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Federal Reserve Districts

First District--Boston

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Economic activity continues to slow in the First District, with most manufacturers tallying year-over-year revenue declines, some of which are substantial.  Both residential and commercial real estate markets in the region saw some further deterioration in recent months, while staffing and software firms report ongoing declines in demand. Retail results, by contrast, are somewhat mixed. Respondents across sectors say they are restraining compensation in multiple ways, and many firms have cut employment. Although pressures are downward, only a few contacts indicate they are reducing their selling prices; manufacturers say they are avoiding general price cuts either to protect margins or because they foresee little demand responsiveness.  

First District retailers report mixed sales results for January and early February, with same-store sales generally ranging from low single-digit percentage increases from a year earlier to single-digit percentage declines.  Several contacts indicate that sales were not as soft as they expected, and a few respondents express more optimism, albeit cautious, than in previous conversations. 

Retailers continue to manage inventory levels tightly and have cut 2009 capital spending plans, although a few say they are taking advantage of expansion opportunities. Most respondents have invoked hiring freezes and some have already reduced or are considering reducing headcount in the near future. Several contacts have also frozen wages or eliminated bonuses or retirement contributions, and note that employees have taken the news of these freezes and job cuts "remarkably well."

Overall, First District retailers are watchful, as they expect consumers to continue to be cautious for the next several quarters. 

Manufacturing and Related Services
Most manufacturing and related services contacts headquartered in the First District report that, based on evidence to date, their sales in the first quarter of 2009 are likely to come in below year-ago levels.  About one-half of the respondents express concerns related to excess inventories or rising receivables, representing a deterioration from the last report.  Many manufacturers indicate that revenues in some business segments have fallen at a double-digit rate; semiconductor firms and their suppliers say their total revenue drop has been 50 percent or more.  By contrast with the general trend, biopharmaceutical sales continue to grow at double-digit rates.  In addition, selected respondents outside of the biopharmaceutical industry note that their exports of innovative products or to some foreign markets have held up relatively well over the past year.  Some of these exporters are seeing signs of slowdown, however. 

Many manufacturers mention that various commodity prices have fallen, but in general these decreases have not been fully reflected in the cost of materials or purchased services.  Manufacturers' selling prices are under downward pressure, prompting some to offer selected reductions.  On the whole, however, respondents express reluctance to implement broad price cuts--either out of a concern for margins or because they estimate that customer response would be limited under current circumstances. Biopharmaceutical firms are implementing price increases averaging in the single digits.

About one-half of the contacted firms have cut domestic employment and/or hours in the past three months.  Apart from planned growth in the biotech industry, most contacts expect to keep their U.S. headcounts stable in 2009.  About one-third of responding manufacturers have cut employee pay rates.  Most of the remaining firms expect to increase pay in the range of 3 percent to 4 percent this year.

Domestic capital spending plans for 2009 are mixed.  Some firms intend to adopt labor-saving technologies or to expand their capacity, particularly for research and development or for making high-technology products.  Others are cutting their capital expenditures, citing pressures to conserve cash.

Almost all of the contacted manufacturers express caution about their revenue prospects, albeit to varying degrees.  Some firms anticipate that their sales will be depressed throughout 2009; reasons include falling automotive production and consumers "battening down the hatches."  Others are hoping for an improved economic environment by the second half of the year, or expect their own company to fare relatively well despite economic headwinds. Some respondents indicate that their strong cash position will provide some buffer against financial stresses in the year ahead.

Software and Information Technology Services
While year-over-year revenue changes reported by First District software and IT services firms range from modest declines to increases of over 25 percent, nearly all contacts indicate slowdowns in activity during the fourth quarter of 2008 and into the first quarter of 2009.  Respondents say clients continue to be interested in their product lines but are financially unable or unwilling to commit to transactions.  Despite softer demand, New England software and IT services firms have been able to maintain selling prices, although a couple of contacts note that clients are asking for new payment plans or are taking longer to pay.  While some firms have reduced headcount and frozen wages, others are making selective hires and intend to give raises in the range of 3 percent to 4 percent. Almost all respondents indicate they are either reducing capital and technology spending or are more cautious regarding spending; for instance, multiple contacts report delaying the purchase of new computers, while others have substituted videoconferences for travel.  The down economy is affecting all contacts, with many who had previously hoped for growth in 2009 now predicting flat revenues.    

