March 15, 2006 Federal Reserve Districts First District--Boston

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First District economic reports are generally positive about early 2006, but include some soft spots. Retailers' results in January and February are mixed, and while staffing firms cite strong revenues at the close of 2005, some have seen a slowdown since then. Manufacturers and software and information technology firms are more solidly in the positive camp. Vacancies have come down somewhat in the Boston office market, but contacts remain uncertain about the fundamentals. Retail and tourism First District retailers report mixed sales results for the months of January and February, with year-over-year sales ranging from down 7 percent to up 12 percent. Products that sold particularly well this period include health and beauty items, sporting goods, women's apparel, and bedding. A pharmacy chain notes that photo processing sales are weak due to the increasing trend in digital photography, and an electronics and appliance retailer attributes slow sales partly to short supplies of plasma televisions and the failure of the New England Patriots to qualify for the Super Bowl. Inventory levels are in line with expectations according to contacts. Vendor prices are varied, with some contacts noting selected price decreases, and others still observing increases in petroleum-related items. Selling prices are also mixed, with some retailers able to pass increases along to consumers, and others holding prices steady or decreasing them slightly. Same-store employment is generally steady. Many retailers plan to increase capital spending, with most citing new store openings or the implementation of various new systems. A travel and tourism contact reports that overall tourism in New England has been "a real challenge." The mild winter has hurt the region's ski resorts, but may have been a plus in the Boston metropolitan area, where tourism is doing well. The respondent notes a steady stream of international travel due to favorable exchange rates, particularly from the UK, Germany, and Ireland, with many tourists coming to New England for pre-planned ski vacations or shopping trips. Industry expectations in the near term largely depend on future snow accumulation in the northern states. Overall, most retail and tourism respondents view the outlook as hopeful, with expected growth ranging from flat to high single-digit increases. Manufacturing and Related Services Most First District manufacturers and related services providers report that fourth quarter 2005 and first quarter 2006 sales and orders remain higher than a year ago. The percentage increases are mostly in the single digits. Gains are widespread across products, with non-automotive transportation equipment cited as being particularly strong. About one-half of the respondents express concerns about materials and energy costs, fewer than in recent reports. Manufacturers indicate that they are paying more for copper, paper, chemicals, various derivatives of oil and gas, and product transport than a year earlier. Companies using natural gas report substantial rate increases. The remaining firms either cite examples of recent easing in materials and energy costs, or say that these costs are not exerting pressure on their company's margins. For example, one company indicates it is no longer facing supply constraints for steel, while another observes that additional capacity in Asia has caused resin prices to soften. The majority of manufacturers contacted have raised their selling prices in recent months, with increases typically in the single digits. Some indicate that they have implemented greater increases for high-end or custom products than for more standardized items. By and large, customers are reportedly accepting price hikes, except for instances where they have ready access to multiple suppliers. Most manufacturers are keeping their domestic headcounts unchanged or are paring back slightly. Those that are hiring indicate some delays or obstacles in adding technical personnel. Pay increases are in the range of 3 percent to 5 percent. A couple of large respondents express concerns about pension costs. Most companies expect to hold capital spending fairly steady in 2006, with an emphasis on information technology or productivity enhancement projects. Most manufacturers expect their company to exhibit fairly normal growth in 2006, with defense- and security-oriented companies tending to be more optimistic than the norm. A couple of companies mention that a softening housing market may cause some erosion in demand for housing-related and other products this year. Temporary Employment Business conditions are generally good for staffing firms in the First District. All but one staffing contact reports year-over-year revenue growth for Q4 2005, with increases ranging from the low single digits to 37 percent. However, reports on demand over the first eight weeks of 2006 are mixed. While a few contacts say that 2006 is off to a good start and that revenues have continued to increase, others indicate that revenues in Q1 have been lower than expected. One Connecticut contact claims that an increase in the state's minimum wage caused Q1 revenues to fall to about one-third of their Q4 level. Demand for workers is strong in office services, call centers, manufacturing, healthcare, and information technology services. Demand for permanent and temporary-to-permanent hiring continues to grow. Contacts report that they continue to have difficulty finding qualified people for skill-intensive positions, including high-end administrative positions, positions requiring special skills such as welding or carpentry, and positions in the information technology sector. This shortage of qualified labor has begun to put upward pressure on pay rates and to drive up recruiting costs. Despite a slowdown for some staffing firms in the first two months of 2006, respondents are upbeat about the rest of the year. The consensus among contacts is that the staffing industry is performing well and that 2006 will be a year of improving business conditions and increasing revenues. Software and Information Technology Services Contacts in the software and IT services industries report year-over-year revenue increases ranging from near zero to 25 percent in their most recent quarters, with most in the double digits. Over half of responding software and IT services firms are increasing their headcounts, via selective hiring of technology workers and marketing and sales personnel. Contacts report tightening in the labor market, especially for technical positions. One firm notes upward pressure on wages as employees see increasing opportunities elsewhere; respondents report annual wage increases between 4 percent and 10 percent. Most software and IT services contacts indicate they are holding capital spending fairly level; however, a few have increased outlays to expand facilities and upgrade equipment. The outlook among software and IT services contacts is more optimistic than six months ago; all expect either steady or accelerated growth for their companies in the second quarter. Commercial Real Estate Although office vacancies have declined recently in the Boston market to around 12 percent, contacts say the fundamentals that underlie office space demand are still weak. Total employment remains below early 2000 levels and financial services, a major office employment sector in Boston, is reportedly soft. Contacts note that improving office vacancy numbers, combined with what they characterize as poor office job growth, suggest that existing workers are getting more space. Despite the weak fundamentals, contacts report that there continues to be "a remarkable amount of capital" available for commercial real estate purchases. Property values have continued to rise without significant decreases in vacancies or increases in rents. Respondents say, however, that the purchases are not speculative, but rather reflect foreign investors' long term interest in Boston commercial real estate. The outlook for New England's commercial real estate sector is slightly pessimistic. Although some areas in the region are experiencing remarkable strength in commercial real estate markets--Providence RI has reportedly seen vacancy rates fall to around 6 percent--most contacts continue to worry about the long term job support for the region's commercial space. Return to top Summary New York