June 14, 2006 Federal Reserve Districts First District--Boston

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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 First District retailers cite mixed results for the months of April and May. One contact in the restaurant industry reports that same-store sales were up almost 5 percent for company-operated restaurants and less than 1 percent for franchise-owned restaurants in the quarter ending in April; they were flat in May. An office-supplier notes that sales gains in the quarter ending in April were a little softer than earlier in the year, but still solid, with same-store sales 1 percent ahead of year-earlier levels; total company sales were up 9 percent due to new store openings. An electronics retailer reports that sales have been flat or slightly down, while a drugstore chain registered a robust increase in same-store sales over May 2005. Another contact notes that sales of sporting goods, home goods, children's and women's apparel have been strong, but that men's apparel has been weak. Most retailers are cautiously optimistic, and remain concerned about increasing fuel costs and rising interest rates. 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 Most First District manufacturers and related services providers report that first quarter and early second quarter sales were higher than a year ago. Many had double-digit revenue gains. Among the strong performers are firms in the medical supplies, semiconductor, aerospace, and information technology equipment industries. A couple of manufacturers note new weakness in some segments of retail, but others say their consumer-oriented business continues to be strong. 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. Staffing Services Business is steady for responding First District staffing firms. Most contacts describe business in the first two months of Q2 as "pretty good" or "consistent," reporting revenue growth in the low- to mid-single digit range. One contact says that, while business has been strong in Q2, there has been "no rapid-fire growth." Another reports that revenues are currently up 6 percent over last year, but have shown "no real growth since February." Only one respondent reports year-over-year revenue growth in the double digits. At the other extreme, a contact indicates that his firm's revenues are down 50 percent from last year due to structural changes within the firm and the region's increasing cost of doing business. 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 Business appears to be growing steadily at software and IT services companies in the First District, with firms reporting year-over-year quarterly revenue increases ranging from low single digits to 14 percent in the most recent quarter. Contacts state that the market is competitive and, as a result, the majority have kept their prices unchanged. Two software companies report that the increased use of off-shoring within the software and IT services industry has made it "imperative to have a component of off-shoring" priced in to remain competitive. 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 Contacts across New England report improved conditions for centrally located office space. Boston's downtown vacancy rate has declined to nearly 10 percent, with availability (vacancies plus sublease space) of 12 percent to 13 percent. Correspondingly, rents are moving upward. Contacts in Boston attribute declining city vacancies not to corporate expansion or job growth, but instead to former suburban tenants taking advantage of low pricing to lease city space. In contrast to central business district office space, suburban office markets and light industrial markets are facing some difficulty. Boston suburbs feature office availability rates 5 to 10 percentage points higher than the city center. 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. Return to top Summary New York