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Federal Reserve Districts

First District--Boston

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Business contacts in the First District cite mixed results amid signs of improvement, although activity generally remains below year-earlier levels. Some respondents are beginning to hire and/or reverse pay cuts or freezes, or planning to in 2010. Prices are generally said to be stable. Contacts in a number of sectors express uncertainty about whether recent improvements will last, but most--outside of commercial real estate--expect recovery to take hold in 2010.

Contacted retailers in the First District report mixed sales results for the months of October and November. Same-store year-over-year sales growth ranges from negative to positive mid single digits. Respondents reporting positive sales attribute growth in part to consumers looking for deals for the upcoming holidays, while contacts observing softer sales convey concern about the effect of unemployment rates on consumer spending. Several retailers also indicate they believe that notwithstanding some early signs of recovery, consumers are much more cautious today than in previous years, making for a more challenging sales environment. All respondents are cautious in their outlook, although some are more optimistic than others.

Contacts continue to manage inventory levels cautiously, with several retailers reporting lower inventory levels than a year ago. Capital spending remains guarded, but some contacts are taking advantage of favorable opportunities to expand or budgeting for renovations and IT spending. Some First District retailers report increasing headcount in line with new store openings, and others are loosening hiring restrictions. Seasonal hiring is mixed, with some contacts hiring in anticipation of increased holiday sales and others scaling back seasonal hires because they anticipate soft holiday sales. Wages remain mostly steady, although one respondent reports wage cuts were successfully taken in order to prevent a cut in headcount. Selling prices are reportedly stable.

Manufacturing and Related Services
Manufacturing and related services contacts headquartered in the First District cite mixed revenue trends in the third and fourth quarters (to date). Biopharmaceuticals companies indicate that their revenues continue to increase. Some equipment makers report that sales have picked up from their depressed levels in the first half of the year, while others say their business remains in a slump. Respondents across a variety of industries note that sales to retailers, restaurants, and personal services establishments remain depressed.

Manufacturers report that most materials costs and selling prices remain steady. Some firms that cut wages and salaries earlier in 2009 have recently restored pay to pre-cut levels or plan to do so in 2010.

Most contacts say that they have held their domestic headcounts relatively steady in recent months, but biopharmaceutical firms continue to expand employment. Several contacts mention that lower-than-normal attrition is limiting their hiring requirements. Some seeking to fill specialized technical positions indicate they are disappointed with the quality of the applicant pool. For the most part, capital spending remains subdued. Many note that they have adequate cash to fund both needed and discretionary investments.

Most manufacturers and related services providers are anticipating modest to moderate revenue increases over the coming six to 12 months. Some indicate that an uneven economic recovery or secular shifts in their industry are likely to limit their opportunities for growth.

Software and Information Technology Services
First District contacts in software and information technology services report mixed results. Activity remains slow for some firms, while it has improved considerably for others. One contact notes that increased interest among prospective clients is not translating to revenue growth, with companies still hesitant to finalize deals. By contrast, another contact reports strong demand across multiple product lines and various geographies. While some New England software and IT services firms continue to reduce headcounts, others plan to expand their workforces. Those firms that implemented wage freezes this year anticipate lifting them in 2010, with raises expected to be in the 3-percent to 5-percent range. Despite differences in the level of business, the sentiment among all respondents is at least slightly more optimistic than it was last quarter. Although contacts worry about the sustainability of recent improvements, they generally expect the positive momentum to continue into next year. Expectations range from gradual upticks over the course of 2010 to high levels of growth from the start of the year.

