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Federal Reserve Districts

First District--Boston

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Business activity in most sectors continued to expand during February and March in the First District, although retail reports are somewhat mixed and real estate markets report little improvement. Manufacturers cite ongoing revenue gains, some quite strong, although they also voice increased uncertainty about the outlook. Most consulting and advertising firms report strong year-over-year growth in the first quarter. Retailers and manufacturers continue to fill vacant positions but say they are doing only modest net hiring; consulting and advertising contacts intend to add to headcounts but are uncertain about skilled labor supply. Retailers and manufacturers cite commodity cost pressures and some are raising their selling prices to pass cost increases along to their customers.

First District retailers report mixed sales results for the period from January through early March, with comparable same-store sales ranging from modest decreases to mid-single-digit increases. Several respondents note the negative impact that inclement weather had on sales. Sales of apparel, accessories, groceries, and home furnishings are strong, as the consumer continues to seek value.

Inventory levels are mixed, but retailers say they are working to manage them carefully. Contacts note price increases for commodities, including cotton, dairy, grains, meat, produce, and nuts; several express concern about likely future cost increases. Shipping costs are said to be increasing, attributable to rising oil prices. Selling prices are mixed, with some contacts holding prices steady and others passing cost increases along to customers. Headcount is increasing in line with new store openings and select hiring opportunities. Capital spending is mixed. Outlooks range from cautious to cautiously optimistic.

Manufacturing and Related Services
Business is good overall at most responding manufacturers. One firm in the chemical business reports that sales are skyrocketing and its plants are running at full capacity. Technology-related manufacturers also report that sales growth continued to be strong in 2011Q1. Revenue growth varied across different business segments at more diversified manufacturers, with some sectors such as health care-related products and transportation seeing rapid sales growth and others experiencing more moderate increases. By comparison, the climate has softened a bit for a medical-device producer as well as an electronic-systems manufacturer because of uncertainty about the federal budget; both firms have a portion of their sales tied to customers that rely on government contracts and/or grants and that seem unwilling to spend until the budget uncertainty is resolved. In addition, a manufacturer heavily tied to residential construction reports a further deterioration in its business as housing markets remain sluggish. Commodity prices continue to be a concern for a number of contacted manufacturing firms; they especially mention price increases for oil, precious metals, corn, and wheat. Some firms have already raised their selling prices in response to these input price increases and others plan to do so as the need arises. Companies who recently raised their prices comment that the increases were accepted easily by their customers. A food products manufacturer notes that there have been few objections because their customers are facing price increases from numerous suppliers. At some firms, these recent price increases do not fully compensate for their inability to raise prices in prior years. As a result, profits are flat at one firm despite its robust sales growth, and some other firms are looking for ways to cut costs further. A number of companies also note rising transportation costs for their goods due to rising diesel fuel prices. In addition, firms that use electronic components in their production are somewhat concerned about supply-chain disruptions in Japan. Inputs from Japan are expected to be in short supply soon (if they are not already) and the extent to which Japanese disruptions will impact firms' costs and/or production is uncertain. Respondent firms' sales exposure in Japan, however, is relatively limited and the revenue impact of the disaster is expected to be fairly small.

A number of technology-related manufacturers plan to hire additional workers in the coming months, in addition to the workers some of them have already hired this year. Much of this hiring will be domestic, but not necessarily in New England. Non-technology manufacturers note limited if any hiring plans. At least one firm plans to reduce its workforce slightly through restructuring in an effort to cut costs further, given continued uncertainty in the economic environment. Nearly all firms, however, mention plans to implement merit-based salary increases of 1.5 percent to 3 percent. In addition, one firm says it is planning for a greater merit pool next year to compensate for a few years of low salary increases.

Overall, manufacturing firms continue to be cautiously optimistic. They anticipate growth will continue at a steady pace, but relative to the last round they voiced somewhat greater uncertainty about the outlook for the rest of 2011. This change is due to the natural disaster in Japan, the current geopolitical climate worldwide, and ambiguity about U.S. government spending going forward.

Selected Business Services
Consulting and advertising contacts in the First District mostly report significant growth in revenue during the first quarter of 2011. Consulting contacts in particular experienced large increases in demand, with year-over-year revenue increases ranging from 12 percent to 40 percent. They believe that clients are setting aside larger portions of their budgets for consulting or advertising services as the impact of the recession wanes. One exception is an advertising company whose revenue was down 25 percent from a very strong first quarter of 2010. Contacts have slightly increased the prices they charge for their services or they plan to do so over the course of the year.

Most respondents plan to augment employment by the end of the year to meet increased demand. The magnitude of the planned staff-size increases ranges from 3 percent to 12 percent. A number of contacts say they are experiencing recruiting difficulty because they are looking for highly specialized workers. One consulting firm also notes that the long work hours that consulting companies demand may no longer be acceptable to many qualified candidates. Wages are steady or up slightly, with one consulting firm reporting it has removed bonus cuts.

Our contacts are hopeful regarding their performance in the second quarter and the rest of 2011. They see the pipeline as very robust and expect significant year-over-year revenue growth of 10 percent to 20 percent, except for one advertising company that foresees flat demand. Some contacts note that unsuccessful recruiting efforts are a risk for these projections.

Commercial Real Estate
New England's commercial real estate market was roughly flat in recent weeks. In Boston, office leasing activity is stable, but not sufficient to generate significant positive absorption. Asking rents for office space are either flat or up marginally in greater Boston. However, contacts note that some existing tenants are successfully bargaining for rent reductions, bringing their rents down to current market rates from higher levels agreed upon at the market's peak. In Rhode Island, political uncertainty over budget deficits is said to have stalled business plans, resulting in light leasing activity, but pending deals for downtown Providence continue to engender optimism regarding office absorption in the coming months. In Portland, the commercial market was mostly quiet, with the exception of two significant deals for call-center space. A Portland contact perceives continued downward pressure on office rents despite modest positive absorption. Outlooks across the region call for slow but positive office absorption for the remainder of 2011, conditional on ongoing employment growth in line with recent trends.

The multifamily sector remains strong in southern New England, with new construction under way in several areas of greater Boston and in the planning stages in two Rhode Island locations. Lenders continue to bid aggressively for apartment projects in greater Boston, as rental rate increases persist. While some Boston contacts worry about potential overbuilding in this sector, at least one is confident that a glut is unlikely in light of permitting hurdles and a scarcity of vacant land in desirable locations. Respondents mention no significant new construction activity aside from the multifamily sector.

Residential Real Estate
States throughout the region experienced year-over-year declines in single-family home sales in February with the exception of New Hampshire where sales increased modestly. The median price of homes also slipped slightly in the region except for Rhode Island where the median price rose. Meanwhile, sales and median prices of condominiums were lower than a year ago except in the Greater Boston area where the median condo price edged up. Contacts cite inclement weather as a factor contributing to February sales declines; sellers as well as buyers were discouraged by the weather, with home listings decreasing as well. Contacts also note that sales in the first half of 2010 were boosted by the homebuyer tax credit, making year-over-year comparisons difficult to interpret.

Contacts report a recent increase in activity attributable to more favorable weather as well as the typical seasonal rise at the onset of spring. Some respondents say the distressed share of property sales has declined, but others lacked sufficient figures to assess the distressed property share accurately. Although inventory levels declined in much of the region during February, the number of homes on the market remains relatively high across New England, particularly in New Hampshire. Notwithstanding their reports of recent increases in activity, contacts emphasize that activity levels in the region's housing markets remain far from what they would characterize as "normal" and they anticipate a lengthy recovery.

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Last update: April 13, 2011