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Federal Reserve Districts

First District--Boston

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Business activity continues to slow in the First District, with the partial exception of the non-auto retail sector where contacts say sales are better than expected. Manufacturers report ongoing year-over-year declines in sales or orders, with the pace worsening in the first quarter. Most responding consulting and advertising firms cite marked declines in first-quarter demand compared with a year ago. Commercial and residential real estate markets remain in the doldrums, although residential contacts see early signs of improvement. Business contacts indicate that costs are generally declining and most price pressures are downward; real estate prices continue to fall, but most responding manufacturers and advertising and consulting firms are holding prices steady.

The majority of non-auto retailers contacted in the First District report sales gains for February and early March, with same-store sales up from a year earlier by mid single-digit percentages. Several contacts note that business seems to be improving slightly from previous periods or that results are better than expected even if below year-earlier levels. In particular, items that appear to be a good value to the consumer are selling well. As one respondent notes, "value has never been more important; people are trying to stretch their purchasing power." By contrast, automobile dealers in the First District continue to struggle, with nearly all respondents reporting declines in sales ranging from 10 percent to 50 percent from a year earlier. Dealers attribute these declines largely to lower foot traffic and to potential car buyers' difficulties in obtaining credit; they also note a shift in demand from new to pre-owned vehicles.

Retailers continue to manage inventory levels tightly. Although a few contacts mention improving expansion opportunities, most have cut 2009 capital spending plans, typically by 25 percent to 50 percent from last year. Some respondents are hiring "only where necessary," and others say they will be reducing headcount in the near future. Most contacted retailers have also frozen wages and/or eliminated bonuses. Overall, First District retailers are cautiously optimistic, with several expecting to improve, albeit hesitantly, by the fourth quarter.

Manufacturing and Related Services
Most manufacturing and related services contacts headquartered in the First District report that market conditions worsened in the first quarter of 2009--in some cases, deeply and abruptly. More than one-half of respondents say that sales or orders were down at double-digit rates from a year ago. Capital goods manufacturers in particular indicate that their customers have become more cautious, with some holding their purchases below budgeted amounts and a few cancelling orders or delaying delivery. One major equipment maker is "surviving on our order backlog," while another says "the world has really changed" since the turn of the year. Respondents report year-over-year sales growth only in limited areas, including defense equipment, goods and services used in scientific research, and biopharmaceuticals and selected other health-care-related products.

Many manufacturers indicate that various input costs have come down in recent months, including steel and oil and gas derivatives, while selling prices have remained fairly flat. Respondents mention that some of their suppliers have come under financial stress, which has led to actual or potential disruptions in sourcing or requests for advance payments and other forms of assistance.

About three-quarters of the contacted manufacturers and related services providers plan to cut domestic employment in 2009; some say they are inclined to reduce headcount by more than they had intended at the start of the year. In addition, about three-quarters of the respondents are freezing or reducing employee compensation. Measures include deferrals or suspensions of merit pay increases, reductions in wages and salaries, furloughs and temporary factory shutdowns, suspensions of 401K plan matches, and higher employee contributions for health insurance.

Over one-half of respondents expect to cut capital spending in 2009, mostly because of weak sales but in some cases to preserve cash. Of the remaining firms, the majority expect to keep total investment roughly unchanged from 2008 levels. Some companies are seeking to sell off marginal or unprofitable business units.

Several manufacturers and related services providers acknowledge that the U.S. economic environment may possibly improve by yearend 2009 as a result of the fiscal stimulus package and other initiatives. However, the combination of strong economic and financial headwinds and ongoing global uncertainties are causing contacts to plan for a continuation of challenging conditions.

Selected Business Services
Most First District advertising and consulting contacts report weaker demand in the first quarter of 2009, with demand declining from 15 percent to 40 percent year-over-year for all but one. Several business services respondents say these are the first year-over-year sales decreases since their firms' creation. In some cases, the steep drop in demand was associated with the loss of large clients that merged or were acquired by other companies. On a positive note, however, a number of firms saw an improvement in demand in recent weeks.

Costs have remained stable or decreased somewhat for contacted advertising and consulting firms. All respondents are experiencing downward price pressures and observe steep price reductions, up to 50 percent, by some competitors. Nevertheless, contacted companies have held prices constant and do not expect to change them in 2009. Although several firms made significant headcount reductions in 2008, half of the respondents will maintain stable employment in 2009 and some firms will continue to hire, although at a slower pace than during normal times. Wages and salaries at most firms will be held constant in 2009. In the few cases where salaries increased, the changes were less than 2 percent as compared with the usual 6 or more percent. Some firms have cut bonuses significantly or have moved full-time employees to part-time status. Most New England business services respondents foresee a tough second quarter and expect demand to start recovering in the second half of the year.

Commercial Real Estate
The commercial property market for deals over $10M remains largely dormant in New England, according to contacts. Both sides of the market remain reluctant, as buyers face tight credit and sellers resist price markdowns. However, deals valued below $10M continue to occur at a modest pace; most are obtaining financing from regional and community banks. The recent foreclosure auction of Boston's Hancock Tower confirms that property values in the region continue to fall; contacts predict that typical office properties in Boston will experience declines in value on the order of 25 percent to 40 percent from their peak.

Leasing volume remains slow in all markets in the region. In greater Boston, rents continue to fall as both official vacancy rates and shadow vacancy (including slack space and/or space for sublease) continue to increase; office vacancy is estimated near 15 percent. Substantial downward pressure on office and retail rents is also reported for Providence, Hartford, and Portland (ME). In Providence, the office sector is experiencing negative absorption, but leasing activity for industrial properties remains "brisk," with absorption close to zero and vacancy still below 10 percent. In Hartford, net absorption of office space was estimated at roughly zero; Hartford's industrial sector, like Rhode Island's, was relatively active as firms "repositioned themselves for an eventual recovery." The Hartford retail market fared better than a contact expected, measured by the number of store closings. However, Portland's retail market is seeing vacancies of prime space continue to accumulate. Light industrial was the strongest sector in Portland, with no increase in vacancies.

Most contacts remain pessimistic about the outlook for the commercial real estate market, given weak labor and credit market conditions. However, our Hartford contact detected a positive shift in sentiment in mid-March and predicts that leasing and sales activity will pick up in the fourth quarter as liquidity returns to the market for commercial mortgage-backed securities.

Residential Real Estate
Through February, home sales and prices continued to decline across most of New England, although contacts cite some positive signs. Home sales fell year-over-year in February by 11 percent in Massachusetts, 15 percent in Rhode Island, 22 percent in Maine, and 26 percent in Connecticut. However, New Hampshire home sales increased 1 percent year-over-year. The median home price fell 17 percent or more year-over-year in these five states; Rhode Island's 26 percent drop was the largest. Condo sales declined 16 percent year-over-year in Massachusetts, 32 percent in Rhode Island, and 42 percent in Connecticut, as median condo prices fell 11 percent to 15 percent.

Despite the mostly negative numbers in February, contacts report several reasons for optimism about New England housing markets. Beyond the February sales data, a New Hampshire contact says that activity is picking up. There are also reports of increased activity, especially open house attendance, in Massachusetts. Respondents stress that low prices, low interest rates, and the new-homebuyer tax credit should encourage home-buying in the near term; several view the tax credit as a key reason for the recent pick-up in activity. Another positive note is that the Massachusetts condo market saw unseasonable month-to-month increases in sales and prices in February.

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Last update: April 15, 2009