Fed Gives Mixed Report on Massachusetts Economy

Commercial real estate and manufacturing are rough spots in the local economy while biotech and information technology are doing better, the Federal Reserve Bank of Boston reported Wednesday in the latest version the economic conditions survey often referred to as the "beige book."

The report reflects conditions as described to Fed bankers and researchers by members of the business community.

Commercial real estate continues to lean "toward the negative," the report states. One downtown Boston commercial broker told the Fed the market is " 'still slow, but not dead,' with very little new job creation to bolster demand."

The report adds: "The outlook remains downbeat and some contacts say it has worsened."

Residential is also worse year over year, with sales volume and prices down significantly.

Manufacturers and their suppliers have struggled. Two third said sales or orders were "flat to down year-over-year in the second quarter or more recent months," the report states. Looking toward 2009, half of manufacturers said they were "cautiously optimistic" and half said they were "anxious and concerned," according to the report, and described conditions as "challenging" and "volatile."

Most retailers reported year-over-year sales increases for June and July. Some retail contacts told Fed researchers consumers are "cautious" and "more focused on seeking value because of the economic downturn."

Tourism in Boston has been "surprisingly good," with declining room rates but growth in visitor traffic to museums and other attractions.

"Business and international travel both remain strong," the report states.

Information Technology companies reported business was "flat to favorable" in the second quarter. Almost all reported year-over-year revenue growth.

"Through the end of the year, most responding firms are projecting continued growth, but at a somewhat slower pace than recently," the report states.

Staffing industry representatives reported a mixed bag. Demand has been strong for workers in biopharmaceutical, manufacturing, software and Web-development. But financial and engineering companies are showing reduced interest in hiring.

Source: Boston Business Journal

Goldman Sachs upgrades Lowe's to buy

Sept 2 (Reuters)- Goldman Sachs upgraded Lowe's Companies (LOW.N: Quote, Profile, Research, Stock Buzz) to "buy" from "neutral," citing in part a stabilizing housing market.

The brokerage said housing turnover declines moderated again in July to 15.5 percent from 17.9 percent in June, the fifth consecutive improvement and the smallest drop since July 2007.

Declines in existing home sales slowed to 12.4 percent from 15 percent in June, it noted.

Goldman, which raised its 12 month price target on the company by $1 to $28, said the company and street expectations still appear reasonable after a strong second quarter.

Shares of Lowe's closed at $24.64 Friday on the New York Stock Exchange.

Source: Reuters

Real Estate Recovery Expected in 2011

The nation is in for more than a year of stagnant job creation and tepid economic growth that will set the stage for marked improvement in 2011, according to two of academia’s respected authorities on the economy and commercial real estate.

In separate forecasts presented this month, economists in Georgia and Texas expressed dour expectations for national job growth in the coming year. Because commercial real estate depends on employment growth to drive the demand for space, the forecasts suggest that demand will be weak for the foreseeable future.

Dr. Rajeev Dhawan, director of the Business Economic Forecasting Center at Georgia State University, blames the credit crunch for pushing the economy into a recessionary state. In a forecast published Wednesday, Dhawan says the credit crunch has damaged the economy’s growth prospects until 2010.

“Some banks are on the brink of failure and it will be up to the FDIC to bail them out,” Dhawan says, expounding on the nation’s economic predicament. “Should they run short of funds, look for the government to bail out the FDIC, leaving taxpayers with the tab.” That’s why Dhawan is projecting real gross domestic product growth at a rate of 1.4% in 2008, decelerating to 0.5% in 2009 before beginning an anemic recovery to growth of 2.2% by 2010.

That lackluster economic growth means net job losses that have averaged 66,000 per month so far this year will grow to 90,000 losses per month in the second half of 2008. Expect less severe losses averaging 15,000 job cuts per month in 2009, Dhawan says. “The job market will emerge from the twilight zone in 2010, when the economy will add jobs at a monthly rate of 100,000.”

