April 21, 2004 Federal Reserve Districts First District--Boston

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Economic activity is gaining momentum, according to business contacts in the First District. Most retailers and manufacturers report that sales and orders are ahead of year-earlier levels. Respondents in residential real estate and the insurance industry indicate that business continues at the high levels that characterized 2003. Contacts note increasing prices for metals, wood, energy, and other petroleum-related inputs, which some say they are able to pass on to customers. Retail and Tourism Retailers in the First District report improving sales in late February and March of 2004. Although a March snowstorm hindered sales in the furniture sector, sales and traffic have reportedly improved this period from a year ago. Sales of big-ticket items, particularly office furniture, are said to be strong. Contacts in the lumber and hardware sectors report double-digit year-over-year increases compared with reduced sales in 2003 caused by unfavorable weather conditions. Compared with the preceding quarter, however, sales of lumber products are said to be up, while hardware products are down 10 percent. Employment is flat according to respondents, with minimal seasonal hiring. Wages are mostly steady, although some retailers are implementing 3 percent to 4 percent annual increases. Most contacts report that inventories have increased slightly in the past couple of months. Rising costs for wood and metal products have raised selling prices in the lumber, hardware, and furniture sectors, but not hindered sales. Most gross margins are said to be holding steady. About two-thirds of respondents plan to keep capital spending flat in 2004, while the remaining retailers' plans are mixed. Travel and tourism in northern New England is reportedly picking up at a moderate pace, after a slow start in the first quarter of 2004 because of cold and windy weather. According to contacts, advance bookings are strong for the upcoming summer, particularly for international travelers; they are expected to pick up further once airlines add several direct flights between Boston and Manchester, England in the second quarter. All of the contacted retailers anticipate positive sales growth in the next three months, although many expect the rate of improvement to be weather dependent. While shoppers still seem to be cautious, contacts report that consumer confidence seems to be on the rise and feel that economic conditions are improving. Manufacturing and Related Services Almost all First District contacts in manufacturing and related services report that sales and orders in the first quarter of 2004 were ahead of year-earlier levels. Growth was particularly strong for biopharmaceuticals, microelectronics products, and medical equipment. Durable goods manufacturers are pleased to see positive trends continuing, following a pickup in late 2003. Various other manufacturers indicate that the first quarter of 2004 marked an upturn, with particularly robust business recorded in March. Even the relatively few companies whose business has continued to lag year-earlier results are planning for a pickup before year-end. Many contacts report sharp cost increases, especially for steel, energy, and petrochemical products such as polypropylene and polyester. Some manufacturers are experiencing supply problems with respect to steel and computer boards. Paper and packaging prices also are beginning to increase. Some businesses report that the cost increases are creating worrisome pressures on margins, while others indicate that customers are now willing to pay somewhat higher prices if justified by commodity cost inflation. Faced with competition, companies across a wide range of industries view continued product innovation to be an important vehicle for maintaining steady to rising selling prices. About one-half of the contacts in manufacturing and related services are increasing their U.S. headcounts, in most cases modestly. The remaining firms are either holding employment steady or finding ways to make modest cutbacks. Pay increases are expected to average 2.5 percent to 3.5 percent in 2004, while healthcare costs are continuing to rise substantially more. Most of the reported capital spending increases are oriented toward new product development and production (especially in the life sciences industry) as well as productivity improvements (including production equipment and information technology). Businesses are mostly optimistic that demand for their products will keep increasing throughout the year. However, they also express some caution and uncertainty in the face of continuing geopolitical instability, the upcoming U.S. presidential election, and the possibility of rising interest rates. Residential Real Estate Residential real estate markets are active throughout the New England region. In Massachusetts, the number of sales of both detached houses and condominiums rose modestly in January and February, following record volume increases in the fall. Some replenishment of depleted inventory has occurred. Sale prices of detached homes increased at an annual rate of approximately 7 percent, while condominium prices rose at a double-digit annual rate, stimulated by demand from first-time buyers and empty nesters, according to respondents. In the rest of New England, contacts report busy markets with seasonally rising levels of activity. The inventory of entry-level housing stock remains limited throughout the region. Most contacts expect modest changes in the number of sales and in prices for the next quarter. Insurance Demand for insurance grew slowly in the first quarter of 2004. Contacts selling life insurance report particularly strong increases, while sales of disability insurance grew only slightly and annuity sales were weak. Price increases for insurance products are moderating, which respondents attribute to increased competition. Demand growth in international markets was faster than in the United States. Employment levels remained steady in the first quarter, but some companies expect declines later in the year through attrition or reorganization. Capital spending ranged from steady to strong, with some firms planning further increases in technology spending for expansion abroad, catch-up after a few years of deferral, or merger-related projects. Respondents do not expect 2004 to be very different from 2003, but hope for higher interest rates, improved consumer confidence, and continued job growth. Worries about terrorism persist. Return to top Summary New York