Staffing Services
New England staffing contacts report upticks in activity through the end of the third quarter and into the fourth. While year-over-year revenues are still down--from 10 percent to 60 percent--revenues are improving on a sequential basis, with increases reported in billing hours and number of assignments. Labor demand is strong from the health, biopharmaceutical, telesales, and technology industries. Stimulus funds have led to increased demand from the government sector and improvement is noted in the financial and manufacturing industries as well. Demand remains better for temporary hires, with permanent placements seeing at most marginal increases. Several contacts note that overall labor supply is in abundance, while it remains a challenge to fill specialized positions. An elongation of the hiring cycle continues, with employers reviewing more resumes and requiring multiple interviews before making decisions. One contact also reports that more employers are choosing to search for applicants without the help of staffing firms. While First District staffing respondents are increasingly optimistic and suspect the bottom has been reached, they express uncertainty as to whether recent improvements can be maintained through the holidays and winter season. Their outlook remains cautious for the first half of 2010, with some not anticipating sustained growth until the latter half of the year.

Commercial Real Estate
Contacts indicate nearly uniformly that the region's commercial real estate market continued its downward trajectory in recent weeks. Leasing activity is very weak and downward pressure on rents remains intense. A Boston contact reports that landlords are working hard to retain existing tenants, who are driving increasingly hard bargains. Rents for class A Boston office space (downtown) continued to soften in recent weeks and have fallen roughly 30 percent from peak values; even so, cap rates (ratio of operating income to building price) have risen roughly 150 basis points for core properties since the market peak. Vacancy edged up by about a half a percentage point. Sales activity remains scarce, and "the good buildings are not on the market." In Hartford, our contact notes that the usual "seasonal bump" that occurs in the fall never materialized this year, and that very little leasing or sales activity took place in recent weeks. However, as reported last time, rents do not appear to be falling precipitously in Hartford. The leasing market slowed in recent weeks also in Rhode Island, where a key concern remains the emerging glut of class B office space in downtown Providence.

A few contacts express concern that recent FDIC guidance on commercial real estate will merely serve to delay, rather than prevent, commercial foreclosures and associated bank losses. In the worst case scenario that some describe, foreclosure events will be concentrated in time (at some point within the next two years), triggering greater financial fallout than if they were spread more evenly. Because they do not expect property values to recover before the coming wave of maturities come due (even taking into account loan extensions), these respondents argue that it is preferable for banks to recognize losses sooner rather than later, or at least to prepare for inevitable losses. On the bright side, two Boston contacts note that the financing environment is somewhat better now that it was six to 12 months ago, at least for high-quality properties. A regional banking contact reports that he has seen a "big uptick" in loan volume in commercial real estate since the end of September. Increased loan demand has come from properties seeking refinancing out of loans previously held by life insurance companies, some of whom are seeking to move such loans off their books.

Contacts agree that the outlook remains bleak for commercial real estate for at least another year and possibly two years, but also point out that uncertainty is high. They reiterate that the key factor leading a recovery will be improvement in the employment situation.

Residential Real Estate
Home sales continue to increase year-over-year across the New England states. Growth was particularly strong in Maine and Rhode Island, where sales rose by more than 20 percent year-over-year in September. Several contacts mention the important influence of the first-time homebuyer tax credit on the rise in sales. The tax credit has since been extended and expanded, but the extension had not yet occurred when these deals were being made, so homebuyers were trying to close their deals before the original deadline of December 1. As a result, much of the September sales activity involved entry-level homes. Year-over-year increases in sales are expected to continue through October and November because of the earlier deadline; in addition, pending sales numbers look promising.

While sales continue to increase, median home prices continue to decline year-over-year in New England. The lone exception is the Boston area, where the median home price in September was up 6 percent from September 2008. In other areas, the median home price dropped between 2 percent and 8 percent year-over-year in September. It is difficult to determine what part of this median price drop can be attributed to increased sales of entry-level homes due to the tax credit. In New England condo markets, sales were up by at least 10 percent year-over-year, and prices were mixed.

While contacts are pleased by the extension of the first-time homebuyer tax credit, some are even more excited about the expansion of the credit to include existing homeowners. Inventory is low in residential real estate markets in Massachusetts and contacts there hope that this broadening of eligibility for the tax credit will help bring sellers back into the market.

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Last update: December 2, 2009