Recent and anticipated job losses are a serious challenge for the commercial real estate industry, according to Dr. Mark Dotzour, chief economist at the Real Estate Center at Texas A&M University. “In the real estate business we don’t care what GDP is,” Dotzour quipped in a forecast presented to members and guests of the Real Estate Council of Austin on Aug. 18. “All we’re interested in is job growth, and we’ve had negative job growth in the U.S. now for about eight months. I call that a recession.”

Dotzour says the credit crunch has begun to thaw for global banks and has become a balance sheet crunch for commercial real estate lenders. Investors are amassing funds to invest in real estate, he says, and the challenge now is for lenders to clear devalued loans from their books so they can provide financing for new deals.

Both economists harbor heartening expectations for relief from high oil prices, which Dhawan expects will drop to $89 per barrel in the fourth quarter this year and average about $107 per barrel throughout 2009. Oil prices have already retreated 25% from the summer’s record highs near $150 per barrel now that American consumers have stepped back on consumption.

Less expensive oil would help the economy regain its footing before the Federal Reserve clamps down on inflation by raising interest rates. The Fed would prefer to keep interest rates low to stimulate the economy until banks have had more time to recover liquidity, economists say, but persistently high oil prices could thwart those efforts to let banks heal. “If the price of oil does not retreat below $100 per barrel by October on a sustained basis, worries of inflation will cause the Fed to raise rates much earlier than expected,” Dhawan says.

Consumers and manufacturers may find their dollars buy more this fall, which would help the economy limp through the winter. Dotzour believes the prices on steel, cement and other materials vital to commercial real estate construction will come down this fall along with oil prices.

Why? Dotzour theorizes that China’s extraordinary efforts to prepare for the Olympic Games spurred that country to accelerate construction programs for transportation infrastructure and residential and commercial space, and to stockpile commodities such as diesel fuel. Now that the Olympics have ended, Dotzour expects China’s demand for those products and materials to slacken for several months, giving global producers an opportunity to catch up with demand and bring prices down.

“It’s going to be interesting to see what happens to the price of copper and steel and all the construction materials,” Dotzour says. “If [China’s] demand does slow down, we’re looking at the possibility of a pretty dramatic decline in construction materials costs in the coming months.”

Dotzour points out a source of hope for commercial real estate investors, who would certainly welcome an unexpectedly stronger economy next year. Due to the credit crunch and economic uncertainty associated with the presidential election, Dotzour believes a number of U.S. companies and consumers have put off major decisions to spend or commit to space this year.

By March 2009, he says, businesses will have a better understanding of their financial standing and tax burdens under the new president, and may cut loose with a swath of business deals, leases and real estate purchases. “It’s possible we could have a very pleasant surprise around April.”

Source: National Real Estate Investor

U.S. economy hit by surging inflation

WASHINGTON (AP) -- Wholesale inflation soared in July, leaving U.S. prices rising at the fastest pace in nearly three decades. While recent declines in oil and other commodity prices raise hopes inflation may have peaked, some economists worry about the widespread nature of the July price surge and caution it will take more time for that pressure to ease on Wall Street and Main Street.

The Labor Department reported Tuesday that wholesale prices shot up 1.2 percent in July, pushed higher by rising costs for energy and a variety of other products from motor vehicles to plastic goods.

The increase was more than twice the 0.5 percent gain that economists expected and left prices rising over the past 12 months by 9.8 percent. That marked the biggest annual increase since the 12 months ending in June 1981, a period when the Federal Reserve was driving interest rates to the highest levels since the 1861-1865 U.S. Civil War in an effort to combat a decade-long bout of inflation.

Core prices, which exclude food and energy, rose 0.7 percent last month. That increase was the biggest since November 2006 and more than triple the 0.2 percent rise in core prices that had been expected.

Elsewhere, the Commerce Department reported that construction of new homes and apartments slid to an annual rate of 965,000 units in July, a 17-year low. Builders continued to slash production as they battled slumping sales and soaring mortgage defaults dumping more homes on an already glutted market.

