WASHINGTON (MNI) – The following is the Federal Reserve text of the
First District assessment of the economy in its Beige Book survey of
economic conditions in all 12 Districts, published Wednesday:
FIRST DISTRICT – BOSTON
Business conditions continue to improve in the First District.
Contacted retailers cite sales increases, manufacturers say demand
continues to grow, and advertising and consulting firms report modest
revenue increases. Home prices appear to be improving along with sales
in most of the region’s residential markets, while commercial real
estate appears to be stabilizing although potential defaults remain a
concern. Most New England employers are no longer shedding workers, and
many are restoring recession-induced cuts in wages and benefits. Both
input and selling prices are mostly said to be stable.
Retail
Contacted retailers in the First District report positive sales
results for the early months of 2010; year-over-year same-store sales
vary from flat to increases of about 20 percent, with “improved sales
tone” across the board. Contacts attribute the uptick in sales to
strengthening consumer confidence, strong marketing, and having “the
right product and the right price.” All respondents are cautiously
optimistic in their outlook.
Inventory levels are primarily on target, although one contact
notes a decrease because of unexpectedly strong sales. Capital spending
is more robust than in previous reports, with contacts spending on new
store openings, store remodels, IT systems and other technology. Several
respondents report slight increases in headcount and the reinstatement
of prior wage cuts. Vendor and selling prices are said to be stable,
although one contact notes an increase in food-related commodity prices.
Manufacturing and Related Services
Most manufacturing and related services contacts headquartered in
the First District continue to report improving demand for their
products in the first quarter of 2010. A furniture maker cites sales
increases of more than 20 percent in the first quarter of 2010 relative
to a year ago, a metals fabrication business reports similarly robust
revenue growth, and business is also strong at a local semi-conductor
firm. Overall, the manufacturers serving IT, electronics, and business
services industries report the greatest increases in demand. By
contrast, firms selling machinery and equipment to industrial customers
and those supplying real estate-related sectors, especially commercial
real estate development, say that business has stabilized or is
improving somewhat, but they expect underlying demand to remain
relatively sluggish for the rest of the year. In addition, some firms
caution that growth in the first half of 2010 appears strong simply
because demand in the first half of 2009 was so weak. There has also
been a bounce in growth at some firms from one-time inventory
corrections.
Input costs for manufacturers are generally unchanged, with the
exception of most metals, for which prices are rising. Many companies
report that they are holding selling prices steady, although a few have
managed (or plan) to implement modest increases this year; they face
limited pressure to reduce their selling prices.
The employment situation in the manufacturing sector remains
relatively unchanged. Two notable exceptions are a metals fabrication
firm that has increased its workforce about 15 percent relative to a
year ago and a large diversified equipment and technology manufacturer
that expects to continue layoffs through this year. At most of the
remaining firms, hiring in the U.S. is expected to remain relatively
flat or increase only slightly for 2010. Manufacturers continue to try
to restore wage cuts and/or unfreeze wages. Most firms report
instituting or planning to institute modest wage increases of 2 percent
to 3 percent this year. Virtually all contacts continue to express
concerns regarding rising health care costs.
Most manufacturing respondents report that their planned capital
expenditures for 2010 are level with or slightly greater than their
expenditures in 2009. Most of the firms’ domestic capital expenditures
will go toward expanding IT investment and/or their research and
development functions. Respondents commenting on financing conditions
say they have improved.
Virtually all the contacted manufacturing firms remain cautiously
optimistic that business conditions will continue to improve as the year
progresses. The consensus, however, is that it may take a while for
underlying demand to pick up substantially, and 2010 may turn out to be
a transition year.
Selected Business Services
Most First District advertising and consulting contacts report
modest quarter-over-quarter increases in revenue in the first quarter of
2010, although some report flat to slightly negative growth.
Nonetheless, all agree that demand is up substantially from the first
quarter of 2009, with one firm’s growth exceeding 30 percent. As some
uncertainties about healthcare reform were lifted, for example,
consulting demand from the healthcare sector showed a rapid increase,
and this strong growth is expected to continue throughout the year.
Consulting demand from private equity firms increased slightly as well.
Most respondents made large price cuts in 2009, in the range of 10
percent to 20 percent, with only a few holding their prices steady. Now
prices are being raised, but they remain below their pre-recession
levels. Regarding compensation; some contacts have kept and plan to keep
base salaries steady, while others have raised salaries from 2 percent
to 10 percent. Performance bonuses are generally down. Most respondents
intend to maintain current staff sizes, with only replacement hiring,
but a few firms expect to increase headcounts by 2 percent to 15 percent
by the end of the year, and one firm plans to further downsize by 5
percent.
Advertising and consulting contacts generally say they are
cautiously optimistic about the rest of the year, as some uncertainties
remain. Most respondents forecast a slow recovery for their industry and
project annual revenue growth for their firms between 5 percent and 10
percent, although some expect flat growth. They express concern about
the availability of credit and the possibility of a double dip.
Commercial Real Estate
Commercial real estate fundamentals in New England have been
roughly stable since the last report. In Rhode Island, the uptick in
leasing activity seen in January has not been sustained and sales volume
remained weak in recent weeks. Nonetheless, our contact notes that
vacancy and rental rates in downtown Providence have stabilized. In
Boston, leasing activity consists largely of renewals, and renewing
tenants continue to give back significant blocks of space. Boston
contacts have not seen sizable rent declines in recent weeks, but
downward pressure on rents remains significant and tenants are
reportedly bargaining hard for improvements and other concessions.
However, owners with weak equity positions cannot secure financing for
improvements and therefore cannot effectively compete for tenants.
Vacancy rates in greater Boston are roughly flat or up slightly since
the last report; apartment vacancy rates in Boston have increased less
in the current downturn than have vacancy rates for office and
industrial properties. In Hartford, the industrial market is currently
the weakest sector, with 1.2 million square feet of vacant space added
in the first quarter of 2010; fundamentals for office and retail
properties were little changed over the same period. While Hartfordfs
commercial real estate market was described as “stagnant” overall,
consumer sentiment in Connecticut was perceived as improving.
In the investment sales market, contacts report growing demand for
commercial properties by institutional investors and life insurance
companies searching for higher yields. In line with this trend, a
commercial real estate lender in Boston has seen significant sales
activity for fully-leased, low-risk properties, and his bank has lost
bids to other, more aggressive lenders. A local asset management firm
recently purchased a prime, mixed-use property in Boston among
competition from multiple bidders. At the same time, investor sentiment
is reportedly mixed as to whether prices have hit bottom, and
significant gaps remain between bidding and asking prices in the riskier
segments of the market.
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** Market News International Washington Bureau: 202-371-2121 **
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