July 27, 2011 Federal Reserve Districts First District--Boston

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Economic activity continues to increase in the First District, but results are somewhat more mixed than in recent reports. Retailers cite modest sales increases, manufacturers note generally good results but a few softer segments, and advertising and consulting firms mostly cite strong growth. Commercial real estate markets continue to see slow improvement, while housing markets remain in the doldrums. Selected retail and manufacturing contacts cite reduced commodity cost pressures compared to the last report, although some upward price pressures persist. Headcounts remain largely unchanged or up only slightly, except for advertising and consulting firms, which continue to hire. Outlooks are generally positive, but most contacts express concern about current and future negative effects of increased uncertainty, attributable in part to failure to resolve the U.S. debt ceiling dispute promptly and the associated unclear future course of federal expenditures and taxes. Retail First District retailers report mixed sales results for the early summer months, with comparable same-store sales varying from flat to mid single-digit increases from year-earlier. A few contacts mention the favorable impact of promotional activity on sales and consumers' shopping patterns. Inventory levels are mixed. Several contacts note upward price pressure on commodities including paint, copper, plastics, and cotton, and one says vendors have given notice of price increases to take effect during the coming months; however, another contact notes a lessening of cost pressures. Respondents are passing along price increases where possible. Headcount is mixed, with some firms adding people in line with new store openings and limited hiring opportunities, and a few consolidating headcount. Capital spending is primarily limited to new store or renovation opportunities and select IT projects. Outlooks range from concerned to cautiously optimistic, although the majority of respondents cite apprehension about the government's ability to handle the debt ceiling crisis. Manufacturing and Related Services Business conditions at contacted manufacturers generally remained good in the second quarter, but results across individual firms and business segments are more mixed than in recent reports. A firm in the aerospace industry cites strong sales as clients purchased parts to implement previously deferred maintenance. A food products manufacturer and a plastics manufacturer also report relatively strong sales volume for the first half of the year. In contrast, a business services firm sees "soft " demand from small businesses, while another says sales in its banking services business were weak because of continued pressure on banks to cut costs. Growth in government-related sales continues to be sluggish. In addition, a company whose products are heavily dependent on consumers' discretionary spending reports that customer demand in the U.S. is weak this year compared to last, although international demand remains strong. Finally, a manufacturer that supplies energy-efficiency-related products to the commercial real estate sector notes that demand declined in the second quarter relative to the first quarter despite higher energy prices in the more recent quarter; they attribute this unusual sales pattern to economic uncertainty. A number of other manufacturers also note that even though their business remains good overall, at least some segments are being restrained by their customers' uneasiness about the current federal fiscal situation and overall low consumer confidence. Commodity prices--especially oil and steel prices--remain a concern for firms with commodity-intensive production processes. Dairy-related prices also continue to rise, and resin (oil)-related packaging costs remain high. Firms implemented price increases, especially earlier in the year, to offset these higher costs; in the current round, there is little discussion of further price increases in the near-term. Indeed, a manufacturer in the food services industry expects prices for wheat and related commodities to soften somewhat in coming months. In addition, supply shortages for bulk chemicals, which had persisted for the last two years, vanished unexpectedly in recent weeks according to a plastics manufacturer; he says it is too early to tell whether the change reflects a drop-off in worldwide demand or an increase in supply. Hiring and investment at contacted firms continues to be limited because of uncertainty about demand and a desire to keep costs low. Manufacturers investing domestically say they are mainly spending to upgrade IT and related systems, although a couple of firms report relatively modest expenditures to slightly increase plant capacity. Employment at the vast majority of contacted firms is stagnant. Much of the ongoing hiring is to keep up with worker attrition, although a few firms are increasing their headcount slightly, with one company "finally" converting some of its temporary help to permanent employees. Looking ahead, many of the responding firms remain cautiously optimistic about growth prospects, especially in 2012. For many companies, however, the outlook for the rest of 2011 is not as strong as it was earlier in the year, since growth in the second quarter came in somewhat lower than expected. Nearly all contacted manufacturers attribute this change in the outlook to the increase in economic uncertainty resulting from the unresolved U.S. fiscal situation. Selected Business Services Consulting and advertising contacts in the First District generally report strong growth during the second quarter of 2011. Most respondents cite year-over-year revenue growth in the 10 percent to 20 percent range, although one consulting firm reports flat revenue and another acknowledges a 9 percent revenue decline. Contacts note that advertising and consulting as industries are very procyclical and have thus benefitted from the recent recovery in the corporate sector. All advertising and consulting respondents have increased employment recently and plan to continue to do so in the near future, with most planned increases close to 5 percent. Several contacts note difficulty in finding qualified employees, which some firms say is constraining their sales growth. Additionally, most contacts observe stable wage growth between 3 percent and 5 percent. Although one contact says that tough competition has forced his company to lower prices, most firms have been able to pass along the costs of their compensation growth to customers. Contacts are generally very optimistic about their outlook for the second half of 2011 and 2012. All expect positive growth for the rest of the year and most expect double-digit growth in 2012. Despite this optimism, most contacts express concern that the current debate over the debt limit has created considerably uncertainty which is delaying business decisions by themselves and their clients. Because their business is very procyclical, they say their services may be some of the first cut if companies become pessimistic and retrench, so they fear that failure to resolve the debt ceiling issue could have huge negative ramifications for their firms and for the general economy. Commercial Real Estate Conditions in New England's commercial real estate market are little changed since the last report. Fundamentals continue to improve across the region, but at a very slow pace. Boston contacts perceive a modest uptick in office leasing activity in recent weeks, yet at the same time note that net absorption of office space slowed in the second quarter compared to the first. Respondents expect Boston's office leasing market to continue the slow improvement pattern of recent months, but say that weak employment reports for the U.S. as a whole constitute a downside risk. In Rhode Island, leasing activity is described as slow, but deals in progress are likely to improve the picture in coming months. Portland's commercial leasing market is said to be stable, but the outlook there looks increasingly uncertain according to one contact. Concerning commercial investment, demand for prime Boston office properties remains robust as sales prices appear to be edging up, based on recent transactions. Boston's apartment market remains very strong and continues to raise concerns of overheating. While apartment rents increased significantly year-over-year in the metropolitan area--by 5 percent to 10 percent by one estimate--contacts judge recent property prices to be too high and warn of a possible excess of planned construction. Meanwhile, some large office construction projects in Boston are moving forward, but others in the planning stages are likely to remain stalled indefinitely. Residential Real Estate Throughout the region, residential real estate markets remained stagnant in May, with most New England states posting significant year-over-year declines in home and condo sales. The homebuyers' tax credit, which boosted sales in the first half of 2010, contributed significantly to the year-over-year declines observed in May, but contacts report activity in the housing market remains slow, with the buyer pool resting at weak level. Contacts in some states, however, note increases in home sales compared with two years ago, which they interpret as a positive sign. Meanwhile, median home prices remained roughly steady in May compared to a year earlier, with states experiencing either modest increases or declines; the median price of condos also moved in mixed directions across the region. According to contacts, job insecurity and stricter lending requirements among larger banks continue to restrict the flow of buyers into the residential real estate market. At the same time, inventories continue to rise in the region, although most contacts say current inventory levels are not troubling because inventories in the region have been low, limiting the selection for potential buyers. Contacts anticipate that sales figures in July will show year-over-year increases as the calendar moves beyond the expiration of the tax credit in June last year. Most forecast sluggish activity for the rest of 2011 and do not anticipate a significant increase in buyer activity until 2012 or later. The median sale price of homes is expected to move up or down only slightly over the coming months. Return to top Summary New York