Shopping hot spots like Boston’s Downtown Crossing are still drawing crowds, but a recent report by the Federal Reserve Bank of Boston suggests holiday sales may not be all that local retailers had hoped.

Despite assertions from retailers on Black Friday – the day after Thanksgiving, which traditionally is the biggest shopping day of the year – that sales were strong and mall parking lots were jammed, the Federal Reserve Bank of Boston said the region’s sales were weak.

“Of all the sectors we examined, retail was the worst,” said Katharine Bradbury, senior economist at the Federal Reserve Bank of Boston. “Retailers we talked to were more downbeat than they have been in months. They told us that store sales were either not growing as fast or are down from last year.”

The Federal Reserve’s November “Summary of Commentary on Current Economic Conditions,” better known as the Beige Book, gave a grim account of retail sales activity in New England. In anecdotal information collected from stores by the Fed in Boston, sales in September and October dipped to as low as 15 percent compared to a year earlier.

The informal survey is conducted by Fed staff who interview retailers as well as executives in other sectors to gauge performance. One drugstore chain reported that sales have “taken a real whack.” Respondents in the home-improvement trade said sales continue to be “way below plan.”

Reasons for the retail retreat appear to be multifaceted. Sluggish home and condominium sales have contributed to lower revenues in do-it-yourself stores. A discount furniture seller, a home electronics store and a family restaurant chain attributed diminished sales to less discretionary consumer spending due, in part, to higher energy costs.

William Rennie, a spokesman for the Retailers Association of Massachusetts, said the Boston-based trade group is predicting a 4.3 percent increase in holiday sales for 2006 over last year. Still, he acknowledged that this has not been the best year overall.

“What we have heard all year is that sales are flat. We haven’t heard of any big increases or decreases in sales,” Rennie said. “We are a little disappointed in flat sales. But I can’t confirm or deny the Fed’s findings.”

But not all the news is bad. The one retail sector that stands out is tourism, said Bradbury. One survey respondent reported that “it’s been a really good fall,” with all New England states enjoying lots of visitors to see the fall foliage.

Business travel is robust and the convention centers are doing well, the Fed noted. Advanced bookings are still low, but many people are purchasing last minute flights on the Internet. While capital spending on tourist-related facilities is occurring in the Boston area, including a surge in new spas, there is reportedly little development elsewhere in the nation.

Other sectors that are booming locally include staffing firms, where respondents cited double-digit revenue growth over a year ago, according to the Beige Book. Regional staffing respondents agree that this has been a record year for the industry and believe that New England matched or exceeded growth rates in the rest of the country.

Staffing companies see continued demand from a variety of high-end sectors, including nursing, biotech and pharmaceuticals, engineering, information technology and financial services.

With the supply of engineers, nurses, IT specialists and other skilled professionals remaining tight, both bill rates and pay rates continue to increase, the Fed said. Respondents are uncertain regarding the degree to which new health insurance legislation in Massachusetts affects them, but most are concerned that it will drive up costs.

At least one respondent told the Fed that they are worried about a possible increase in the minimum wage in Massachusetts. Despite these concerns, contacts are optimistic about 2007, expecting business to continue to expand as long as the economy is strong.

In the manufacturing sector, there are signs of recovering demand in the third and fourth quarters, the Fed reported. Semiconductor manufacturers indicate an upward trend in sales, boosted by customers’ upbeat projections of demand for personal computers, printers and cell phones.

Still, other firms report that business is in the doldrums. For example, a local paper company is easing off production for a time, a manufacturer of commercial aircraft is keeping production low and a beverage firm said November sales are lower than a year earlier.

Rents Up, Vacancies Down
Centrally located office space continues to perform well across New England, the Fed reported. Vacancies continue to fall in downtown Boston, moving down to about 8.5 percent overall. Availability also has improved slightly. Rents are stable or up across the region, with premium office space above the 15th floor priced at nearly $60 per square foot in Boston, the Fed said.

Brokers reported improved leasing in regional office space markets, reflecting job growth. Higher rents and lower vacancies in downtown markets have led some expanding tenants to move to the suburbs. As a result, suburban markets are beginning to see increased rents and lower vacancies.

There remains a remarkable amount of real estate investment in New England, with contacts continuing to express surprise at the assumptions supporting aggressive pricing, the Beige Book said. Though real estate yields are low overall, there is some evidence that they are increasing slightly as improving market fundamentals have increased real estate income.

In New England’s business investment sector, the Boston Fed characterized capital spending plans by manufacturers as modest and said that many regional retailers are scaling back such plans due to slower sales growth.

Trends for aircraft, energy, and scientific equipment are particularly robust, the Fed said. Firms making home furnishings and equipment say orders are flat or up a little from a year ago.

Manufacturers note that rising costs for metals and paper are continuing to exert pressure on margins. Heavy buyers of these products have raised selling prices in 2006 and expect to increase prices further in December or early next year.

Respondents said that fuel costs and most other oil-related products have stabilized, although they express some concern about their already-high levels. Several firms mentioned that their business customers’ finances have improved, causing them to be more willing to pay higher prices. Otherwise, selling prices mostly are either flat or declining in line with their recent trends.

Several companies reported that they plan to expand domestic capacity next year or in 2008. Apart from these projects and some anticipated acquisitions, manufacturers’ U.S. capital spending plans appear to be modest.

The majority of manufacturing respondents expect business to be “pretty good” in 2007, boosted in part by the introduction of new products. The remaining contacts express some uncertainty or have diminished expectations concerning revenue growth, especially during the first half of the year.