June 12, 2002 Federal Reserve Districts First District - Boston

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Economic conditions are improving in the First District, according to most business contacts. Manufacturers report that their business is firming or improving compared with recent quarters. Most retailers say sales are picking up, software and IT firms indicate that demand is up either modestly or substantially, and staffing firms cite modest signs of recovery. The region's commercial real estate markets, by contrast, remain in the doldrums. Retail Most retailers in New England report improving sales in March, April, and May. Home furniture and automobiles are in high demand. A tourism agency has seen improvement, with a pickup in business-convention attendance and hotel occupancy. Sales results for discount retailers, however, are mixed, with one seeing an unexpected drop compared to a year ago, and another up 10 percent. Some retailers report an increase in employment, while others are holding employment level. A tourism contact indicates that hotels are hiring back service workers who were let go in late 2001. An auto retailer has been hiring in all areas of business. Wage rates are mostly level among retailers, with one company budgeting a 3 percent increase for its fiscal year beginning June 1. Vendor prices are said to be fairly stable. Selling prices are holding steady, although hotel rates are down 15 percent compared to a year earlier. Most firms are increasing their emphasis on promotional sales, rebates, special pricing, and added value. The contacted retailers are expecting their businesses to improve in the next six months. Most respondents feel positive about the future of the economy, with a few foreseeing no change. One contact says, "Despite the economy being a little wobbly, I think things will improve." Manufacturing and Related Services Most First District manufacturing contacts report that revenues in the first quarter and early second quarter were fairly close to year-ago levels. Companies with more positive results attribute them to acquisitions, expansions of their retail outlets, or development of new products. Manufacturers indicate that they and their business customers are no longer in an inventory-reduction mode, but nonetheless remain intent on controlling inventory and other costs. The prevailing opinion among manufacturers is that the economy will improve later this year, but only modestly. Many contacts cite signs of slightly improving demand in the last month or two. For example, a paper products manufacturer indicates that business customers are replenishing their inventories. A manufacturer of corporate gift products is getting more requests for quotes, and a maker of business uniforms has seen a pickup. A furniture maker says store traffic appears to be increasing. In contrast to the general tone, some lines of business remain stagnant or are slowing. An aircraft components manufacturer says business is down considerably from a year ago and below plan. Other firms supplying travel- and transportation-related nondurables or services say volumes remain below what they were prior to September 11. One equipment maker reports that financial services firms have cut their purchases, while another says biotech and pharmaceutical firms are increasing their purchases at a lower rate than forecasted. Selling prices are mostly flat. Manufacturers cite higher costs for fuel and petroleum products such as plastics and resins. Although paper costs reportedly remain low, contacts make frequent mention of possible future increases for corrugated cardboard. Insurance costs continue to escalate. Manufacturers remain intent on controlling employment costs and deferring unessential capital spending. Very few firms are adding employees, and almost one-half of the respondents are shutting facilities or installing labor-saving equipment. Pay raises range from zero to 3 percent. Budgets for information technology and air conditioning equipment are especially tight. Temporary Employment The temporary employment industry notes small signs of recovery during the second quarter of 2002. Almost all contacts report either narrowing revenue declines or positive revenue growth compared to a year ago, although profits are minimal. This industry started its downward slide during the second quarter of last year and bottomed out in the third quarter. Since then, many temporary employment agencies have consolidated or restructured. Although many customer industries are still in the doldrums, staffing firms cite pockets of strength--call centers, telemarketing, and customer services--as businesses step up their marketing efforts. The financial services sector is said to be hiring on a moderate scale. Some contacts report stirrings in the light industrial sector, particularly in assembly and light manufacturing. The technology sector, including software, electronics, telecommunications, aerospace, and defense, is lackluster. The supply of well-qualified workers is ample. As a result, many applicants display considerable flexibility in terms of wage demands and choice of work. The loose labor market has also caused some companies to bypass temporary employment agencies and hire directly. Those that do hire through temp firms are generally taking longer to hire and are more interested in short-term placements; they are not eager to add permanent workers. Although wage cuts are rare, wage increases are also minimal. Temporary employment contacts expect the industry to grow during the third quarter, typically the busiest and most critical quarter of the year. Nevertheless, 2002 is not expected to be a banner year for most contacts. Commercial Real Estate Commercial real estate markets in New England remain weak. Although most contacts state that their local market is "not a disaster," they have little positive to say about recent developments, and some characterize conditions as "lethargic." Even in areas where activity levels are relatively high, most of the action has been due to existing companies' relocation or consolidation, not net absorption. The office market remains stable in Connecticut and Rhode Island, but has deteriorated noticeably in the greater Boston area, with vacancy rates high and rents falling. Rents remain steady in most other markets. Most contacts anticipate no significant improvement before the end of the year. Software and Information Technology Services All respondents report some growth in demand for their software products and services. About half of the respondents report very slow sales growth thus far in 2002 compared with a year earlier. These contacts say their clients remain slow to reinvest in technology. An equal number of respondents report very strong sales growth in the first five months of 2002. Multiple contacts in the healthcare software field report a 15 percent or higher increase in revenues or sales and a growing backlog of orders; other companies report sales that are ahead of their targets. One contact at a strongly performing company mentions some concern over their education-related software because of lingering questions about state and municipal government budgets. Most contacts are uncertain about the future of the economy and also about their business for the rest of 2002. Contacts whose businesses have grown slowly so far expect growth to continue to be slow or possibly slow further, while those whose businesses are performing well consider the future to be somewhat uncertain. As a result, most software and IT respondents are holding headcounts level, although a couple are reshaping their job mix. Longer-term, many respondents are convinced that latent demand exists and will be activated either when the economy improves or clients decide they cannot postpone software or IT purchases any longer. Return to top Summary New York