Wall Street tumbled on the gloomy economic news as investors worried the worst housing slump in decades was showing no signs of a rebound and that the Federal Reserve's tool to combat the weakness -- lowering interest rates -- was unlikely to be used given the sharp jump in inflation seen last month in both wholesale and consumer prices.

The Dow Jones industrial average fell 130.84 points to close at 11,348.55 after losing 180 points on Monday. It was the worst two-day performance for the Dow since late June.

Last week, the government reported that consumer prices had jumped by 0.8 percent in July, leaving prices over the past 12 months rising at the fastest pace since 1991.

The steep slump in housing, rising unemployment and a severe credit crisis have worked to offset $92 billion in economic stimulus payments made from April through July intended to keep the economy out of a deep recession. Retail giants Target Corp. and Home Depot Inc. on Tuesday reported that profits sank in the second quarter. Home Depot said it continued to have a downbeat outlook for the year as the housing market shows no signs of recovery.

The July price pressures reflected in part the surge in energy costs that pushed crude-oil and gasoline prices to record highs. Crude-oil prices have fallen by more than $30 per barrel since then, raising hopes that inflation pressures will soon ease.

But the price spikes seen elsewhere in July prompted concerns that the prolonged surge in energy was beginning to show up more broadly throughout the economy, and that while prices may rise quickly, they tend to come back down much more slowly.

"Inflation is way too hot," said Joel Naroff, chief economist at Naroff Economic Advisors in Holland, Pennsylvania "It took a long time for the surge in commodity prices to seep into the general economy so don't expect one month of commodity price declines to suddenly turn off the inflation pump."

But other economists said they believed the July inflation report could represent the worst for inflation pressures this year if -- and they concede this is a big if -- energy prices continue to decline in coming months.

"A firmer dollar, retreating commodity prices and continued economic weakness should damp inflation by the fall," said Sal Guatieri, an economist at BMO Capital Markets in Toronto, who said he looked for elevated inflation numbers at both the consumer and wholesale levels for another month before they start declining.

Economists saw a silver lining in the continued plunge in housing construction, saying it is needed to help reduce the glut of unsold properties as builders compete with foreclosed homes selling at steep price discounts.

In Crawford, Texas, where President George W. Bush is vacationing, spokesman Tony Fratto said the big jump in July producer prices did not "reflect the recent significant fall in oil prices, which everyone would like to see continue."

The Federal Reserve is caught between a slumping economy, as reflected by the further plunge in housing construction, and the big jump in inflation pressures, which has some Fed officials lobbying for the central bank to start boosting interest rates.

The Fed, which aggressively cut interest rates from last September through April, has held rates unchanged at meetings in June and earlier this month. Richard Fisher, president of the Fed's Dallas regional bank, dissented at both those meetings, arguing the central bank should start raising interest rates to make sure the inflation surge does not become embedded in the economy.

"We cannot afford to gamble away our credibility," Fisher said Tuesday in a speech in Colorado. He warned that the recent burst of inflation could threaten the economy as "a lingering inflationary fever."

Rebecca Braeu, an economist at John Hancock in Boston, said that the big jump in core inflation in the wholesale price report would definitely set off alarm bells at the Fed. But she and other analysts said they did not believe the central bank will start raising rates, especially before the November election, as long as price pressures begin to moderate in upcoming reports.

For July, wholesale energy prices jumped by 3.1 percent following a 6 percent gain in June. That increase reflected big increases in the price of natural gas, home heating oil and liquefied petroleum gas, which offset a 0.2 percent dip in gasoline costs.

Food prices rose by 0.3 percent in July after a 1.5 percent surge in June. Beef prices jumped by 7.4 percent, the biggest increase in nearly four years. Milk prices shot up by 5 percent, the biggest gain in a year, while soft drink prices rose by 2.4 percent, the largest increase in four years.

Excluding energy and food, the 0.7 percent rise in core inflation reflected big gains in the prices of passenger cars and light trucks, pharmaceutical preparations and plastic products.

