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Federal Reserve Districts

First District--Boston

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Economic conditions continue to improve in the First District in the waning months of 2010. Most contacted retailers report year-over-year sales increases, manufacturers generally continue to see expansion, and advertising and consulting firms cite relatively strong growth. Respondents in these three sectors indicate employment is stable to rising, with more of the same planned for 2011. Commercial real estate markets are said to be stable, while residential real estate continues in the doldrums. Selected commodities are causing some price pressures, but contacts report only modest pass-through into sales prices to date. The outlook for 2011 is generally positive, albeit moderate.

The majority of contacted First District retailers report positive sales results for the months of November and December. Year-over-year comparable same-store sales are mostly increases ranging from the low single digits to the low double digits, with the exception of one contact who reports a drop in same-store sales but notes a recent positive turn. Several retailers indicate that consumers continue to react positively to promotions. Sales of apparel, sporting goods, cameras, and other gift items were strong leading up to Christmas. Respondents generally are pleased with early holiday shopping results.

Contacts report mixed inventory levels in comparison to plan. As for prices, retailers note cost increases for commodities, including cotton, rubber, and nuts. Several respondents observe price pressure in the industry, but have yet to experience it themselves. Some contacts have worked to lock in pricing through vendor contracts; a couple say that vendors may be absorbing price increases or working to cover increases through product reengineering to keep their selling prices steady. Retailers say that price increases passed on to consumers, if any, will be selective. Headcounts continue to increase in line with new store openings, although a few firms are taking measures to reduce redundancy and consolidate headcount to gain other efficiencies. One respondent is concerned that uncertain potential employer costs associated with healthcare reform may affect hiring. Capital spending is mixed, with several retailers reducing capital spending now that one-time expansion projects have been completed. Outlooks are generally cautiously optimistic, with most contacts forecasting a slow and steady improvement in 2011.

Manufacturing and Related Services
The majority of manufacturing firms surveyed continue to report relatively positive business conditions. The exceptions include one firm with exposure to the residential construction sector, whose business has been sluggish for an extended period, and a few others whose business tends to be a-cyclical. On the positive side, a small diversified manufacturer reports sales growth in the high single digits and notes that its revenues have returned to pre-recession levels. A company in the electronics business says that its sales growth in the fourth quarter was slightly ahead of expectations, but is likely to be somewhat inconsistent going forward due to uncertainty about future large contracts. In addition, sales at a semi-conductor firm remain strong relative to 2009 and are on par with their strong results in third quarter 2010; a food products manufacturer also reports strong sales.

A number of contacted firms continue to try to reduce or limit their inventories to maintain lean operations. By contrast, a few other firms report trying to increase their inventories somewhat either to meet higher demand or to try to offset continued supply constraints or disruptions. Plastics are one intermediate input that remains difficult to obtain, and a semi-conductor manufacturer reports that components necessary for its production process remain in short supply. These supply constraints have yet to translate into higher input or output prices for the affected firms. Increases in commodity prices are the main source of price pressure amongst responding firms; the prices of precious metals continue to rise as do the prices of grains and sugars. The manufacturers affected by these higher input prices have tried to pass along some or all of their increased costs to consumers in the fourth quarter or they plan price increases in early 2011, but they are not certain the increases will stick. Overall, selling prices remain relatively stable at the majority of contacted manufacturers.

Manufacturers continue to report stable to slightly increasing employment. The firms that are hiring tend to be increasing their headcount in skilled positions and/or in production workers to meet increased demand; none are planning substantial increases. Firms' capital expenditures are little changed from previous reports. Most contacted companies anticipate their capital spending in 2011 will be roughly in line with 2010. Those firms who have increased capital expenditures or plan to do so are directing the spending toward IT upgrades or increased plant capacity.

Manufacturing respondents have mixed, but generally positive outlooks for 2011. One firm reports being "very optimistic" about next year, while most are "cautiously optimistic." In comparison, the firm that has been struggling recently said the outlook for the next three to six months is "lackluster." Many contacted firms remain concerned about their health care costs going forward, and a few expect that the macroeconomic uncertainty will continue to weigh on their sales growth.

Selected Business Services
Advertising and consulting contacts in the First District report significant growth in demand during the fourth quarter of 2010, with increases in revenue ranging from 5 percent to 30 percent. Most contacts attribute the rise to pent-up demand across many sectors and industries, as clients have been restrained by economic conditions since 2008. Responding firms held their prices steady or increased them slightly in the fourth quarter; some are planning to raise prices about 5 percent in 2011. Changes in business costs vary, with some firms citing stable wages, some raising compensation, and one firm cutting costs by hiring lower wage-rate replacements for selected employees. All contacts plan to increase employment next year to meet recent and expected increases in demand, with net hiring of 5 percent to 20 percent. Some of them expect salaries to stay stable through 2011, while some expect modest increases.

Most contacts are highly optimistic about their near-term performance and throughout 2011, mostly based on the increased volume of deals already secured and growing inquiries from clients. Expectations about general economic recovery in 2011 contribute to these projections as well. They expect annual growth in revenue ranging from 5 percent to 15 percent.

Commercial Real Estate
New England's commercial real estate market was stable in recent weeks. In Boston, a steady volume of lease renewals generated significant revenue for brokers but resulted in little to no net absorption. For the year, office vacancy increased in greater Boston and, according to one contact, is currently in the high teens in the Financial District, while Back Bay and Cambridge enjoy much lower rates (below 10 percent). In Providence and Portland, modest positive absorption is cited in core downtown districts, as tenants are eager to sign deals to take advantage of low rental rates, which are not expected to persist much longer. In Hartford, the vacancy rate for downtown, class A office space was placed at 24 percent for the third quarter; there is some expectation that the city's office absorption rate will turn modestly positive in 2011. Construction remains limited across the region, with the exception of the multifamily sector, which continues to attract strong investor interest and very attractive financing terms. Based on recent sales prices, one Boston lender to commercial real estate is concerned that the city's multifamily market may be "overheating."

The outlook ranges from quite cautious to solidly optimistic. Boston and Hartford contacts expect slow growth and only limited absorption in 2011. Prospects for absorption in 2011 were more robust in Providence and Portland, and a Boston banking contact expects very strong loan demand for commercial properties throughout 2011. No contacts are predicting a "double-dip" in the commercial real estate market (nor for the economy as a whole). Nonetheless, a few are concerned that commercial foreclosures could increase in 2011, putting downward pressure on property values.

Residential Real Estate
Home and condo sales in the First District continued to show significant year-over-year declines in November, as many contacts had expected. Respondents say the large year-over-year declines throughout New England partially stem from the extra boost in activity observed in November 2009 when the first-time homebuyer tax credit was originally set to expire. Nonetheless, home and condo sales activity remains sluggish by any measure throughout the region, with all contacts anticipating that total 2010 sales will fall short of 2009. Meanwhile, the median price of homes continues to edge up in the New England states, with the exception of New Hampshire, which observed another month of year-over-year price declines. Contacts attribute increasing median home prices to relatively higher sales of more expensive properties rather than a general upward movement in home prices. Second-home purchases continue to fare well relative to other segments of the market, as higher income buyers take advantage of low mortgage rates and a large inventory of discounted homes. Most contacts report that inventory levels are rising; they do not see this as a source of concern except for a contact in New Hampshire, where the November months of supply exceeded other states in the region.

Contacts anticipate a continuation of current sluggish activity levels into 2011, with fewer swings than in 2010. Some respondents express concern about possible tax reforms restricting the mortgage interest deduction.

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Last update: January 12, 2011