June 16, 2004 Federal Reserve Districts First District--Boston

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Business activity continues to gain strength in the First District. Retailers and manufacturers report growth in sales and orders. Demand for software and information technology services as well as temp workers is also rising. Commercial real estate markets may be stabilizing. With some important exceptions including energy and steel, input prices are mostly stable; selling prices are said to be moving up gradually. Wage increases are returning to the 2 percent to 5 percent range. Retail Most retail contacts in the First District report sales growth from a year ago in April and May. However, many respondents note a slower rate of increase than in the last few months. According to a department store and a high-end retailer, consumers are buying and spending more on "luxury" products, such as women's handbags and shoes. Apparel sales are said to be stronger than home-goods sales, and sales of durable and consumable office-supply products are up. Respondents in other sectors, such as furniture and electronic entertainment equipment, indicate sales are down or flat. About two-thirds of the contacted retailers report lean inventories that are in line with sales, while the rest are trying to bring inventories down. Vendor prices and selling prices are mostly stable, though several contacts note price increases for European goods and on some commodity goods, such as paper and steel products. Although there are some pockets of growth, overall employment is steady; wages are expected to increase by 2 percent to 5 percent this year. Travel and tourism in the Boston area has improved, with sales at hotels and restaurants increasing 6 percent to 7 percent this period compared to last year. According to respondents, corporate bookings continue to be strong, particularly in the biotechnology sector, and leisure travel is growing. While most visitors prefer to travel by car, new low-cost carriers at Logan Airport are expected to bring in more visitors in the upcoming months. International travel has also increased, with additional flights from London, Mexico City, Rome, Paris, and Frankfurt. Retail respondents are generally anticipating sales increases over the next six months. However, they express concern about rising gas prices, homeland security issues, and geopolitical uncertainties. Manufacturing and Related Services Most First District contacts in manufacturing and related services report that sales and orders in the first and second quarters of 2004 have been ahead of year-earlier levels. Growth is particularly strong in defense- and semiconductor-related segments. Several companies report that they are doing better than they had anticipated as of late 2003. By contrast, a couple sellers of home goods report weaker-than-anticipated sales trends in the second quarter. Many contacts report sharp cost increases for energy and steel, and some are facing higher costs for paper, petrochemical products, and hardwoods. Specialty steel is in short supply. Other materials costs are mostly flat to down. Many manufacturers and related services providers report that they have been able to increase their selling prices 1 percent to 3 percent or that deflationary pressures have become less intense. However, contacts selling to airlines, automotive companies, and prime defense contractors indicate continuing demands for price reductions. About three-quarters of contacts in manufacturing and related services are increasing their U.S. headcounts a little. Pay increases are mostly expected to average 3 percent to 4 percent in 2004. A couple of firms are feeling pressure to raise pay for selected groups of employees more than originally planned. A majority of respondents are increasing capital spending this year, with IT featuring prominently in many companies' plans. Most businesses have a positive outlook, with one saying its prospects are the best they have been in a long time and another saying the general business climate is more encouraging than it has been since early 2001. Some companies express concern that high energy prices and rising interest rates could damp consumer spending. Cognizant of their experience in the last cycle, firms in the semiconductor industry are trying to avoid an excessive expansion that would be followed by a sharp retrenchment. Temporary Employment Temporary employment firms in New England enjoyed improving business conditions in Q1 2004, continuing into early Q2. Demand for temporaries is up across a wide spectrum of industries, most notably manufacturing, and a number of respondents report increased demand for permanent employees. While labor supplies appear to be tightening, contacts say this is not yet a major concern. Bill rates and pay rates are largely unchanged, with fewer reports of clients putting intense downward pressure on bill rates. Concerns about non-payroll related costs are also muted compared to three months ago, although contacts still report sharp increases in insurance costs. Respondents are upbeat about the rest of the year, expecting labor demand to be higher than in the first five months. While concerns about terrorism and political uncertainty linger, increasing orders and growing demand for permanent hires have engendered optimism among most respondents. Commercial Real Estate The Boston area office market is flat, with few changes since the end of 2003. Despite some positive net absorption, vacancy rates remain between 12 percent and 15 percent downtown and above 20 percent in the suburbs. Rents continue to decline and contacts describe Boston as a "tenants' market," in which tenants can often negotiate rents below their listed values. While some contacts believe the office market will start improving soon, others fear that currently planned large corporate mergers could raise vacancies even higher. All agree that significant job growth will be required to start filling vacant space, because there is a lot of shadow space. On the other hand, real estate transaction prices for high-rise office buildings are exceptionally high, and demand for them has not diminished. Commercial markets in the rest of New England are gradually gaining strength. The Cambridge office market has improved slightly during the past quarter. The apartment market throughout Massachusetts continues to perform well, reflecting the strong housing market. Providence is also strong, especially the retail and apartment markets. In the Hartford market, vacancy rates remain high, although there are no large blocks of office space available. Software and Information Technology Services The market for software and information technology services is becoming more brisk. Year-over-year revenue growth of contacts has "regained its momentum," ranging from 4 percent to 16 percent in the first quarter of 2004. Growth in health care software is steady; other sectors such as human resources software, banking software, network software, and more broad-based custom applications development are even stronger. Respondents say the improvement indicates corporate investment on information technology is picking up economy-wide. Large companies are growing faster than small ones, who say they are facing low-end competition, especially from staffing firms. Companies that export to Europe, Asia, and Canada report no significant stimulus from the weak dollar; all attribute their demand growth to the improving domestic market. Software and IT contacts say employment is steady and the majority plans no new hiring in the near future. Capital and technology spending of most contacted companies is "moderate," with technology development the largest spending category. With a strong order pipeline, most respondents are moderately optimistic. While expectations of revenue growth in the next quarter range from single to high double digits, some contacts express concern about potential effects of the Iraq war and the upcoming election on corporate IT investment decisions. Return to top Summary New York