July 27, 2011
Federal Reserve Districts
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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.
Manufacturing and Related Services
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
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
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
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.