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Federal Reserve Districts

First District--Boston

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Business contacts in the First District mostly continue to see demand growth, but many are toning down their outlooks. Contacted retailers' year-over-year percentage sales changes range from low single-digit declines to high single-digit increases. Responses from manufacturers are mixed, but most continue to report revenue growth. Advertising and consulting firms generally cite strong results, but note a slowdown in the pace. Commercial and residential real estate markets remain soft. Net hiring remains very limited except for advertising and consulting; even there, contacts see restrained hiring going forward. Price pressures continue to ease; some commodity prices are down and many firms are holding their own prices steady. Contacts in several sectors cite uncertainty as a key factor restraining demand.

Retail and Tourism
First District retailers contacted in late September and early October provide mixed messages about sales trends and many note they are having a difficult time gauging their current circumstances. On a year-over-year basis, sales range from being down 3 percent to up 8 percent, with several in the "generally flat" middle. One big-ticket retailer saw sales steadily moving up over the last few weeks, although he cautions that a few weeks do not constitute a trend. Another retailer notes that sales have been up and down, on both a daily and a weekly basis, and attributes this volatility to consumer sentiment gyrating with positive and negative news about the domestic and global economy. Furniture sales are reportedly up a bit in some markets and apparel sales are said to be good. Some retailers still face "high" vendor prices and say they are passing them on to consumers. Contacts are uncertain about what to expect for the 2011 holiday sales season. Firms say they are budgeting about 2.5 percent wage increases for 2012, are hiring selectively, and are not planning layoffs.

The travel and tourism sector reports strength despite the generally downbeat global economic climate. Within the sector, leisure travel is slowing, while domestic and international business travel remains 5 percent to 7 percent higher than in 2010. September growth slowed to 4 percent from the 5 percent to 7 percent year-over-year gains seen earlier in 2011. Advance hotel bookings for 2012:Q1 are up. The industry is expecting positive but slower growth in 2012.

Manufacturing and Related Services
Business conditions at contacted manufactures are mixed. Most respondents continue to report revenue growth, but the vast majority also report that they are less optimistic about the next six to eighteen months than they were the last time they responded. Demand continues to be strong for firms in the automotive and aerospace components industries, as well as for a medical device firm, a semiconductor firm, and companies manufacturing industrial-related products. In comparison, sales growth remains positive but slow at an instruments manufacturer, a business services firm, and a company that makes entertainment products. Reasons contacts give for this sluggish demand include continued tepid sales to government-related institutions and financial services firms being very cautious about their expenditures. Demand was noticeably lower than in previous quarters--beyond the typical slowdown during the summer months--at a food products manufacturer. In addition, a business products firm and a manufacturer whose sales are dependent on the residential investment sector report even weaker demand than in the previous quarter.

Hiring at contacted manufacturers is limited to replacing workers who depart through retirement and/or attrition. A semiconductor firm says it is implementing a hiring freeze because incoming orders for 2012 have dropped sharply in recent weeks, especially from China. A business products firm continues to reduce headcount as part of a strategic restructuring plan and the manufacturer with sales tied heavily to residential investment is also reducing its workforce for the first time since 2009. A repeated theme from the majority of contacts is that they are implementing changes to keep costs low and/or reduce operating expenses. A couple of firms note that merit increases in 2012 will likely be lower than in 2011, while another firm plans to restructure its healthcare benefits to shift more of the costs to employees without offsetting pay increases.

There are fewer reports of input price pressures from manufacturers than in recent months, even though prices for some food-related commodities such as milk remain high. In fact, copper prices have dropped substantially in the last month or so and other precious metals prices have also declined; oil prices are also lower. Thus some manufacturers are facing noticeably lower costs; for the most part, they say they are waiting to see if commodity prices stay lower before adjusting their selling prices. More generally, contacted firms say their selling prices remain stable, although they are raising prices "as needed," as indicated in previous reports. Some manufacturers note, however, that consumers are currently reluctant to spend on discretionary items, so they are offering promotions to partially offset price increases and/or promote their products so as not to lose customers to lower cost competitors.

