributed to the fact that building costs continue to exceed expected rents. The investment sales market remains active in Boston as prices signal an ongoing willingness of buyers to accept low rates of return for prime properties. A Portland contact predicts an increase in sales activity in that market in the coming months as borrowers seek to take advantage of very low mortgage interest rates. The outlook among contacts is unchanged since the last report, with forecasts calling for modest improvements in office fundamentals in 2012, roughly on par with the experience of 2011. While some see upside potential in office rents, downside risks are also noted, such as possible closures in the retail sector and ongoing political gridlock. Residential Real Estate Sales figures in the New England single-family home and condominium market increased in November compared to a year ago, with the growth largely reflecting lackluster year-earlier sales numbers following the expiration of the tax credit in mid-2010. Contacts reiterated concerns about weak demand, citing poor labor market conditions and stricter lending requirements. A contact from Greater Boston contrasts the local market with the rest of the New England region, saying that the Greater Boston area showed possible signs of improvement due to strengthening employment conditions in the city. Meanwhile, throughout New England, the median sale price of homes and condos fell in November compared to a year ago; contacts attribute the declines to a rise in sales of distressed properties. The price decreases were uneven across the region, with Maine slipping by less than 1 percent and Connecticut prices falling by over 10 percent. The median price of condos fell more sharply than home prices. The outlook remains largely the same as in previous reports. Contacts expect sales activity to remain slow in the coming months, but believe prices will stabilize in the region. They do not expect further weakening in the market but also do not anticipate significant recovery in the near term. Return to top Summary New York