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Federal Reserve Districts

First District--Boston

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Reports from business contacts in the First District indicate the economy slowed further in the third and fourth quarters to date. Retailers report that sales are softening and, in some cases, are below year-earlier levels; manufacturers cite declines in orders or sales from a year ago, some of which are sizable. Most software and information technology services respondents see a slowdown currently or in the near future, while temp firms cite a marked falloff in business in November. Upward price pressures are said to have eased markedly. Commercial and residential real estate markets remain weak, although on the residential side, September or October saw steep price declines and sales about level with a year earlier.

Retail and Tourism
First District retailers cite mixed sales results for October and early November, but even those contacts with sales increases from a year earlier report a softening. Retailers say that consumers are scaling back spending, and they expect consumers to spend less on the holidays this year.

Inventory levels continue to be tightly managed. Capital spending reports are mixed for the remainder of the year, but all contacted retailers plan to cut spending for 2009. The majority of respondents have invoked hiring freezes and a few have recently reduced or are considering reducing headcounts. Seasonal hiring for the holidays appears to be scaled back from previous years. Several contacts indicate that credit availability has started to improve; however, one contact notes a reduction in the availability of consumer financing.

Overall, First District retailers are concerned and watchful in their outlook, especially with regard to the upcoming holidays. The majority of contacts express the view that the next six to twelve months will be challenging.

Manufacturing and Related Services
Manufacturers and related services providers headquartered in the First District say that sales and orders have weakened in the fourth quarter to date. Some firms indicate that the deterioration has been dramatic, and that market demand is the worst they can remember. Many companies making major equipment, automotive parts, and consumer-good components report that demand has decreased at double-digit rates from late 2007 or from earlier in 2008. Some respondents indicate that overseas sales are weakening as a result of slumping economies or the strengthening dollar, while others say that overseas sales continue to grow, particularly in Asian markets. In contrast to prevailing trends, contacts report rising sales of aircraft parts and energy-management products. In addition, demand for medical and scientific instruments and supplies is said to be holding up fairly well.

Most manufacturers say that overall materials costs are flat to decreasing, and that transportation costs have come down. However, contacts indicate that some suppliers have not reduced prices immediately or automatically as metals and oil prices have fallen. In such cases, manufacturers are pressuring suppliers for price reductions or are anticipating price reductions as contracts expire or are renegotiated. Reports on selling prices are mixed. Some contacts indicate that their prices are under downward pressure as markets erode. Others have increased their prices slightly or expect to do so in early 2009.

Almost all of the manufacturing and related services respondents report that they are taking steps to reduce their U.S. wage bills. Measures include layoffs, furloughs, and selective pay cuts. In addition, some companies report they are dismissing temporary workers, restricting employee travel, or reducing purchases of consulting services.

The majority of manufacturing respondents indicate that they are trimming capital expenditures, citing a need to spend more cautiously or preserve cash flow. Some contacts report that financing costs have risen to abnormally high levels.

Most manufacturers express caution or concern about their sales in coming months. About one-half say they expect their business to be in decline through the end of 2009. Others cite heightened uncertainty with respect to the economy and financial markets, and have contingency plans should conditions turn out to be worse than currently expected.

Software and Information Technology Services
First District software and IT services firms report mixed outcomes in the fourth quarter to date, with year-over-year revenues ranging from declines of about 10 percent to gains of nearly 25 percent. A few contacts note that clients are delaying deals until there is less market uncertainty or are slowing down payments, thus elongating the sales cycle. Many respondents have felt increased pressure from customers to reduce prices, while others are paying closer attention to spending in order to maintain profits. Some firms are anticipating hiring freezes or layoffs; meanwhile, others plan to continue expanding. All contacts express apprehension regarding the economy and many anticipate a difficult year ahead. Although some firms are hoping for modest to high growth in 2009, contacts say they recognize the unpredictability of financial markets and are proceeding "cautiously."

