July 31, 2002 Federal Reserve Districts First District - Boston

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The First District economy is said to be going through a "bumpy" period. Manufacturing reports continue mixed, with makers of defense, medical, and automotive equipment and semiconductors doing better than producers of IT and telecom equipment or nonmilitary aircraft. Retailers are less upbeat than they were in April and May, with sales mostly flat or down from year-earlier levels. Results for insurance firms vary by sector, while residential real estate markets remain strong. Many contacts express caution and uncertainty regarding the outlook. Retail Most contacted New England retailers report that sales were flat or down in May, June, and the beginning of July, compared with prior-year sales. Several companies cite deterioration after positive results in the first part of the year. The most upbeat reports came from a lumber/hardware store that is seeing strong demand for remodeling and kitchen and bath installations as well as new construction, and from a furniture retailer that had positive sales growth until July, when sunny weekend weather set in. An office-supply store reports that consumables like paper and inkjets are selling well, but that sales of bigger-ticket items are slowing. Other retailers are disappointed with below-expectation sales so far this summer; this group includes a computer wholesaler whose sales are down 15 percent from last year. Most retailers are holding employment steady, though several report layoffs and attrition, especially of administrative and sales employees. Most are granting modest wage increases, with one employer ending a wage freeze in April. Vendor prices are generally stable; exceptions include high-tech goods continuing a trend of price declines and lumber prices, which have firmed up recently after exhibiting multi-year lows. Most retailers claim profit margins are stable. Overall, the contacted retailers have subdued expectations for the remainder of the year compared with their relative optimism a few months ago. Most express hope for modest growth in their own firm's sales, despite low expectations for the economy overall. By exception, lumber/hardware sellers look forward to continued good business. Catching the mood of other respondents, one retailer characterizes the outlook as "imponderable." Manufacturing and Related Services First District manufacturing contacts report mixed trends for revenues and orders in the second quarter and early third quarter. Demand for defense equipment and medical-related equipment and supplies is on an upward trend, and sales of automotive parts remain healthy. Semiconductor firms indicate that business remains below year-ago levels but has turned up nicely in response to rising capacity utilization at fabrication facilities in the Far East. Similarly, manufacturers of industrial equipment and paper report recent upturns in demand, albeit not sufficient to offset declines during the past year. Contrasting these positive developments, other contacts report that the slump is continuing or that the pace of growth has slowed. Sales of information technology equipment, nonmilitary aircraft, telecommunications equipment, and advertising materials remain depressed. Sales of technical publications have weakened as customers in industries such as financial and legal services, consulting, and IT scale back. Selling prices and materials costs are mostly flat to down. Prices for plastics, paper, and semiconductors have reportedly firmed in recent months. Companies report that increased sourcing outside the United States is resulting in lower purchasing costs. Employment trends are mixed. Companies that are increasing head counts are doing so cautiously, and some other companies are still cutting jobs. About one-half of the contacted manufacturers have at least selective pay freezes in effect, especially for salaried employees, but some of these firms now plan to raise pay this year. Reported pay increases are typically around 3 percent. Responding companies generally report that capital spending remains modest. Some firms are increasing their equipment purchases in order to improve the quality of their products or processes, or to develop new products in response to changes in technology. Although quite a few contacts believe that the worst is behind them, the prevailing mood is somewhat subdued. Respondents say that the recent stock market decline and concerns about corporate accounting irregularities may depress demand for their products. Some also worry that no upturn is in sight for industries such as IT, aerospace, and telecommunications. Residential Real Estate Residential real estate markets in New England remain very strong. Demand is high, stimulated both by low interest rates and by uncertain financial markets--many buyers are said to have turned to housing as an alternative to equity. Contacts complain about lack of inventory throughout the region. Respondents report that most newly listed property sells within a few days, in most cases at the asking price, and sometimes with multiple bids. The only exception is Vermont, where the number of listings in the mid-price range is said to have risen during the past quarter. Home prices continued to rise through the second quarter. Contacts say the increases are especially pronounced in Massachusetts; the other New England states report moderate price increases. New construction is down in most states because of a lack of available land, with the exception of Maine, where new construction is very active. Most contacts expect continued strength in housing markets in the short term, with price appreciation slowing down in the second half of the year. Insurance Life insurance contacts continue to report very strong demand. Sales are said to be up 25 to 35 percent in the second quarter from a year earlier. Reports from disability and health insurance providers are less upbeat. The level of disability claims continues to be higher than normal, which one respondent believes is a reflection of soft labor markets. Contacts are having some success raising their rates without losing much business and are thereby offsetting part of the financial losses from higher claims. By contrast, one respondent in health insurance mentions ongoing declines in membership. These declines are partially due to rate increases this company put in place earlier this year to cover rising medical costs and partially due to layoffs by client companies. Insurance companies' mutual funds show mixed results; some are having "surprising" success while others are in net redemption. Insurance industry respondents are less optimistic than they were earlier in the year, especially when looking at their investments and mutual fund sales. Employment in the sector has mainly been flat, as many contacts report continued efforts to improve efficiency. Most say that they do not expect significant changes in the second half of the year. However, those with current sales running higher than anticipated foresee some softening of demand and a return to expected levels. Return to top Summary New York