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Federal Reserve Districts

First District--Boston

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Recent business developments are positive on average across the First District, but performance continues to vary between and within sectors. Reports are mostly upbeat among contacts in software and IT. Manufacturing firms also had mostly positive news, with recent sales at least steady for most and very strong in some cases. Among staffing services, positive developments outnumber negative ones. Retailers give mixed results, including some significant sales declines. In the commercial real estate market, leasing activity is flat to modest and downward pressure on rents remains high in Boston. Residential real estate sales are very weak following the expiration of the home-buyer tax credit but selling prices are up slightly in many parts of the region. Concerning the labor market, some firms are hiring modestly or plan to hire soon, while others are still reluctant to hire. The number of job-seekers is perceived as high by some, while others are having difficulty filling vacancies requiring specific skills. Some software and IT firms are giving significant pay raises and staffing firms also note an increased willingness to pay higher wages among some firms. Constraints in ocean-freight capacity are a concern among manufacturers and retailers, as are increases in commodity prices. The outlook varies widely across sectors, from largely positive in manufacturing and software to cautious in retail and tourism and mixed among commercial real estate professionals.

Retail and Tourism
First District retailers report mixed sales results for July and early August. Year-over-year same-store sales range from decreases of 10 percent to increases in the low single-digits, and one contact quips that "flat is the new up." Back-to-school sales were modest, with the consumer focused on buying for immediate needs only. Several retailers report increases in foot traffic but also smaller average ticket size. Inventory levels are generally in line with expectations. However, decreased ocean-freight capacity has firms concerned about their ability to restock in a cost-effective and timely manner, forcing additional advanced planning. Capital spending is mixed and headcount is stable. Retailers note significant cost increases for food commodities, particularly dairy. Outlooks are cautious or cautiously optimistic.

Travel and tourism are stronger than expected. One contact attributes the trend to generous travel incentives, supported by an increase in the number of low-fare air carriers operating out of Boston. Overseas arrivals are much stronger than forecast. Business travel is also more robust than anticipated, with travel managers using the downturn to leverage favorable rates. The respondent reports modest hiring in the visitor industry, although the outlook remains cautious.

Manufacturing and Related Services
Nearly all manufacturing firms surveyed report favorable results for the second quarter. Demand is particularly strong at semiconductor and pharmaceutical firms. One respondent from a long-standing business describes the second quarter as their best ever. In contrast, a parts supplier for the aircraft industry says that demand has been slow to recover from the recession. Sales held steady in recent weeks among many contacted manufacturers; multiple respondents attribute recent demand to booming business in northern and western Europe. The same firms describe domestic sales as flat in comparison. In addition, several diversified manufacturers and one large domestic industrial manufacturer all note that sales leveled off in recent weeks relative to the first half of the year.

Inventory levels at many contacted firms are reportedly low in comparison with pre-recession levels. One firm remarks that, even if demand were to slow, it would not be as damaging as in 2008 because most goods are being produced only as orders arrive. Low inventory levels are also attributed to supply constraints. A number of firms report that suppliers are producing at capacity due to cuts in capacity in 2008 and 2009. In addition, inputs for one firm have been slow to arrive because of cutbacks in global ocean-freight capacity. These constraints have led at least one contact to stockpile intermediate inputs as a hedge. Despite supply constraints, almost all respondents report that selling prices remain relatively steady, although some note continued fluctuations in raw materials prices. Some firms passed modest price increases on to their customers.

Hiring remains limited among the manufacturing firms surveyed. The companies that cut workforces substantially during the recession are slowly re-hiring workers, although employment at most of these firms remains below 2008 levels. Some firms expect hiring to pick up next year, although one firm wants to see sustained growth before making major hiring plans. A few semiconductor and pharmaceutical firms continue to have difficulties filling skilled positions. Capital spending plans at most manufacturers remain moderate, as some firm's upgraded IT infrastructure and other equipment. A number of firms characterize the investment environment as favorable but had not yet found good opportunities.

Many firms remain optimistic about growth going forward. One contact notes that demand is much stronger than what news reports suggest. By contrast, a few firms are not as optimistic as they were three months ago. Firms again mention being concerned about the uncertainty of fiscal policy going forward.

Software and Information Technology Services
Software and information technology contacts in the First District report that business conditions continued to improve. Year-over-year revenue increases ranged from mid-single digits to 15 percent in the most recent quarter. Half of contacted firms increased their headcounts and another was "on the cusp of hiring." One contact, however, reports a modest reduction in headcount due to restructuring. Wages are steady or up notably, with some merit increases in the range of 3 to 5 percent. Prices held steady and one contact observes less discounting pressure relative to a year ago. Half of contacted firms say that they have increased capital and technology spending relative to last year in order to expand or upgrade equipment; remaining contacts held capital and technology expenditures steady. The outlook among contacts is moderately positive. Most expect a continuation or slight acceleration of current growth rates.

Staffing Services
The majority of First District staffing contacts report that business continues to strengthen, although a few experienced stagnant or inconsistent activity over the past three months. Most contacts describe business since the end of Q2 as "fair to good" or "generally positive," with revenue growth in the single digits. Year-over-year revenue changes vary widely, from down slightly to up by over 40 percent. Labor demand increased, particularly in the light industrial, information technology, and health care sectors; however, the consensus among contacts is that jobs are hard to fill. A few contacts report that the supply of job seekers is plentiful but that clients are reluctant to hire; others said that recruiting workers with specific skills has become more difficult. Bill rates and pay rates are steady or up slightly, as many clients show increased willingness to pay higher rates for quality workers. The number of conversions from temporary to permanent staff increased and permanent placements picked up. Several contacts express concern over rising costs, particularly workers' compensation, health insurance, and state unemployment insurance taxes. Despite these concerns, contacts predict continued growth in the coming quarter.

Commercial Real Estate
Contacts in Hartford, Boston, and Portland describe commercial leasing activity as flat in recent weeks, while a Providence contact describes activity as healthy, notwithstanding some seasonal slowing in recent weeks. Lease renewals and relocations resulted in net negative absorption across the region as businesses continue to consolidate operations. Investors continue to bid aggressively for low-risk properties, while demanding steep discounts on distressed assets. Contacts in Hartford and Portland both are increasingly pessimistic concerning the outlook based on weak forecasts for job growth, while a Providence contact sees potential for significant positive absorption in the downtown office market based on deals currently under discussion. Also on the bright side, loans are flowing to new condominium conversions in core Boston neighborhoods based on increasing buyer demand.

Residential Real Estate
New England contacts report large year-over-year declines in home sales. In July, the greater Boston area reportedly had the fewest sales in over a decade while other parts of the region also experienced very weak sales. Nonetheless, contacts observe relative calm among realtors regarding weak sales activity. They understand that the home-buyer tax credit moved sales forward in time, leaving fewer buyers in the market following the expiration of the incentive. Some contacts are optimistic that a recovering economy and low interest rates on mortgages, particularly for buyers with good credit, will draw buyers into the market in the near future.

The number of homes and condos on the market increased around the District. A couple of respondents in Massachusetts expect the increased inventory, and resulting greater choice, to lure more buyers to the market; conversely, a New Hampshire contact is concerned about the excess supply of homes. The median price of homes and condos moved up in most parts in New England. Such moves are attributed to a greater fraction of sales coming from higher-end properties rather than to a general increase in prices. The only exception to this trend is New Hampshire, where prices fell 1 percent year-over-year. Contacts expect prices to remain stable in the coming months, although they anticipate slower sales for the rest of year due to the expiration of the tax credit and perceived lack of job security.

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Last update: September 8, 2010