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Federal Reserve Districts

First District--Boston

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Business activity in the First District continues to expand gradually. Contacts in manufacturing, software and IT services, staffing, and commercial real estate seem more upbeat than six or 12 weeks ago, while retailers continue to give mixed reports, and residential real estate markets remain soft. Labor demand is improving somewhat, with most contacted sectors undertaking modest net hiring. Some firms report raising prices or wages and complain of selected increases in non-labor costs, but most say they are holding their prices and wages stable. The outlook for 2011 is slightly more optimistic than last time, with somewhat less reference to downside possibilities.

Retail and Tourism
First District retailers report mixed sales results for the fall months. Year-over-year same-store sales range from decreases in the low single digits to increases in the low single digits, with several contacts reporting flat sales. The majority of contacted retailers expect a highly promotional holiday shopping season yielding modest sales increases. Inventory levels are mixed, but generally in line with expectations. One respondent notes that cost pressure from reduced ocean freight capacity has abated, while another reports increasing price pressure from rising fuel costs. Headcounts continue to increase; these increases primarily reflect new store openings, although some firms are staffing up for the holidays. One respondent cites increased wage pressures. Retailers note significant cost increases for commodities, particularly cotton, liquid sugars, and nuts. Outlooks range from cautious to cautiously optimistic, with most contacts making less mention of downside risks than in earlier conversations.

Travel and tourism in the Boston area is strong. One contact attributes the trend to generous travel incentives and perceived value. Leisure travelers are reported to be taking more frequent short vacations rather than fewer long trips. The tourism outlook is seen as positive as long as the promotions continue.

Manufacturing and Related Services
Nearly all contacted manufacturing firms are relatively upbeat about their current activity levels. Firms in the semiconductor sector continue to report particularly robust sales growth in the third quarter, and manufacturers who sell components for automobiles and other machinery also report relatively strong revenue growth. A couple of manufacturers note that their sales are on pace with the very strong results they posted in the fall of 2008, prior to the economy's deterioration. Other firms indicate that their sales figures have weakened somewhat relative to the first half of this year, but are still strong relative to 2009. Most responding firms express less concern now than at the end of the summer that sales growth has plateaued and/or could diminish.

Inventory levels at most contacted firms have risen a bit since the second quarter, either to correct undue reductions made in response to the economic downturn or to limit future supply disruptions. One firm notes that its inventory levels are back on plan after being low for a few quarters because of a dramatic increase in orders. Some manufacturers say their suppliers continue to operate at capacity and are still slow to provide necessary production materials. These continued tight supplies along with rising oil and metals prices have created input cost pressures for selected firms. To offset their higher costs at least partially, these manufacturers (most of whom are intermediate-goods suppliers) have either raised their selling prices or plan to do so in the near future; one firm plans to raise prices from 4 percent to 6 percent, expecting that only about half of the increase will stick. Notwithstanding these exceptions, responding manufacturers characterize selling prices as relatively stable.

All but one of the contacted companies reports stable to increasing employment. The number of recent or planned hires at individual firms is not large, but they say business is good and they need more staff to handle the increased demand. Nonetheless, employment remains well below 2008 levels at most firms. In addition, capital expenditures currently remain in line with plans and most firms expect little if any change in capital spending for 2011.

Responding manufacturers generally expect growth to continue at a reasonable pace heading into 2011, although a few say they think 2011 may not be quite as strong as 2010. Indeed, some uncertainty continues to surround the outlook for next year. A number of firms, however, are somewhat less cautious when discussing the prospects for next year than they have been in recent conversations.

Software and Information Technology Services
New England software and information technology contacts report that business continues to improve, with year-over-year revenue increases ranging from mid-single digits to over 20 percent in the most recent quarter. Increased activity has led most respondents to continue raising their headcounts. One contact is adding positions across the board, reporting a 10 percent increase in staff year-to-date; another, by contrast, reports a modest reduction, with a number of customer service and information technology positions being sent overseas. Prices are holding steady, although most respondents report that strong discounting pressure still exists. Capital and technology spending is relatively unchanged, with only one contact reporting an increase in outlays. Respondents are generally more optimistic than they were three months ago. With strong order pipelines, most are expecting a continuation or slight acceleration of their current rate of growth in early 2011.

Staffing Services
A majority of New England staffing contacts report that business continues to expand. Most contacts describe business since the end of the third quarter as "good" or "slightly improved," citing revenue growth in the single-digit range, although a few have experienced inconsistent activity in recent months. Year-over-year revenue changes range from flat to up more than 30 percent. Labor demand has strengthened, particularly in the information technology, medical, manufacturing, and legal sectors. Labor supply is starting to tighten, with contacts reporting increasing difficulty in finding qualified candidates, especially for high-skilled jobs. In response, many contacts have strengthened their recruitment efforts and some have expanded their sales forces. Jobs remain hard to fill from the demand side as well: an elongated hiring cycle persists, with many clients still reluctant to hire. Some respondents continue to express concern over rising employment-related costs such as UI and workers' comp. Despite these concerns, staffing contacts remain generally positive in their outlook, predicting faster growth in 2011.

Commercial Real Estate
Reports indicate that New England's commercial real estate market improved modestly in recent weeks. Office leasing volume is up in core Boston business zones, but mostly because of lease renewals as net absorption remains close to zero. Providence saw slow but positive net absorption and a pickup in leasing activity in recent weeks. In Portland, no significant absorption is reported but rents appear to have leveled off and some significant deals for downtown office space are under discussion. By exception, market fundamentals are flat in Hartford as business sentiment remains cautious amid uncertainty.

Around the region, investment sales activity is on the rise across most sectors, with multifamily still the most in-demand property class and retail second. Competition for well-leased multi-family properties in prime locations has intensified: financing terms are increasingly favorable and capitalization rates have fallen to as low as 5 percent in some cases. Respondents note a number of modest construction and development projects around the region, including retail construction and speculative (residential) land development in Portland, a significant number of multifamily projects in Boston, and health-care-related activity in Providence.

Boston contacts are moderately optimistic but do not expect growth to result in substantial net absorption during the next six to 12 months. Risk of further downward pressure on office rents in Boston's financial district continues, reflecting both high vacancy rates and a downward shift in the cost basis among properties recently sold at discounts. A Providence contact, while quite optimistic in the near term, sees some vacancy risks on the horizon in two to three years. Portland's outlook is more upbeat than in the last report, based on talk of growing investor interest and potential leasing demand. The outlook for Hartford remains uncertain and our contact is not willing to bet on robust growth in the near future.

Residential Real Estate
Home and condos sales in the First District declined again in September on a year-over-year basis. Contacts throughout the region continue to attribute the declines to the expiration of the tax credit, along with job insecurity and more general economic uncertainty. Respondents expect year-over-year monthly declines for the rest of the year and worry that 2010 sales will be lower than 2009. At the same time, the median price of homes and condos is edging up in most parts of the region. Some contacts say the rise in the median price is due to increased activity in higher-end properties, not to a broad increase in home prices. Inventory continues to climb throughout the region; most contacts see these increases as a positive development because the number of properties for sale has been very low. Contacts do not expect strong activity to return to the region's housing markets until consumer confidence improves.

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Last update: December 1, 2010