Source: CNN

Fed paints gloomy picture of New England economy

The New England economy remains "mixed" but by some indicators is "generally softening," the Federal Reserve Bank wrote in Wednesday's edition of its Beige Book, a summary of nationwide economic activity.

The sector-by-sector review found a little reason for optimism in residential real estate but little other good news.

In residential real estate, "contacts in Massachusetts continue to report increased activity at open houses, and April's pending home sales numbers in the Boston area are said to look promising. However, one contact notes that financing issues could still prevent increased activity from translating into increased sales," the report states.

Commercial real estate contacts report that the Boston office building market, "dormant" during the first quarter, "has seen a number of properties come up for sale in recent weeks." But transactions are not increasing significantly, the authors added.

Commerical real estate deals are being financed by life insurance companies and commercial banks, not by Wall Street investment banks, they said.

Commercial leasing activity, the report stats, has slowed in recent weeks.

The authors appeared surprised in noting that despite problems in commercial real estate, layoffs have been "minimal."

The retail outlook appears especially grim.

"Retailers say they see clear evidence that consumers are scaling back their spending, and the majority of respondents complain that the media's "doom and gloom" portrayal of the economy contributes to such cutbacks," the report states. Nevertheless, capital spending remains on pace.

Many retailers "expect conditions to improve by early to mid-2009," the report states.

Manufacturing, the report states, shows continued "deteriorating" conditions.

"Contacts say that demand has started to weaken for nonresidential building equipment and for non-automotive transportation equipment and services," the report states.

"Contacts from various industries report that overseas markets remain relatively strong, although some say their Western European sales have been sluggish in recent months," it adds.

Materials costs have been especially tough on manufacturers, the report states, while "average pay increases (in manufacturing) are in the range of 3 percent to 4 percent."

Software companies reported some slowness in domestic licensing revenue.

"All (software) contacted firms have raised pay, generally around 4 percent. The majority of New England software and information technology respondents are projecting revenues to continue growing at current rates."

A staffing executive said companies increasingly are holding out for "A" candidates rather than settling for "B" candidates.

Source: Boston Business Journal

Capital Crisis Nearly Done, Recession Just Getting Started

Jamie Dimon, the chairman and CEO of JPMorgan Chase & Co told bank investors this week that a recession in the U.S. is just getting started and could be deeper and worse than capital markets crisis the country has experienced since August.

While the current credit market crunch may soon be over, the U.S. economy could still face a deep and extended recession, Dimon said.

Dimon suggested that the slump in mortgage and corporate loan markets could bottom out this year, but the economy may face a longer-term challenge even as financial markets begin to function again. The "slower burn" of a recession may rival the severity of the 1982 contraction, he said.

Dimon said the capital markets crisis is possibly 75% done based on the observation that most lenders and structured finance investors have taken their losses and raised additional capital. Dimon added that there are still problems yet to be recognized and there has been little new asset generation.

As for the impact of the recession, Dimon said the outcome couldn't be predicted. The longer and deeper it runs, the more de-leveraging banks will do and the more losses they will take.

Source: CoStar

For Retailers, It's Black Tuesday

For major retailers, the week of darkness has arrived. With $4 gasoline and tight credit keeping consumers' wallets shut, it's time to announce dismal profits. Unless you're a discounter or a seller of hip clothing really ahead of the fashion curve, forget about it. Wall Street is braced for the worst.

Here's one sign of how bad things are: "Coupon redemption is at an all-time high," says Britt Beemer, president of America's Research Group, which studies shopper behavior. Beemer's research shows that 59% of shoppers last month showed up at stores with specific lists of items they were limiting themselves to buying. The historical average over the 29 years he's been surveying: 33%. Also, more people are reporting plans to shift their shopping from chains to independent stores, where they think price haggling is more accepted.

And he finds that half of women shoppers have no opinion of this season's spring apparel lines, simply because they haven't bothered to look closely at them. Better to postpone buying decisions for now. "That's unusual because winter to spring is always the most dramatic seasonal fashion change," Beemer says.