Staffing Services
Staffing contacts in the First District report "dismal" outcomes through the end of 2008 and into 2009, with one remarking that business activity "fell off a cliff in November" and remained slow through January.  Revenues are flat to decreasing year-over-year, with declines in the range of 20 percent to 50 percent.  Labor demand is reportedly low across all industries in New England, especially in the manufacturing sector; however, a few respondents report demand from state and local governments for skills such as civil engineers and road maintenance workers.  Many contacts are witnessing a flood of labor supply, with one respondent receiving 100 resumes in an hour for an administrative position and another reporting that 80 percent of phone calls to his firm are from job seekers.  Some contacts have been pressured by clients to reduce bill rates from 5 percent to 15 percent, with those reductions translating directly into decreases in pay. 

Several contacts say they believe the New England employment picture is slightly better than the national average, and one notes an increased willingness by candidates, particularly those working in the Midwest's automotive industry, to relocate to New England.  While a few respondents cite a slight uptick in activity in February, all are concerned about the uncertainty of the economy and many anticipate several months before a recovery occurs.

Commercial Real Estate
The commercial real estate market showed signs of further deterioration throughout the region in recent weeks. Contacts in Boston drew attention to the fact that rents are falling rapidly across the metropolitan area, for both office and retail space. One contact described a rental markdown of close to 25 percent for space in a downtown office building, just within the last two weeks. Another Boston contact estimates that downtown office rents are down 20 percent on average since September 2008. Contacts also point out that, in a growing share of cases, rental rates are not being published in property listings, a sign that rates are negotiable. The downward pressure on rents reflects a sharp increase in the supply of space for sublease even as official vacancy figures edged up only slightly. Office vacancy was estimated by one contact at about 12 percent downtown, 18 percent in close-in suburbs, and 27 percent in the outer suburban ring.

In Providence, the downtown office market is described as stable, but sublease supply is up and downward pressure on rents is mounting. Some retail closings were reported in Providence, and the industrial market is "drifting lower, but not in big trouble yet." No major changes are reported for Hartford, but deal volume is close to zero for both leasing and sales. Office vacancy increased "marginally", but sublease supply has doubled since December 2008. Retail vacancy has risen in the area, but not by as much as this contact predicted earlier in the year. 

The credit situation is described as largely unchanged since last report. Financing continues to flow to deals under $10M but remains scarce for deals above that threshold and virtually non-existent for deals over $50M. The financing for the smaller deals is coming from community and regional banks around the region with healthy balance sheets. One Boston contact expects an increase in defaults on large commercial properties as risky loans come to maturity in the next 12 months; he says borrowers will be unable to refinance these large deals unless investors return to the securitization market.

Contacts expect further deterioration in the commercial market in the coming months due to ongoing weakness in the economy and ongoing disturbances in credit markets.

Residential Real Estate
Home sales and prices showed steep declines across the New England region in December 2008 and January 2009.  Home sales in December declined year-over-year by 6 percent in Rhode Island, 16 percent in Maine, and 20 percent in Connecticut.  In January, home sales dropped 12.5 percent year-over-year in Massachusetts and 35 percent in New Hampshire.  Median home prices also continued to drop across the region.  Inventory continues to decline in Massachusetts. By contrast, because of the low level of sales activity, New Hampshire had almost 23 months of supply in January 2009, up from 11 months of supply in January 2007.

Condo sales dropped more than 25 percent year-over-year in Rhode Island and Connecticut in December and in Massachusetts in January.  While home prices saw large declines throughout 2008, condo price declines were much more modest until recently.  In the New England states for which they are reported, median condo prices fell 10 percent to 26 percent year-over-year in December or January. 

Contacts are generally optimistic regarding the tax credit included in the stimulus package.  Even though the new $8,000 credit is still available only for new homebuyers, they are pleased that Congress removed the payback requirement that was part of the 2008 $7,500 credit.

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Last update: March 4, 2009