June 11, 2008
Federal Reserve Districts
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Sales and revenue results at First District retailers and manufacturers continue to be mixed, but contacts indicate that business activity is generally softening. Respondents cite ongoing cost pressures; many manufacturers say they have raised or plan to raise prices. Revenue growth rates have slowed for software and information technology services firms in the region, and most staffing firms report little growth. Contacts in residential real estate cite some positive signs, but ongoing declines in home sales and prices. According to most respondents, the outlook remains uncertain.
Inventory levels and employment are generally stable, with several respondents scrutinizing the need for future hiring. Capital spending is largely on plan. A majority of contacted First District retailers mention cost pressures, mostly related to oil.
Overall, First District retailers are cautious in their outlook and expect the next few months to be a continued challenge. However, most are confident they will pull through this period of economic uncertainty; they expect conditions to improve by early to mid-2009.
Manufacturing and Related Services
Many manufacturers continue to voice concerns about sharply rising materials costs, especially metals, plastics and other petroleum derivatives, and chemicals. They also mention that energy and transport costs have increased substantially. Most of the affected respondents have raised prices or expect to do so shortly. However, some firms are experiencing margin pressures because of competition in specific product markets or deteriorating finances on the part of their business customers.
A majority of manufacturing respondents have implemented restructuring programs to reduce their U.S. headcounts. The remaining firms are mostly holding domestic employment steady. Average pay increases are in the range of 3 percent to 4 percent. Contacts generally describe their 2008 U.S. capital spending plans as normal and say their domestic investments focus on reducing operating costs or developing new products. Roughly one-half of the sample point to lingering problems in capital markets; they mention high costs or stringent conditions, or they worry that funding may not be available for large, lumpy projects such as acquisitions.
Almost all firms express concerns about the U.S. economy, especially consumer spending, housing markets, and energy costs. Many expect that the impact on their business will be most notable between now and the end of the summer. A few mention likely or potential vulnerabilities in 2009.
Software and Information Technology Services
Several staffing executives report a change in hiring procedures among client companies. One contact says, "Clients are holding out for the A candidate, when in the past, they took the A and B candidate." Another complains about "intense scrutiny on resumes," which is putting applicants for temporary positions through a rigorous process akin to that used for permanent hires. One contact believes recent economic uncertainty has augmented business, with client companies increasingly turning to temporary staffing to avoid long-term obligations. On the other hand, some clients are hesitant to undertake new projects, thus lowering their need for job applicants. Despite their concern over economic instability, respondents in the staffing industry voice optimism regarding the second half of the year.
Commercial Real Estate
Contacts indicate that commercial leasing activity has slowed further in recent weeks, but not dramatically so. Many say that maintenance and construction costs are up sharply, putting pressure on net operating incomes. In greater Boston, contracted rents for prime office space are falling short of original asking rents. Existing tenants are cutting back on space. Absorption is negative and vacancies continue to edge up. Downtown buildings appear to be doing fine, with about 10 percent vacancy, but activity is slower in the suburbs, where vacancy is estimated at 14 percent or higher. Leasing activity has been slow throughout other parts of New England but, as in Boston, office vacancy rates are still low or average by historical standards. Retail leasing activity has been strong among tourist-oriented shops in Maine, but slower in strip-mall developments across the region, where vacancy appears to be up slightly. A Providence contact reports that commercial real estate in Rhode Island is currently "in a recession."
Despite the downbeat reports, commercial real estate contacts throughout the District indicate that layoffs have been minimal so far. Expectations are that market conditions will get slightly worse before getting better, with the turnaround expected by the fourth quarter of 2008 or the first quarter of 2009.
Residential Real Estate
Contacts in Massachusetts continue to report increased activity at open houses, and April's pending home sales numbers in the Boston area are said to look promising. However, one contact notes that financing issues could still prevent increased activity from translating into increased sales.