Despite April sales figures that came in a little bit better than expected, department stores and specialty chains are getting hit hard as more money shifts to discounters like Wal-Mart (nyse: WMT - news - people ), Costco (nasdaq: COST - news - people ) and BJ's Wholesale Club (nyse: BJ - news - people ). Wal-Mart, which kicks off industry earnings announcements Tuesday, is expected to announce it made 75 cents per share for the April quarter, up from 68 cents a year ago, on a 7% jump in sales to $92.4 billion.

Analysts also think that off-price chain TJX Companies (nyse: TJX - news - people ), which operates TJ Maxx, Marshall's and Bob's Stores, is poised to nudge profits up to 40 cents a share from 37 cent last year, on a 6.6% increase in sales.

The rest of the landscape looks bleak. Big department stores Macy's (nyse: M - news - people ), which reports on Wednesday, and J.C. Penney (nyse: JCP - news - people ), which goes on Thursday, are both expected to show a 4.5% decline in sales, according to consensus estimates. Analysts expect Macy's to lose two cents a share and J.C. Penney to drop more than 50% to 49 cents a share. Penney's full-year outlook calls for a 31% drop in profits, to $3.29 a share.

The outlook isn't much better for upscale retailer Nordstrom (nyse: JWN - news - people ), where profit is expected to drop to 50 cents a share from 60 cents, on a slight dip in sales. Nordstrom reports Thursday.

Lehman Brothers economist Drew Matus sees a fundamental slump in consumer spending lasting through the first quarter of 2009, save for a modest early summer push spearheaded by government rebate checks (don't believe everyone who denies an intent to spend those checks, he argues, since people tend to answer such surveys with socially acceptable answers). That doesn't bode well for the next back to school and holiday pushes.

Other than discounters, the only retailers it pays to own right now, it seems, are those fashion houses staying a step ahead of their competitors. With more consumers focused on deals than on the latest trends, there's only room for sales growth for those stores that are truly getting the trends right.

Among those are Urban Outfitters (nasdaq: URBN - news - people ), the Philadelphia-based chain expected to push quarterly profit to 22 cents a share from 17 cents a year ago when it reports on Thursday, on a 23% jump in sales.

"There just aren't many specialty retailers catering to the 20-to-35-year-old consumer that they go after. And their track record of being on the fashion curve is [among] the best in retail," says J.P. Morgan Chase retail analyst Brian Tunick.

Tunick also encouraged by the full-year prospects of J. Crew (projecting earnings of $1.86 a share in 2008 from $1.54 last year) and Abercrombie & Fitch (nyse: ANF - news - people ) (to $5.70 a share from $5.20), both of which are known for increasingly fresh apparel concepts.

Source: Forbes.com

Consumer Prices in U.S. Rise Less Than Forecast 0.2%

May 14 (Bloomberg) -- U.S. consumer prices rose less than forecast in April, reflecting cheaper furniture and lodging costs that offset the biggest jump in food expenses in 18 years.

The consumer price index increased 0.2 percent after a 0.3 percent gain in March, the Labor Department said today in Washington. So-called core prices, which exclude food and energy costs, climbed 0.1 percent, compared with a 0.2 percent advance a month earlier.

Companies are holding down prices to attract customers after the economy grew at the slowest pace since the last recession over the last two quarters. Smaller gains in core prices are welcome news for Federal Reserve policy makers, who last month said uncertainty about the outlook for inflation was ``high.''

``It does look like you're starting to get some real improvement here,'' said Michael Feroli, an economist at JPMorgan Chase & Co. in New York. ``It's good news for the Fed.''

Treasuries, which had fallen earlier in the day, erased losses after the report. Ten-year note yields were at 3.91 percent at 8:33 a.m. after rising as high as 3.97 percent earlier today.

