June 14, 2006
Federal Reserve Districts
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The First District economy continues to expand. Manufacturers and software and information technology services firms indicate that revenues are up solidly from a year ago, with many manufacturers reporting double-digit gains. Companies in the staffing industry also report steady revenue growth. Retailers' results, by contrast, are mixed, with the majority citing softer year-over-year sales gains. Respondents say the downtown office real estate picture is improving, but mostly at the expense of suburban markets. Labor markets continue to tighten in New England, with various professional and technical positions reportedly difficult to fill; pay rates, however, are not said to be accelerating. Many business contacts continue to express concern about high or rising input costs, but report mixed success in raising their own prices.
Retail and Tourism
Inventory levels are also mixed, with some retailers reporting more inventory than desired, while others cite a need to boost inventories. Vendor prices continue to reflect increases for petroleum-related items, while many contacts report being able to pass on some price increases to consumers. Employment is varied, with one contact eliminating several positions because of weaker than expected sales, and several others increasing headcount due to acquisitions and seasonal hiring. Most contacts say they are in line with capital spending plans for the year, with spending primarily focused on new stores.
A travel and tourism contact reports that business is so robust in Boston, the area is on pace to exceed the benchmark high levels established in 1999-2000 in every metric except average room rates. Business travel remains strong, but is still cost sensitive. Advanced bookings are also solid. International travel seems to be thriving, and the opening of several new major hotels is expected to further spur demand. Rising gas prices and inflation remain a concern.
Manufacturing and Related Services
About one-half of the respondents express concern about high or rising transportation and input costs, especially brass, bronze, titanium, and oil derivatives. Some manufacturers have seen input costs decrease as a result of downward trends for technology products or greater foreign sourcing. About one-half of the contacted manufacturers have raised their selling prices in recent months or plan to do so shortly. On the whole, they report that commercial and industrial customers have been more accepting of price increases than retail purchasers.
Most manufacturers report little change in their U.S. headcounts, apart from selective additions in professional, technical, and sales positions. Financial and supply-chain management positions are said to be hard to fill. A couple of firms are increasing production worker hours in the U.S., but others continue to shift employment (both production and non-production) to lower-cost locations. Average pay increases for 2006 are mostly in the range of 3 to 4 percent.
Domestic capital spending plans are quite varied, ranging from no change or "tight" to substantial increases relative to last year. Some manufacturers are investing to expand their product development or production, while others are implementing IT system upgrades or installing more modern equipment.
Most manufacturers are upbeat about the demand for their products and services through the remainder of 2006. To the extent they see risks, their concerns chiefly center around the outlook for consumer spending and housing markets, although some mention possible adverse effects on their own margins or the economy at large from high or rising commodity prices.
The consensus among contacts is that demand for labor is solid but jobs are becoming harder to fill. Labor supply continues to be tight, particularly for high-end clerical and administrative positions, skilled manufacturing jobs, and medical positions. More than one contact reports that even as the availability of skilled labor is diminishing, clients are taking their time with the hiring process or "setting the bar too high," and often losing qualified candidates to other companies. Some respondents also indicate that clients are unwilling to pay higher bill rates despite increasing recruiting costs and upward pressure on pay rates for skilled workers. All contacts note an increase in demand for permanent labor and a shift in the role of staffing companies away from the "temp" side to more comprehensive staffing services, including human resources and project management services. Contacts expect more of the same for the remainder of the year--steady demand for staffing services coupled with a continued tightening in the supply of skilled labor, resulting in increasing pay rates and bill rates.
Software and Information Technology Services
Most software and IT services firms are increasing their headcounts between 5 percent and 10 percent. All firms with plans to hire report a tightening in the labor market in New England, especially for technical positions. Several firms note increased turnover and upward pressure on wages as employees now have more job opportunities. Respondents report annual wage increases between 3 percent and 10 percent. Most software and IT services contacts indicate they are holding capital spending fairly level; however, a few have increased outlays to expand facilities and upgrade equipment.
First District software and information technology firms expect either steady or accelerated growth for their companies in the third quarter. Two companies say the biggest challenge to growth is finding people to fill open positions at reasonable cost.
Commercial Real Estate
New England--and Boston in particular--continues to attract large volumes of commercial real estate investment; contacts characterize the level of interest as being "off the charts" or "incredible." They note that the resulting price increases continue to compress commercial real estate yields. One contact worries openly that commercial real estate properties are being "priced to perfection" and may not be able to perform to the ambitious assumptions implicit in their transaction prices.