Staffing Services
The sentiment among New England staffing respondents is gloomy. While contacts report varied year-over-year revenue changes in the most recent quarter, all have experienced flat to sharp declines in business during the past several weeks. Labor demand has slowed, especially for workers in general administrative and financial occupations, and the majority of respondents say that the demand for permanent hires has weakened even more than for temps, with one contact reporting a 20 percent decline in revenues from permanent placements over the past year. Rising unemployment has improved labor supply, but it is still difficult to fill positions for engineers, programmers, healthcare lab personnel, and IT-professionals. A few contacts remark that clients are asking to renegotiate bill rates downward, by 5 percent to 15 percent, which will in turn place downward pressure on pay rates in the coming months; another respondent notes that applicants have been more flexible recently about accepting lower offers.

Staffing executives in the First District are very worried about the crisis in the financial markets and the effect it is having on clients, with one contact noting, "Everybody's spooked. There's no hiring going on at all." The end of the year typically marks a slower time for the staffing industry as clients are closing their books and terminating projects, but respondents expect this year to be much worse. One contact anticipates at least a 20 percent drop in revenues during the fourth quarter of 2008, and most are hoping to maintain revenues but expecting declines in 2009.

Commercial Real Estate
The mood among contacts this period is downbeat. A Boston respondent is concerned that the "bearish mood" has spread to sectors of the regional economy previously described as robust, such as higher education. The same contact describes the credit squeeze as "murderous," and cites the example of a major downtown Boston project which remains stalled for lack of the last $50M in financing, despite having secured tenants that would occupy a significant share of the space. A commercial property lender in Boston reports that lending remains extremely conservative at their bank, as they approach their own borrowing limits and strive to maintain adequate cash reserves. In Connecticut, sales volume is reportedly very low and financing limited.

The office rental market in Boston is showing growing signs of weakness, with very low leasing volume and softening rents--the latter are reportedly down 10 to 15 percent from their peak in early 2008. Absorption is negative and vacancies have edged up to around 11 percent downtown and to 15 or 16 percent in the Boston suburbs. There is talk of looming layoffs in the financial sector that will put further upward pressure on office vacancies. Another Boston contact notes that retail vacancies are not being filled, and he is aware of upcoming store closings that will add to retail vacancies in the next few months. In Maine, rents are down 10 to 20 percent across all sectors, but vacancies are holding steady, and no large job losses or store closings have been reported yet.

The outlook is pessimistic. Absorption is expected to remain negative in Boston throughout 2009. Contacts in Maine and Connecticut are concerned that firms will be going out of business or announcing large layoffs, adding to commercial vacancies and putting further downward pressure on rents. Credit market conditions are not expected to improve significantly in 2009, either.

Residential Real Estate
In a change from August numbers, home sales in the New England region showed modest declines and some increases in September and October compared to the year before. However, these numbers reflect deals that were initiated 45 to 60 days earlier, and some contacts report that activity has slowed again since the troubles in the financial markets in September and October.

Single-family home sales in Massachusetts increased 5 percent year-over-year in September and were up again in October, including a 13 percent year-over-year increase in the Boston area. Home sales in New Hampshire increased 1 percent year-over-year in October. Home sales in September decreased 1 percent year-over-year in Rhode Island and 5 percent year-over-year in Connecticut. These improvements in year-over-year sales changes compared with August coincided with substantial price declines. Median home prices were down 8 percent in Connecticut, 13 percent in Massachusetts, and 17 percent in Rhode Island in September compared to a year earlier. Median home prices in New Hampshire fell 13 percent year-over-year in October. In the Massachusetts multi-family home market, sales increased 40 percent year-over-year in the third quarter while prices dropped 35 percent.

While most contacts see the September sales numbers as a positive sign, they express doubt about whether the improved sales patterns will continue; respondents in Boston and New Hampshire say the market was very quiet in October and November. One contact continues to think that the downturn in the housing market will last through the end of 2009.

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Last update: December 3, 2008