Economists' Forecasts

Economists forecast that the consumer price index would increase 0.3 percent, according to the median of 77 projections in a Bloomberg News survey. Estimates ranged from increases of 0.1 percent to 0.7 percent.

Excluding food and energy costs, prices were projected to rise 0.2 percent.

Prices rose 3.9 percent in the 12 months ended in April, down from a 4 percent year-over-year gain in March. The core rate increased 2.3 percent from April 2007, after increasing 2.4 percent in the 12 months ended in March.

Today's report showed energy expenses were unchanged after a 1.9 percent increase in March as gasoline prices dropped 2 percent. Fuel oil costs jumped 4.4 percent and natural gas prices climbed 4.8 percent.

The decrease in gasoline prices reflects government efforts to adjust the numbers for seasonal variations, Dana Saporta, an economist at Dresdner Kleinwort in New York, said before the report. The increase in prices at the pump was smaller than usual during April, causing the adjustment process to show a drop.

Energy Costs

Energy costs have climbed this month and likely will continue to be a threat to inflation. Crude oil on the New York Mercantile Exchange touched a record $126.98 a barrel yesterday and the average cost of regular gasoline reached an all-time-high of $3.73 this week, according to AAA.

Food prices, which account for about a fifth of the CPI, jumped 0.9 percent, the most since January 1990. The increase was paced by rising costs for fresh fruits and pork.

The consumer price index is the government's broadest gauge of costs for goods and services. Almost 60 percent of the CPI covers prices that consumers pay for services ranging from medical visits to airline fares and movie tickets.

New vehicle prices dropped 0.2 percent and airline fares fell 0.5 percent. Costs for home furnishings and operations fell 0.1 percent, while the cost of staying at a hotel dropped 1.9 percent.

Clothing costs increased 0.5 percent.

Air Fares

Air fares may climb in coming months. The jump in energy costs prompted Delta Air Lines Inc., the third-largest U.S. carrier, to raise the fuel surcharge on round-trip flights this month by $20. The four other largest airlines followed suit within days. The surcharge is now more than the base fare on some short domestic flights.

The central bank can't be ``complacent about inflation,'' Janet Yellen, president of the Fed Bank of San Francisco, said in a speech yesterday. Recent measures of consumers' outlook for prices ``highlight the risk that our attempts to deal with problems in the real economy could lead to higher inflation expectations and an erosion of our credibility,'' she said.

Yellen also said she anticipates inflation will slow as the labor market weakens and ``commodity prices level off,'' echoing comments by other policy makers.

Cleveland Fed President Sandra Pianalto, Kansas City Fed President Thomas Hoenig and the Dallas Fed's Richard Fisher also said yesterday there were concerned about rising prices.

Rate Outlook

Investors project the Fed will keep the benchmark interest rate unchanged at its next meeting on June 25. That would be the first pause since the central bank started cutting rates in September.

Rising prices from overseas, reflecting the drop in the dollar, are another source of concern. U.S. businesses have leeway to boost prices as companies abroad charge more.

The government said yesterday that prices of imported goods rose 1.8 percent in April and were up 15.4 percent in the last 12 months, the most since records began in 1982.

Labor's report on wholesale prices is due May 20.

Some companies are lowering prices to attract customers as the economy slows.

Wal-Mart Stores Inc., the world's largest retailer, yesterday reported higher quarterly profit and said earnings may trail analysts' estimates after record gasoline prices buffeted consumers. The Bentonville, Arkansas-based company discounted some items as much as 30 percent to drum up demand.

``There are still uncertainties about the rest of the year,'' H. Lee Scott, Wal-Mart's chief executive officer, said on a recorded call. ``The economy is playing a critical factor in 2008. Customers are focusing on food and daily use items.''

The U.S. economy expanded at a 0.6 percent annual pace in the first quarter, according to Commerce Department data. Economists surveyed by Bloomberg News forecast growth would slow to 0.1 percent from April through June and consumer spending would advance at a 0.5 percent pace, the smallest increase in 17 years.

Source: Bloomberg.com