July 28, 2004 Federal Reserve Districts First District--Boston

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Reports from business contacts in the First District are somewhat more mixed in early July than they were six weeks earlier. Some contacted retailers and manufacturers are less upbeat this time around, although most respondent firms continue to make gains. Many contacts mention rising prices for selected commodities, with some indicating it is becoming easier to pass these cost increases--at least partially--along to customers via slightly higher prices. Residential real estate continues to be a positive factor in the New England economy. Retail First District retailers cite mixed sales results in the second quarter. According to contacts, home improvement and building product sales continue to increase by double digits, while furniture sales are mostly flat compared to this period last year. Consumer spending on small-ticket items, such as art supplies and apparel, is stronger than spending on big-ticket items, such as electronic equipment and flooring. A state auto dealers' association reports weak sales across the board in the second quarter; manufacturers' incentives continue to be popular but are not spurring sales as much as they did earlier. Inventory levels are up slightly according to most respondents. A number of contacts report cost increases for wood, steel, fabric, and paper goods, which have resulted in slight increases in selling prices. Some respondents indicate that customers are willing to absorb these increases, particularly for paper goods. Employment levels are mostly steady, with some slight increases, although one contact is considering cutbacks. Capital spending is generally in line with plans, some of which call for minimal spending. Most contacted retailers anticipate that sales will improve slowly in the next six months, while some expect no change or a slowdown. Respondents also express some uncertainty and caution about rising health-care costs, geopolitical instability, and rising interest rates. Manufacturing and Related Services Most First District contacts in manufacturing and related services report that sales and orders in the second quarter of 2004 were slightly to well above year-earlier levels. Makers of pharmaceuticals and medical equipment cite particularly large gains. With some exceptions, companies in technology and office equipment businesses did not see as much growth in Q2 as they had hoped. Manufacturers of a wide range of consumer products report new signs of weakness, especially with respect to their chain-store customers. Manufacturers report that they have been able to pass along steel price increases but that they have been only partly successful in recouping higher costs for raw materials derived from petroleum and natural gas. Transportation costs are increasing as a result of fuel surcharges and regulation-induced declines in trucking capacity. Paper prices are up, generally slightly. Some companies are lowering their costs by sourcing more inputs from Asia, while currency movements have served to raise the cost of European inputs. Most manufacturers are holding their U.S. headcounts flat or reducing them slightly. Some firms are adding to their sales and product design and engineering workforces. Pay increases are generally running in the 3 percent to 4 percent range, while increases in health-care costs are much higher. However, biotech employment is expanding, and industry contacts report that labor markets have tightened and salary increases are somewhat above the norm in other industries. There are also scattered reports of delays in filling accounting positions. Capital spending plans for 2004 tend not to be ambitious. Several companies report that they plan to reduce expenditures this year or next after completing major projects. Others are choosing to continue to "hold the line." The outlook is more mixed than in recent reports. Although many contacts continue to be optimistic about their business prospects in the coming six to twelve months, others are concerned about signs of slowdown in consumer and technology spending. Residential Real Estate Residential real estate markets in New England remain strong. Most contacts report high activity levels, although some have observed slightly fewer potential buyers in the last two weeks, which they attribute to vacations. In May, Massachusetts again logged record monthly sales for both single-family homes and condominiums, while the median selling price reportedly increased about 15 percent from a year earlier. Home sales in the state have exceeded the year-earlier month in almost every month during the past year. Contacts in Vermont and New Hampshire also report double-digit price increases, but contacts in the rest of New England report either stable prices or more modest price increases. Sales remain robust throughout the region and inventory continues to be low. In particular, the lack of affordable housing persists, although higher-priced homes are staying on the market longer in most areas. Contacts do not expect any changes in the next few months. Insurance New England-based insurance companies report that their revenues grew moderately in the second quarter, despite a slowing pace of price increases. Sales of life insurance exhibit the strongest growth, and disability insurance providers are seeing a boost from a declining number and duration of disability claims. Sales of annuities are improving, while reports from property and casualty contacts are mixed. Demand from outside the United States, especially Asia, is said to be strong. Employment is flat or slightly down for most companies, but spending on capital is somewhat healthier, as some companies seek to keep costs in check while attempting to boost profitability. Respondents do not expect the second half of 2004 to be significantly different from the first. Contacts are encouraged by recent economic news, including the rise in interest rates. Price pressures and the looming threat of terrorism are ongoing sources of concern. Return to top Summary New York