WASHINGTON (MNI) – The following is the latest Beige Book survey of
economic conditions in the Federal Reserve’s First District, published
Wednesday:
FIRST DISTRICT – BOSTON
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 governments 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 commodityintensive 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 Englands 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 Bostons 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. Portlands commercial leasing market is said
to be stable, but the outlook there looks increasingly uncertain
according to one contact.
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** Market News International Washington Bureau: 202-371-2121 **
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