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Federal Reserve Districts

First District--Boston

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Business contacts in the First District are fairly upbeat, with the exception of most retail respondents. Revenues in the fall months were generally ahead of year-earlier levels, with double-digit increases for software and information technology services firms and also for staffing firms. Commercial real estate markets continue to strengthen. By contrast, while tourism-related businesses are doing well, most contacted retailers say sales have softened; in addition, manufacturers report that orders or sales of products related to housing have weakened. All respondents say the high end of the labor market continues to tighten. Pricing is mixed, as energy-related cost pressures have eased but selected other input and vendor prices are rising.

With the exception of one contact, retail respondents in the First District report softening sales during the fall. Same-store sales in September and October range from down 15 percent to up 8 percent from a year earlier. A drugstore chain reports that business is improving, and expects sales to remain quite strong. However, another company reporting a sales increase notes that sales have "taken a real whack," but are ahead of last year because of strong performance early in the year. A respondent in the home and lumber business indicates that sales continue to be "way below plan," which he attributes to the downturn in the housing market; a hardware contact also reports negative fallout from the housing market. But a discount furniture seller, a retailer selling home electronics, and a family restaurant chain all attribute their slowdowns to consumers' weaker finances or other non-housing-related causes.

Inventory levels are mixed, but most changes are in line with plans. Some retail contacts report cost increases for energy related products, including rubber and plastics; increases are also reported for steel and selected food products. However, the price of flat-panel televisions is rapidly declining. Several contacts report passing along small price increases to their consumers. Employment has been mostly steady, with some hiring occurring for new store openings. Many respondents are scaling back capital spending plans in response to slower sales growth.

A tourism contact reports that "it's been a really good fall," with all New England areas enjoying a good fall foliage period. Tourism is currently "going gangbusters" in the Boston area, but starting to slow elsewhere. Business travel is strong and the convention centers are doing well. Advanced bookings are still low, with a lot of people purchasing at the last minute on the Internet. Foreign tourism remains strong. While capital spending on tourist-related facilities is occurring in the Boston area, including a surge in new spas, there is reportedly little development elsewhere.

Many retail contacts remain concerned about the downturn in the housing market. Overall, most are cautious in their outlook. Tourism is expected to remain strong in the winter months.

Manufacturing and Related Services
First District manufacturers and related services providers generally report that revenues in late 2006 have been running somewhat ahead of year-ago levels. Trends for aircraft, energy, and scientific equipment are particularly robust. Firms making home furnishings and equipment say orders are flat or up a little from a year ago. On the other hand, contacts report that orders for homebuilding materials have trailed off substantially of late, and a couple of capital goods manufacturers indicate that sales have weakened as a result of what they perceive to be temporary adjustments on the part of customers.

Manufacturers note that rising costs for metals and paper are continuing to exert pressure on margins. Heavy buyers of these inputs have raised their selling prices in 2006 and generally expect to increase prices further later this year or in early 2007. Respondents indicate that their costs for fuel and most other oil-related inputs have stabilized, although they express some concern about their high levels. Several firms mention that their business customers' finances have improved, causing them to be more willing to pay higher prices. Otherwise, input prices and selling prices mostly are either flat or declining in line with their recent trends.

Regardless of whether their domestic headcounts increased, decreased, or remained unchanged over the past year, most manufacturers anticipate that their U.S. employment levels will hold steady or drift down in coming months. Base pay increases mostly are expected to remain in the range of 3 percent to 4 percent in 2007. Production workers are tending to receive lower raises, while experienced technical and accounting workers are receiving larger increases. Some contacts indicate that they need to boost pay of professional and technical workers considerably in the Boston and New York City areas in order to recruit or to stem turnover. Contacts remain concerned about escalating health care costs.

Several companies report that they plan to expand domestic capacity in either 2007 or 2008. Apart from these projects and some anticipated acquisitions, manufacturers' U.S. capital spending plans appear to be modest.

The majority of manufacturing respondents expect business to be "pretty good" in 2007, boosted in part by the introduction of new products. The remaining contacts express some uncertainty or have diminished expectations concerning revenue growth, especially during the first half of the year.

Software and Information Technology Services
The majority of software and information technology (IT) services contacts in the First District report double digit year-over-year revenue increases in the most recent quarter; however, a couple were down and a communications IT firm saw revenues decline 30 percent. Growth is particularly strong in the health care and energy and utilities segments. One energy software company observed that the combination of energy legislation from 2005 and their clients being "flush with cash" has made them "willing to loosen their purse strings." By contrast, a custom applications developer notes that "it is still tough to get people to spend on IT." Most New England software companies have left selling prices unchanged as a result of a competitive market environment.

Approximately half of the contacted IT companies are adding technology workers and sales staff, with companies serving the healthcare sector reporting that they are hiring aggressively in order to keep pace with demand. Two firms are downsizing their U.S. labor force; one plans to tighten slightly to be consistent with their run rate, while another is looking to shift headcount to India. Those with plans to hire report a tightening in the New England labor market, especially for specialized technical positions. Respondents cite annual wage increases for most employees between 4 percent and 8 percent.

Software and IT services contacts indicate that capital and technology spending is at "normal" levels. Several report that financing has become easier. New England software and IT firms are generally positive in their outlook, anticipating steady or accelerating growth.

Staffing Services
Business is booming for New England-based staffing firms, with most respondents citing double-digit year-over-year revenue growth. Staffing firms see strong demand from a variety of "high-end" sectors, including allied health and nursing, biotech and pharmaceuticals, engineering, IT, and the financial sector. Contacts also report growth in temporary-to-permanent and permanent hiring. Manufacturing remains the only customer sector with flat or negative revenue growth. New England staffing respondents agree that this has been a record year for the staffing industry as a whole, and believe that the New England region is matching or exceeding growth rates in the rest of the country.

With the supply of engineers, nurses, IT specialists, and other skilled professionals remaining tight, both bill rates and pay rates continue to increase. Respondents are uncertain regarding the degree to which new health insurance legislation in Massachusetts and Vermont will affect them, but most are concerned that it will drive up costs. One contact is worried about a possible increase in the minimum wage in Massachusetts. Despite these concerns, contacts are optimistic about 2007, expecting business to continue to expand as long as the economy is strong.

Commercial Real Estate
Centrally located office space continues to perform well across New England. Vacancies continue to fall in Boston's core business district, moving down to about 8.5 percent overall. Availability (vacancies plus sublease) has also improved, albeit slightly. Rents are stable or up across the region, with premium office space above the 15th floor priced at nearly $60 per square foot in Boston.

Contacts report improved leasing fundamentals in regional office space markets, reflecting job growth. Higher rents and lower vacancies in downtown markets have led some expanding tenants to move to suburban areas. As a result, suburban markets are beginning to see increased rents and decreased vacancies.

There remains a remarkable amount of real estate investment in New England, with contacts continuing to express surprise at the assumptions supporting aggressive pricing. Though real estate yields are low overall, there is some evidence that they are increasing slightly as improving market fundamentals have increased real estate income.

Overall, contacts expect slight decreases in vacancies and slight increases in rental rates going into the New Year. In addition, real estate investment is expected to continue to be strong.

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Last update: November 29, 2006