September 9, 2009
Federal Reserve Districts
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Many business contacts in the First District report recent signs of improvement, although most say activity remains below year-earlier levels. Contacted retailers, manufacturers, and software and IT services providers, while still reporting mixed results, are more confident about their companies' and the economy's eventual recovery. Staffing firms cite upticks in activity. Residential real estate sales rose in recent months, although prices continued to fall; commercial real estate markets remain very soft. Price pressures are mostly said to be modest and fewer firms say they plan layoffs than in the last round.
Retailers continue to manage inventory levels carefully, with several working to bring inventory more in line with sales. Capital spending remains carefully controlled. Contacts note that headcounts are stable. Selling prices are steady, but a few retailers express concern about potential price pressures.
Manufacturing and Related Services
Manufacturers say that materials costs are flat to down compared to a year ago. The only notable increases are due to foreign currency appreciation. Selling prices also are reported to be mostly flat to down, depending on the degree of market competition.
Apart from implementing previously announced restructuring programs, most of the contacted manufacturers and related services providers have no plans to increase or decrease their U.S. employment in coming months. Domestic hiring is limited mostly to offsetting attrition or expanding R&D and finance staffing. Many firms are continuing to hold down labor costs through furloughs, pay freezes, or suspensions of 401K plan matches. Several respondents that had cut employee pay 5 percent to 20 percent earlier this year say they are now planning to restore previous pay levels in 2010. Capital spending plans remain subdued, and center mostly on new product development or cost reduction.
Most manufacturers and related services providers are planning for modest revenue growth and continued cost controls over the coming six to 12 months. Many indicate that their finances are in solid shape, with stable or improving cash flow. Some express lingering concerns about consumer spending.
Software and Information Technology Services
Staffing contacts express continued concern over expected increases in health insurance costs and state unemployment taxes in 2010 and whether they will able to pass those costs on to clients who may not yet be profitable. Contacts note that clients are currently hiring to fill vacancies, rather than hiring to expand. One contact indicates that many companies are trying to do their own sourcing instead of utilizing staffing firms, as hiring speed is no longer paramount. New England temporary services respondents are largely more optimistic than they were three and six months ago, but remain uncertain about the near term, as they anticipate a long, gradual recovery.
Commercial Real Estate
In recent weeks, our Providence contact has seen an increase in foreclosure sales of commercial properties, all of which had been originally financed through commercial mortgage-backed securities (CMBS). Sale prices on these properties reflect discounts of up to 60 percent from peak prices observed in 2007. A Boston contact has observed declines in property value ranging from 30 percent to 60 percent on various downtown office buildings. One contact predicts that the national commercial property value index will decline 50 percent peak-to-trough before recovering. In a number of cases, rents have fallen below the level that supports debt repayment. In light of these conditions, delinquencies and foreclosures are expected to increase further in the coming months. Underwriting standards in the commercial market remain very strict, with loan-to-value ratios largely below 70 percent. Small regional banks continue to support the bulk of financing activity in the region. Our regional banking contact reports that they have maintained a healthy balance sheet through conservative lending, and experienced higher profits this summer compared to a year ago as a result of increased market share in (commercial and residential) mortgage lending.
Over the next six months, contacts expect commercial market fundamentals either to decline further (in Boston and Providence) or to remain roughly flat (in Hartford). None expects a significant recovery of property values within the next year, and possibly longer depending on the extent of commercial foreclosures and the employment outlook. The recovery of deal volume, rental rates, and vacancy rates typically lag recovery in employment rates by up to six months. Therefore, contacts are watching the employment numbers closely and adjusting their forecasts accordingly.
Residential Real Estate
While sales were up, New England home prices continued to fall in June and July. Median home prices fell 5 percent to 14 percent year-over-year in July in the six states. An exception was the Boston area, where the median home price in July was only about 1 percent below what it was in July 2008. This Boston contact believes that sellers are pricing more realistically and "further price declines should be minimal." Another contact attributes low prices to the large number of bank-owned property sales and also to the fact that prices at the peak were unsustainable; this contact does not believe that prices will return quickly to the pre-slump level. Respondents report the inventory of homes for sale in Massachusetts has fallen below a "balanced" market level, as potential sellers are listing their homes "only if they have to;" this seeming shortage should self-correct once prices stabilize.