Despite the uncertain economic environment, contacted manufacturers continue to look for worthwhile investment opportunities, and some have made recent acquisitions. To the extent that manufacturers are holding back on investment, they say it is not because of a lack of credit or insufficient cash holdings. Overall, firms are less optimistic about business conditions heading into 2012 than they were in the last round. Many firms are shifting any pickup in demand they previously anticipated for 2012 forward to 2013.

Selected Business Services
Consulting and advertising contacts in the First District report generally strong business conditions, although weaker than three months ago. Marketing and advertising contacts report robust growth--between 10 percent and 25 percent year-over-year. The higher end of the growth figures are driven by demand from financial firms, including private equity, who need to market new products in the changing financial and regulatory environment. Strategy and business consulting contacts report weaker demand in the third quarter than earlier in the year; they say clients are focusing on services that can be directly tied to the bottom line such as sales and process efficiency rather than strategy and management. Economic consulting firms report varying degrees of success, with firms doing government work experiencing stagnant demand, while firms focused on litigation see strong growth (close to 20 percent) reflecting growing caseloads involving large financial firms and the financial crisis. A healthcare consulting firm cites growth of only 2 percent year-over-year, attributing it to weakness in the pharmaceutical industry, with most growth coming from developing countries.

Contacts say they are generally raising prices about 3 percent to 5 percent to cover cost increases and maintain profit margins. Two strategic consulting contacts, however, made bigger price changes: one firm dropped prices by 10 percent to compete with cheaper foreign firms, primarily in India, while the other raised prices 10 percent to keep up with compensation costs. Hiring activity is mixed, with firms spread along the spectrum from a 25 percent addition to a 10 percent layoff. Nearly all contacts, however, say hiring is likely to be restrained or flat for the foreseeable future.

For the most part, contacts have revised their expectations downward since the last conversation in July. Although many still expect business conditions and profitability to remain strong, they note that they are in a highly pro-cyclical industry and economic indicators point towards a pessimistic outlook. The one exception is firms that primarily provide services to the financial industry, who expect strong growth as financial firms continue to deal with the aftermath of the financial crisis and regulatory overhaul. Several contacts say they believe the increasing prospect of continued political stalemate in Washington is having serious deleterious effects on both their firms and the economy as a whole.

Commercial Real Estate
Reports from commercial real estate contacts around the District contain a mix of good news and bad. On the good news side, in both Boston and Providence significant amounts of office space were absorbed in the third quarter as tenants took advantage of attractive rents for prime locations. In the column of bad news, the outlook turned more pessimistic among roughly half of contacts in light of a perceived increase in national and global risks to growth. Respondents also report a number of other mixed or contradictory signals. While one contact perceives that leasing activity in downtown Boston has increased in recent weeks, another contact notes that the pace of office absorption year-to-date in Boston, while positive, remains well below what would be expected in a healthy recovery. Sales activity remains limited in Providence, while Boston continues to enjoy robust investment demand for prime office and apartment properties. The lending environment is characterized, on the one hand, by aggressive competition to fund loans on low-risk properties, such as well-leased buildings in prime Boston locations, and, on the other hand, by a decline in credit availability for properties carrying higher risk, such as those experiencing high vacancy rates. Construction activity in Boston continues at a moderate pace in the apartment, education, and health sectors, while office construction activity is described as negligible.

Residential Real Estate
Notwithstanding substantial increases in home and condo sales in August compared to a year ago, residential real estate markets in New England remain weak and sluggish. Contacts note that the enormous decline in buyer activity last year following the expiration of the tax credit largely explains the year-over-year increases observed this year. Meanwhile, the median sale prices of homes and condos decreased slightly in August throughout the region, with the exception of the Greater Boston area where prices rose. Inventory levels in Greater Boston reached very low levels in August. Residential respondents throughout New England describe buyers as cautious and patient, reflecting fears over job security. Some contacts express concern about the ability of consumers to secure home-purchase financing. At the same time, several contacts note an increase in investors purchasing single-family properties to rent out.

Forecasts for the remainder of the year remain bleak, with contacts anticipating 2011 sales will fall short of last year's total. Respondents do not expect a significant improvement in residential real estate within the next one to two years.

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Last update: October 19, 2011