April 24, 2002 Federal Reserve Districts First District - Boston

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Economic activity in the First District is mixed. Real estate contacts report residential markets are strong. Respondents in the insurance industry say demand is picking up. With exceptions, retail contacts report flat sales compared with a year ago, which they indicate is approximately in line with expectations. Revenues are flat or down for New England manufacturing contacts, but demand is showing signs of picking up for defense contractors and companies producing selected consumer products. Both manufacturers and retailers say selling prices are flat. Many manufacturers are keeping wage freezes in effect; retailers indicate wages are rising only slowly. Contacts continue to expect only modest recovery and have varied views about when their business will rebound, with some expecting improvement during the second half of this year and others looking into 2003. Retail Most New England retailers contacted report first quarter same-store sales flat with a year ago and roughly in line with expectations. An exception is a firm selling construction supplies, which cites double-digit sales growth. An auto dealers' association reports good sales, but a bit of a slowdown at the end of March. By contrast, business is still very weak for contacts serving the tourism industry. Aside from tourism, respondents are "feeling better;" a couple have seen more improvement in recent weeks. Retail contacts are generally holding headcounts steady. Wages are rising at about a 3 percent pace, which is said to be slower than last year. One respondent has implemented a wage freeze; another is cutting pay. Prices are holding steady or falling slightly, with the exception of building supplies affected by tariffs. Some retailers indicate margins are being squeezed, others say cost cutting has maintained profits. While retailers say they are hopeful the economy will improve this year, they are not planning on a strong turnaround. Tourism contacts say leisure travel will recover before conference and business travel. A few contacts expect the third or fourth quarter of the year to be "significantly better." Others foresee no real improvement until early 2003. Manufacturing and Related Services Almost all First District manufacturing contacts report that revenues in the first quarter of 2002 were either flat or down relative to a year ago. Some report an emerging pickup in demand resulting from consumer spending, selective relaxation of business spending constraints, or U.S. government defense purchases. For example, one company in the semiconductor industry believes that the worst of its severe slump may be over as sales of personal computers and cell phones appear to be recovering. Markets for selected appliances and automotive parts, consumer instruments, and computer-based corporate training products also are turning up. However, makers of capital goods such as computer equipment, large electrical equipment, and aircraft and parts express disappointment that business remains in a slump. Manufacturers mostly report that selling prices are flat. Contacts producing large capital goods, plastics products, and paper are experiencing downward pressures. Materials costs are largely flat, but manufacturers express concern about announced postal rate hikes, already-rising medical costs, and anticipated increases for metals and petroleum-based products as contracts come up for renewal. Manufacturers remain intent on controlling costs. About one-half envision having some form of pay freeze in effect through at least the first half of this year; only a couple have announced the lifting of a pay freeze. Almost all contacts expect their employment levels to hold steady or to drift downward with internal productivity enhancements or outsourcing. Manufacturers are retaining a tight stance with respect to capital spending and inventory investment. Although some contacts indicate that they have "loosened the purse strings" slightly this year, all respondents point to ongoing needs to become more efficient or restore profitability. Manufacturers express mixed views regarding the outlook. Some interpret very recent upticks in their business as a confirmation of economic recovery. Others--notably makers of capital goods--now expect their business to remain weak throughout 2002 rather than improving in the second half. Residential Real Estate New England's residential real estate markets are very strong. Contacts report high levels of activity and shortages of listings throughout the region, especially in mid-price range market segments. The mild winter and low interest rates have helped spur demand. Contacts report instances of multiple bids and sales above asking price; many properties sell within a few days of being listed. Massachusetts experienced a large increase in sales of both detached homes and condominiums in the first quarter of this year, following a decline in sales the previous quarter. Home prices in the first quarter of 2002 are said to be steady in Connecticut, Maine, and Rhode Island, but up moderately in Massachusetts, New Hampshire, and Vermont. Most contacts expect the market to remain active and strong in the near future, but anticipate price increases if supply remains limited. Insurance Life insurance contacts report very strong sales for the fourth quarter of 2001 and the first quarter of 2002. One contact reports year-over-year sales growth in excess of 50 percent in both their term and single life insurance products, with slower growth in variable life and universal life products. A second contact mentions similar growth for their life insurance products and continuing record-level application requests. One respondent cites strong mutual fund sales at the end of 2001 and the beginning of 2002, while another indicates that sales are soft. Both attribute these results in part to investors' increased attention to published rankings for mutual funds. On the disability insurance side, claims are up; increases in disability claims are usually associated with a weak economy. This contact has had some success raising prices and generally views business as being "pretty good." A health insurance contact mentioned some loss in membership attributable to layoffs at large corporate clients, reflecting "continued softness in the economy." Although there is a feeling of optimism among insurance respondents, all seem to have concerns about the near future. One points out that while news reports say the economy is improving, they have not seen any signs yet. Employment levels are expected to remain the same, with some contacts reporting making a small number of cuts while others report a few additions. Return to top Summary New York