October 27, 2004 Federal Reserve Districts First District--Boston

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Economic activity continues to expand in the First District. Most retailers and manufacturers say third-quarter sales exceeded year-earlier levels. Hiring and capital spending remain cautious, and high energy costs are a source of concern. Contacts in the insurance industry report modest demand growth. Housing markets remain strong, although some homes are remaining on the market longer. Retail Most First District retailers report that sales in the third quarter were above year-earlier levels, ranging from flat to 7 percent gains. Demand is strong for lumber and lumber-related products, as home building and remodeling continue. Sales of women's apparel, jewelry, and accessories are said to be up, while men's apparel and home d�cor are down. An automobile dealers' group indicates that sales increased modestly in the third quarter compared to the previous quarter; manufacturers' discounts continue to be popular, and sales of services and parts keep dealerships' profitability afloat. Travel and tourism revenues in the Boston area were reportedly strong in the third quarter. Hotel occupancy levels and room rates were up 15 percent compared to the previous quarter, almost reaching 1999 levels. Compared to last year, corporate spending on meetings and training has increased. Forward bookings through the remainder of the year are above year-ago levels, particularly for corporate holiday receptions and special events in December. Some retailers note that inventory levels are slightly higher than planned. Contacts report some increases in vendor prices, mostly a result of rising transportation costs and price pressure on some commodities and petroleum-based products. Most of these increases are being passed along to the customers. Employment is said to be up in the third quarter, with some sizable increases, and wages are stable. Several contacts report that capital spending is currently below budgeted amounts, mostly because of under-spending on expansion projects. Respondents say they feel the economy is solid overall, or at least holding steady, and many expect single-digit gains in the fourth quarter. Most contacts are worried about rising gas prices, while several express concern about soaring health care costs. Manufacturing and Related Services Most First District contacts in manufacturing and related services report that sales and orders in the third quarter of 2004 were slightly to well above year-earlier levels. Makers of pharmaceuticals and biotech, medical, and energy equipment report particularly large gains. Firms manufacturing office and IT equipment indicate that their business continues to grow, but at least some segments of their customer base are being cautious in placing orders. Some makers of consumer products or items used in the manufacture of consumer products indicate that demand is sluggish. For example, a home appliance manufacturer reports that orders are relatively weak and a supplier of parts and equipment to the semiconductor industry notes a significant softening in that industry since its second quarter peak. Some respondents conjecture that increases in fuel costs are causing consumers to cut back on other purchases. Another mentions competition from foreign producers. Companies that use significant quantities of petrochemical products indicate that some of their customers are now willing to accept price increases attributable to the sharply higher costs for these inputs. Nevertheless, these firms express concerns about downward pressures on their margins. Respondents acknowledge paying more for electricity and natural gas, but the impact on their overall costs tends to be muted because their operations are not very energy-intensive. Most manufacturers are holding their U.S. headcounts fairly flat. Those with rapid growth are adding cautiously, while others are shedding positions as they adopt labor-saving technologies. Companies cite challenges in filling high-end positions that they attribute to heavy competition among employers in technology meccas such as Boston or to federal government security procedures. Pay increases, currently running in the 3 percent to 4 percent range, are expected to be little changed in 2005. Manufacturers generally expect their domestic capital expenditures to rise modestly in the coming year. For the most part, contacts expect a continuation of current revenue growth patterns in 2005. Some express concerns about industry-specific developments or rising costs for energy and materials. Residential Real Estate Residential real estate markets throughout New England remain strong as contacts report high levels of activity in the third quarter. Following a long period of fast sales, when many homes sold within a few days, houses now remain on the market longer. Houses in lower price ranges continue to sell quickly according to brokers, while the highest-priced homes take especially long to sell. Consequently, the inventory of high-priced homes has increased, although the overall level of inventory in most areas has not changed markedly. Most respondents characterize local markets as still favoring sellers. In most states, the number of sales has been higher in 2004 than in the same period of 2003. Prices remain robust, and most areas have experienced increases in sale prices this year. In Massachusetts, contacts say the average sale price for single-family homes in August was 12.5 percent higher than a year ago, while the average sale price of condominiums was up 4 percent. Other states report similar price increases. Most contacts anticipate that markets will remain stable in the next few months as long as interest rates stay low, although the typical winter slowdown in activity is expected. Insurance Respondents say sales of life insurance, particularly to individuals, grew slowly in the third quarter and in early October. Demand for variable annuities was notably stronger than for fixed income annuities and mutual funds. Disability insurance showed moderate demand growth over the same period, coupled with a further decline in disability claims; contacts suggest the decline in claims indicates the employment situation is picking up. Amid intense competition, some companies have focused on adjusting prices and restraining spending rather than seeking sales growth. Capital spending and employment levels are largely flat. Respondents are mildly optimistic, expecting revenues to grow moderately over the remainder of 2004 and into 2005. While confident of the overall health of the economy, they express concern over such issues as rising energy prices and fiscal policy. Return to top Summary New York