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The First District economy shows few signs of improvement. Retailers cite disappointing
December results, although some gained in January and February. Most manufacturing
contacts report weak demand. Commercial real estate markets in New England remain
very slow. Most software and information technology providers say demand is
declining. The outlook is highly uncertain and virtually no contacts are making
plans based on expectations of an upturn.
Retail
Most retail contacts in New England report lackluster sales in December, although
some contacts report a slight uptick in January and February. Art and graphics
supplies reportedly sold well, while electronics sales slowed and inventories
rose. Conditions in the travel and tourism sector remain weak; contacts report
hotel occupancy rates in the Boston area continue to be low because of soft
corporate and international travel. Furniture sales did not meet expectations
in December, but reportedly picked up in January and February. A surplus merchandise
contact experienced record-high sales in December, having obtained unusually
good inventory from big retailers. Hardware stores report double-digit increases
in sales compared with a year ago; the harsh weather and fear of terrorism--consumers
purchasing items such as duct tape and plastic--have helped boost sales.
Most retailers are holding employment levels steady; two contacts, however,
are implementing slight decreases in head count. Wages are mostly constant,
although Maine's minimum wage increase has led to some raises even in above-minimum
pay rates. Most capital spending plans continue to be minimal. Overall, vendor
prices and selling prices are level or falling.
Some retail contacts expect sales to increase slightly over the next six months,
while others foresee little improvement. Most contacts are hopeful for a turnaround
if the geopolitical uncertainties are resolved in the next six months.
Manufacturing and Related Services
First District manufacturing contacts continue to report few, if any, signs
of a pickup in demand for their products in early 2003. Most makers of capital
goods and other business products indicate that business is weak, especially
for aircraft and power equipment. Makers of consumer products say business is
soft or, at best, just meeting plan. Some consumer goods companies indicate
new signs of deterioration. For example, one furniture company observes that
consumers became more cautious in early February and a label maker says that
sales to retailers have been running below expectations in the new year. However,
others say that conditions are basically similar to what they observed in late
2002 or even a little better. In contrast to the general trend, sales of supplies
and equipment to health-related sectors continue to rise. Contacts in the semiconductor
industry anticipate that first-quarter revenues will be up at a double-digit
rate from a year ago; however, one firm is continuing to see good momentum quarter
to quarter, while another calls the quarterly pattern "flattish."
Selling prices remain under competitive pressure. Although materials costs
are generally in check, contacts express concern that rising oil prices will
raise costs for items such as plastics and chemicals.
About one-half of the manufacturing contacts expect to shrink their workforce
in coming months. Most of the remaining firms are either holding staffing steady
following layoffs in recent months or hiring selectively. In 2003 merit pay
increases are or will be modest, ranging from zero percent to 4 percent at most
firms. Capital spending budgets for 2003 generally are similar to last year's.
The few companies planning significant increases cite the need for efficiency
improvements or new product development.
Most manufacturers are either anticipating or hoping for a modest improvement
in conditions during 2003. However, they remain cautious in the face of economic
and geopolitical uncertainties. Contacts variously describe their companies
as "focusing inward" � "not spending with confidence, not taking a lot of chances"
� "just muddling along" � "[having] absolutely no visibility right now."
Temporary Employment
Conditions in the staffing industry are mixed, with most companies experiencing
flat or modest year-over-year growth in revenues and profits during the fourth
quarter of 2002 and early 2003. Labor supply remains abundant. Wages and billing
rates are largely unchanged, although many respondents express alarm at steady
increases in employee insurance costs. Temp hiring in manufacturing and light
industry is particularly weak, with Vermont reportedly lagging behind the other
New England states. Staffing firms are keeping their own payroll and capital
spending low, with few instances of further restructuring or reorganization.
Most respondents anticipate modest growth in 2003, particularly during the second
half.
Commercial Real Estate
Commercial real estate markets in New England remain sluggish. Respondents report
little change in activity since our last contact in November, with any new leasing
activity being spurred predominantly by consolidation rather than by expansion
or growth. While demand for building purchases continues to be strong, lack
of demand for rental space has led to lower rental rates and higher vacancy
rates in office markets throughout the region. In the Boston area, the published
vacancy rates are around 15 percent in the city and 30 percent in the suburbs,
but substantially more space is actually available for rent, as some companies
make deals for space that is not even listed for sublease. Rental rates for
Class A space have dropped to what Class B or Class C buildings commanded two
years ago. With little expectation that the economy will improve in the near
future, contacts predict a third consecutive year of negative absorption.
Software and Information Technology Services
The demand for software and information technology services has continued to
weaken in early 2003. With some exceptions, contacts in the software industry
report flat or negative first-quarter revenue growth ranging from zero percent
to minus 12 percent compared with last quarter. January is said to have been
atypically slow for several custom applications and network software firms.
Providers of telecom-related software and services report soft sales along a
continuing downward trend, while firms selling software development tools say
demand has been level since November. By contrast, several contacts producing
human resources and health-care software report annual revenue growth of more
than 10 percent.
Software producers seeing revenue gains continue to add labor. The rest are
still adding no jobs, with some firms having reached optimal size and others
beginning to struggle to avoid layoffs. Capital spending is level across the
sector with few plans for change in the coming months. Companies continue to
spend only out of necessity or to complete previously postponed investment projects.
Software and information technology contacts indicate that the outlook has
deteriorated since the last quarter of 2002 and is marked by considerable uncertainty.
The majority of respondents expect flat to deteriorating demand for the next
quarter, partly reflecting increased geopolitical risk.
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Summary