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March 4, 2009
Federal Reserve Districts
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Economic activity continues to slow in the First District, with most manufacturers tallying year-over-year revenue declines, some of which are substantial. Both residential and commercial real estate markets in the region saw some further deterioration in recent months, while staffing and software firms report ongoing declines in demand. Retail results, by contrast, are somewhat mixed. Respondents across sectors say they are restraining compensation in multiple ways, and many firms have cut employment. Although pressures are downward, only a few contacts indicate they are reducing their selling prices; manufacturers say they are avoiding general price cuts either to protect margins or because they foresee little demand responsiveness. Retail Retailers continue to manage inventory levels tightly and have cut 2009 capital spending plans, although a few say they are taking advantage of expansion opportunities. Most respondents have invoked hiring freezes and some have already reduced or are considering reducing headcount in the near future. Several contacts have also frozen wages or eliminated bonuses or retirement contributions, and note that employees have taken the news of these freezes and job cuts "remarkably well." Overall, First District retailers are watchful, as they expect consumers to continue to be cautious for the next several quarters. Manufacturing and Related Services Many manufacturers mention that various commodity prices have fallen, but in general these decreases have not been fully reflected in the cost of materials or purchased services. Manufacturers' selling prices are under downward pressure, prompting some to offer selected reductions. On the whole, however, respondents express reluctance to implement broad price cuts--either out of a concern for margins or because they estimate that customer response would be limited under current circumstances. Biopharmaceutical firms are implementing price increases averaging in the single digits. About one-half of the contacted firms have cut domestic employment and/or hours in the past three months. Apart from planned growth in the biotech industry, most contacts expect to keep their U.S. headcounts stable in 2009. About one-third of responding manufacturers have cut employee pay rates. Most of the remaining firms expect to increase pay in the range of 3 percent to 4 percent this year. Domestic capital spending plans for 2009 are mixed. Some firms intend to adopt labor-saving technologies or to expand their capacity, particularly for research and development or for making high-technology products. Others are cutting their capital expenditures, citing pressures to conserve cash. Almost all of the contacted manufacturers express caution about their revenue prospects, albeit to varying degrees. Some firms anticipate that their sales will be depressed throughout 2009; reasons include falling automotive production and consumers "battening down the hatches." Others are hoping for an improved economic environment by the second half of the year, or expect their own company to fare relatively well despite economic headwinds. Some respondents indicate that their strong cash position will provide some buffer against financial stresses in the year ahead. Software and Information Technology Services Staffing Services Several contacts say they believe the New England employment picture is slightly better than the national average, and one notes an increased willingness by candidates, particularly those working in the Midwest's automotive industry, to relocate to New England. While a few respondents cite a slight uptick in activity in February, all are concerned about the uncertainty of the economy and many anticipate several months before a recovery occurs. Commercial Real Estate In Providence, the downtown office market is described as stable, but sublease supply is up and downward pressure on rents is mounting. Some retail closings were reported in Providence, and the industrial market is "drifting lower, but not in big trouble yet." No major changes are reported for Hartford, but deal volume is close to zero for both leasing and sales. Office vacancy increased "marginally", but sublease supply has doubled since December 2008. Retail vacancy has risen in the area, but not by as much as this contact predicted earlier in the year. The credit situation is described as largely unchanged since last report. Financing continues to flow to deals under $10M but remains scarce for deals above that threshold and virtually non-existent for deals over $50M. The financing for the smaller deals is coming from community and regional banks around the region with healthy balance sheets. One Boston contact expects an increase in defaults on large commercial properties as risky loans come to maturity in the next 12 months; he says borrowers will be unable to refinance these large deals unless investors return to the securitization market. Contacts expect further deterioration in the commercial market in the coming months due to ongoing weakness in the economy and ongoing disturbances in credit markets. Residential Real Estate Condo sales dropped more than 25 percent year-over-year in Rhode Island and Connecticut in December and in Massachusetts in January. While home prices saw large declines throughout 2008, condo price declines were much more modest until recently. In the New England states for which they are reported, median condo prices fell 10 percent to 26 percent year-over-year in December or January. Contacts are generally optimistic regarding the tax credit included in the stimulus package. Even though the new $8,000 credit is still available only for new homebuyers, they are pleased that Congress removed the payback requirement that was part of the 2008 $7,500 credit.
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