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Federal Reserve Districts

First District--Boston

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Business contacts in the First District generally report slowing economic activity. Retailers and manufacturers are seeing declines or slower growth in sales or revenues than in the last few reports; commercial and residential real estate contacts continue to be downbeat. The exceptions are consulting and advertising contacts, who cite healthy revenue growth. Most respondents mention cost pressures, especially from transportation and energy; manufacturers generally say they are raising selling prices.

Most retail contacts in the First District report a downturn in sales results for the months of May and June, but there were a few bright spots. Same-store sales range from low double-digit decreases to low single-digit increases from a year earlier. Even those contacts reporting positive sales growth say that consumers are scaling back their spending.

Most retailers report reducing inventory levels in response to softening sales. Headcount levels are mixed, with several respondents reporting reductions. Capital spending is also mixed. All contacted First District retailers mention cost pressures, mostly relating to petroleum and metal-based items. Several respondents are taking, or looking for ways to take action to address increased transportation costs for both merchandise and their employees.

Overall, First District retailers are cautious to cautiously optimistic in their outlook and expect the economy to remain a challenge until early to mid-2009.

Manufacturing and Related Services
Most manufacturers and related services providers headquartered in the First District see signs of current or future softness. A broad range of companies report that sales are slow, that sales growth has slowed, or that sales growth is expected to slow by the fall.

Demand for housing-related items remains weak; a home furnishings manufacturer is planning a major promotion in an attempt to avoid layoffs and an HVAC components manufacturer is shutting a factory. Makers of consumer nondurables complain of poor sales at retail stores and restaurants. A manufacturer of components for consumer durables just enjoyed its "best quarter ever," but has marked down sales projections starting in the fourth quarter. A couple of manufacturers provide selected examples of robustness in foreign markets, but others note that foreign demand growth may be slowing. Contacts say that financial and legal services firms have become hesitant to lease office equipment and subscribe to data services. By contrast with the general trend, biopharmaceutical companies continue to report strong sales growth.

Almost all contacted manufacturers voice concerns about elevated materials, transportation, and energy costs. They are anticipating further hikes in prices for oil derivatives, shipping, and travel. Respondents generally have raised their selling prices in recent months, except for products governed by long-term contracts or subject to intense competition. Over one-half of contacts expect to increase their selling prices further in the second half of 2008 and/or early 2009. While some contacts express worry that price increases have led or will lead to losses of market share, others indicate that their customers have become more receptive to price increases because they see them as a consequence of generalized cost pressures.

About one-half of manufacturing respondents are contemplating (mostly small) layoffs in the second half of 2008. Some of the remaining firms are continuing to recruit for added science and engineering positions. On the whole, contacts raised U.S. wages and salaries in the first half of 2008 and plan no further adjustments this year, particularly since turnover rates have stabilized or declined. However, some note upward pressures because employees are increasingly voicing dissatisfaction with their pay in light of rising living costs.

Manufacturers generally say that second-half capital spending will remain in line with their annual plans, reflecting needed investments. Some mention they will be taking a harder look at discretionary spending, and a few indicate that ongoing financial market distress is deterring plans for IPOs and acquisitions.

Manufacturers expect a weak or weaker economic environment in the second half of 2008 and the first half of 2009. They describe themselves as "cautious," "concerned," "discouraged," or "anxious"--especially with respect to consumer spending and sentiment.

Selected Business Services
The majority of First District selected business services contacts report double-digit first quarter revenue growth from a year ago. Demand for consulting services from the healthcare and information technology industries is robust; however, demand from the airline industry has softened significantly. Advertising and marketing firms are seeing robust demand from the tourism industry to promote local destinations as well as from the retail industry.

Most firms are keeping bill rates stable after increasing them at the end of 2007 or at the beginning of 2008. Several respondents note increased travel costs and fuel surcharges. Advertisers are either hiring key senior staff or keeping headcounts stable. Headcounts at all of the contacted New England consulting firms are growing, but at a slightly slower rate than revenues. One consulting respondent notes that a number of people on the job market are looking to "jump to stability," making recruiting a challenge for smaller firms. Contacted consulting firms indicate they are increasing salaries less this year than they did last year.

The majority of New England consulting respondents expect steady revenue growth for the remainder of 2008, although they remain concerned about the economy.

Commercial Real Estate

Sentiment was decidedly morose among commercial real estate contacts this cycle, with the exception of a small mutual bank that continues to enjoy robust demand for its small-scale commercial property loans. Contacts in Providence, Boston, and Hartford all indicate that leasing activity was very slow in recent weeks, even slower than expected based on seasonal considerations. They say that businesses are stalling on lease renewals in the expectation of getting more favorable deals in the near future as the market continues to soften. Still, no dramatic increases in vacancy rates have emerged as yet. In the metropolitan areas of Boston, Hartford, and Providence, office rent growth appears close to zero after concessions are taken into account. The industrial property market has been very weak in both Connecticut and Rhode Island--in the latter case, vacancies are up and rents are down (both modestly) compared to last year.

Sales activity is limited as credit remains very tight and buyers and sellers hold out for their preferred prices. Investment sales and new construction have been hit particularly hard. For example, three major building projects in downtown Boston (office and mixed-use high rises) are said to be currently languishing as they scramble to obtain tenant commitments and financing. As evidence that property valuations have fallen relative to operating incomes, sources report that capitalization rates for commercial property in greater Boston are now approaching 7 percent, up from last summer's estimated 5 percent. Despite enjoying brisk business and high commercial mortgage interest rates, a small Boston mutual bank foresees that it could run up against lending capacity constraints before year's end. Accordingly, lending officers at the bank have been instructed to adopt a "more selective" stance.

Compared with the last report, contacts are less optimistic that market conditions will improve by year's end. One commercial broker is cautioning his clients to be prepared for a long period of stagnation in commercial property values and leasing demand. Another is concerned that retail space is in oversupply in relation to forecasts of weak consumer demand. Despite such pessimism, contacts do not predict a major bust in the market unless the regional employment picture worsens dramatically in the coming months, an eventuality that contacts currently take to be unlikely.

Residential Real Estate
Residential real estate markets in New England continue to show slower sales in 2008 than in 2007. In Massachusetts, home sales decreased 10 percent year-over-year in May (although the monthly change represents the largest April-to-May sales increase in 10 years), while condo sales decreased nearly 25 percent. Connecticut and New Hampshire experienced year-to-date home sales declines of 27 percent and 23 percent, respectively, compared to the same period last year. Rhode Island home sales decreased 18 percent year-over-year in April.

Median home prices in Massachusetts decreased 9 percent year-over-year in May, while condo prices held steady. Connecticut and New Hampshire both report year-to-date median home price declines of 9 percent compared to 2007. Rhode Island home prices dropped 11 percent year-over-year in April.

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Last update: July 23, 2008