April 26, 2006 Federal Reserve Districts First District--Boston

Skip to content Summary Districts Boston New York Philadelphia Cleveland Richmond Atlanta Chicago St. Louis Minneapolis Kansas City Dallas San Francisco Full report

Business activity continues to increase in the First District. Most manufacturers and selected business services firms report revenues well above year-earlier levels in the first quarter of 2006; retailers also indicate sales were ahead of a year ago in February and March. A majority of firms are passing cost increases on to customers. Manufacturers and consulting firms indicate the labor market for professional positions is tightening. Residential real estate markets continue to slow compared with a year ago; observers characterize current activity levels as more sustainable than those during the past few years. Retail and Tourism Retail contacts in the First District report positive results in February and March, as year-over-year sales range from flat to single-digit gains. Products that sold particularly well this period include footwear, accessories, home goods, and kitchen and bath-related products, although one retailer mentioned that year-over-year comparisons are complicated by Easter's shift from March to April. A restaurant contact notes that warmer weather seems to have helped sales. However, both women's and men's apparel sales were softer than expected, and an automobile dealers' group indicates that sales continue to be weak. Inventory levels are mixed, but reportedly in line with expectations. Vendor prices are varied, with some contacts noting ongoing price decreases, on imported apparel, for example. Selling prices also continue to be mixed; some retailers are passing increases along to consumers, while others are holding prices steady or decreasing them slightly. Same-store employment is generally steady, although one contact has had layoffs. A couple of contacts report reduced capital spending, while several others are planning new store and showroom openings, the acquisition of new vehicles, store remodeling, or minor technology updates. A travel and tourism contact reports "feeling good" about tourism in New England. While the ski season was weaker than expected and last minute bookings are still prevalent across New England, tourism in the Boston area is booming. The contact says business and convention travel is recovering and leading to increased advanced bookings; she expects tourism in Boston and nearby coastal areas to thrive in the summer months. With the exception of the auto dealers association, most retail and tourism respondents are cautiously optimistic in their outlook, with expected growth in the remainder of the year ranging from flat to high single-digit increases. Manufacturing and Related Services Most First District manufacturers and related services providers report that first quarter sales were higher than a year ago. Many had double-digit or high single-digit percentage revenue gains, and several comment that overseas demand rose faster than domestic demand. Order backlogs are signaling continued revenue growth in the second quarter. Biopharmaceutical sales are doing particularly well. Many respondents express concern about high or rising costs for energy, transportation, and metals (chiefly steel and copper). Some also face increased costs for food and other agricultural-based inputs. About two-thirds of the contacted manufacturers--makers of both intermediate and final goods--have raised their selling prices in recent months. Some of these firms are satisfied with their ability to increase prices, while others feel that competitive pressures are constraining their increases. Companies not raising prices describe the situation as "horrible" or "a big problem." Manufacturers are fairly evenly balanced in their intentions to reduce, hold constant, or increase their U.S. headcounts, but almost all firms (even some with layoffs) are hiring as they seek a higher skill mix. The market for skilled workers is said to be tight or somewhat tighter than in late 2005. Contacted companies are experiencing difficulties filling vacancies in fields such as finance, accounting, supply-chain management, engineering, and scientific R&D. However, overall average pay increases for 2006 mostly are targeted to remain in the same range as last year, that is, 2.5 to 4 percent. Domestic capital spending plans are quite varied. Some manufacturers are planning to add capacity or new production capabilities. Others intend to reduce capital expenditures as they complete big projects, engage in outsourcing or off-shoring, or feel a need to conserve cash. Most manufacturers expect the demand for their products to increase in 2006. Their concerns center around high energy, materials, or regulatory costs; rising interest rates; and problems in the domestic auto industry. Depending on the company, these forces are viewed as risks that could possibly reduce profitability or--toward the end of 2006 or in 2007--cause a cutback in spending that would hurt revenues either directly or through a weakening of the general economy. Selected Business Services All responding First District advertising and management consulting firms enjoyed improving business conditions and revenue growth in the first quarter of 2006, with most firms reporting double digit gains from a year ago. Contacts attribute their improved growth rates to increased merger and acquisition activity and a general improvement in the economic climate, noting that all of the industries they serve have seen increased sales. The majority of responding consulting companies have earned moderate price increases over year-ago levels with no discernible effect on demand; however, one contact commented that his firm was not getting price increases per se, but rather reducing the amount of discounting. Three contacts note that costs have increased substantially for travel, with hotel and airfare costs both up more than 10 percent relative to a year ago. While most of these expenses are passed on to the client, one firm noted that non-billable travel and training costs hurt their bottom line by a couple of margin points in the first quarter; as a result, they are buying space for a training room to avoid renting increasingly costly hotel space. A majority of New England business services contacts plan to increase their headcounts in 2006. Several firms note that the labor market is tightening, with one contact describing it as a "war for talent;" while qualified people are out there, they all have multiple offers. Most contacts raised wages by 3 percent to 6 percent over the last year. All respondents have a positive outlook, with one commenting that, "unless there is a catastrophic shift in the business cycle, we anticipate more of the same for the rest of 2006," which another stated, "means we'll be pretty darn busy." Residential Real Estate Residential real estate contacts in the First District uniformly cite a continued slowing in the pace of sales. The Massachusetts real estate market has seen five consecutive months of year-on-year sales declines in detached single family homes. Condominiums in Massachusetts, however, are performing well, setting monthly volume records in both January and February. The slowing residential sales pace has led to an overall increase in inventory. Compared to about 10 months of inventory at this time in 2005, the Massachusetts market currently features 16 months of inventory. Contacts across New England suggest that the inventory awaiting sale is not evenly distributed across price ranges, but rather that there are many high-end properties on the market, while entry level and midrange properties are tight in many communities. Residential real estate prices appear to be leveling off. Price appreciation, although still positive overall, is below 5 percent year-on-year in most markets. Contacts feel that the deceleration in price increases is a positive sign; they characterize the New England market as being slower but healthier than in the last few years. Though much of the current year's performance will be determined by spring sales, the general expectation is for prices to remain steady and for the sales pace to be slower than in recent years past. One Massachusetts contact said that even with slower sales, he expects 2006 to be among the top five years all time for residential real estate. Return to top Summary New York