November 27, 2002 Federal Reserve Districts First District - Boston

Skip to content Summary Districts Boston New York Philadelphia Cleveland Richmond Atlanta Chicago St. Louis Minneapolis Kansas City Dallas San Francisco Full report

The economy remains slow in the First District. Some retailers are slightly more upbeat than in the last report. Manufacturers indicate that conditions remain difficult and some report slowing activity in recent weeks. The office real estate market is weak in the Boston area and sluggish elsewhere in New England. Staffing firms report small improvements from a year ago, but most software and IT companies say demand is down. Contacts are generally hopeful about 2003. Retail Most retail contacts report sluggish sales in September, October, and early November, although they are ahead of last year's post-September 11 depressed levels. Sales of art and office supplies and small-ticket home items remain even, while home furnishing sales increased slightly in October. Contacts from the hospitality and tourism sector gave the most upbeat report, with autumn usually New England's busiest season. Tourism-related sales are reportedly strongest in New Hampshire and Connecticut, and convention figures are higher than expected throughout New England. However, overnight business travel and hotel occupancy continue to fall short of expectations, especially in the Boston area where hotel occupancy is up only 3 percent from a year ago. Many contacts report that aggressive promotions and marketing have helped keep sales from declining. Headcounts are steady, as most retailers are filling only essential positions. Contacts report stable vendor prices. Selling prices are level, with the exception of the tourism sector where hotels, restaurants, and tour companies continue to offer low-priced "package deals." Most retailers claim gross margins are slightly higher than last year. Almost all contacts report little, if any, increase in their 2003 capital spending plans. Some retailers are expecting sales to pick up modestly in the next six months, while others expect flat sales until the third quarter of 2003. Manufacturing and Related Services Most First District manufacturing contacts report that business conditions continued to be tough throughout the third quarter and into the fourth quarter. Apart from growth in defense, makers of capital goods and other business products indicate that business remains soft; their sales are generally flat to down. Most makers of consumer products say they are doing "okay" in a challenging market, with sales up at a single-digit rate from a year ago. Several firms mention recent dips in revenues. For example, a textile manufacturer says that orders began to fall off in November. A furniture maker indicates that the West Coast port lockout caused a delay in filling orders, while a food manufacturer says the work stoppage resulted in a loss of business to foreign competitors. A paper company reports that e-billing is causing demand to slip again, after a brief improvement in late summer. A biotech firm notes lower-than-anticipated growth because of delayed approval of products by the Food and Drug Administration. Selling prices are mostly flat to down. Respondents comment that their customers in troubled industries such as airlines and financial services are pressuring them for concessions. Materials costs are largely flat, except for situations in which manufacturers have coaxed reductions from their suppliers. Most manufacturing contacts say they are reducing employment or holding it steady. No companies report upward pressures on pay. Capital spending plans are mixed. Some respondents are undertaking large initiatives in 2003 involving modernization of their plant or information systems. They say these investments will lead to reductions in labor requirements or increase throughput. Other companies are reducing or holding the line on capital spending. Manufacturers generally express a hopeful attitude. Several respondents indicate that once the economy improves, so will their business. In the case of business tied to the semiconductor industry, this upturn is said to be unlikely to occur before late 2003. Other firms say they have taken actions to put themselves in a more advantageous competitive position. Temporary Employment Most temporary employment firms report slow growth in the fourth quarter to date. However, several contacts cite improvement, ranging from "a slight pickup in business" to "performing well." Most placements are for temporary or contract staff. Revenue is down from last year. Continuing price pressure from the client side and escalating costs are squeezing margins. Contacts have initiated stringent cost controls to eke out some profit. Demand for temps is reportedly expanding in microelectronics, light industrial, construction, mortgage, nonprofit, health care, telemarketing, and customer service. Information technology hiring remains negligible while the academic market is losing momentum. Supply continues to exceed demand, even at high caliber levels. Despite what one contact describes as "one of the longest droughts" in the history of the staffing industry and a widespread feeling of uncertainty, respondents are optimistic that brighter days lie ahead. Improvement is foreseen at the end of the first quarter of 2003. Commercial Real Estate Commercial real estate markets in New England have not improved over the past quarter. The Boston office market remains weak, with low activity levels, rising vacancy rates, and declining rental rates. Vacancy rates are around 14 percent in downtown Boston and they exceed 20 percent in the suburbs. Those numbers understate the amount of available space, however, as the sublease market continues to be very active and long-term contracts force some tenants to pay for space they cannot utilize. As a result, rental rates have declined by 20 percent to 30 percent over the past year and many tenants are trying to renegotiate existing contracts. In the rest of New England, office markets are similarly flat and activity levels are low. Contacts report that industrial and retail space is doing better than the office market. Because they see no signs of improvement, contacts anticipate that the markets will remain weak for the next two to three years. Software and Information Technology Services According to a majority of respondents, demand for software and information technology services has worsened or at best not improved over the past quarter. Custom applications and payment systems software developers report a slowdown in sales and either negative or "lackluster" performance after a strong summer, and producers of human resource software and software development tools report generally sluggish demand. While health-care software providers continue to experience robust sales, they point out that their performance does not usually follow the business cycle, in part reflecting new legal standards on hospital information security. Product prices for all companies have remained flat, as firms have been unable to pass rising accounting and insurance costs on to consumers. Employment is largely flat, as respondents have either reduced their hiring targets to zero or continued with employment freezes. The exception is medical software producers, who report variable growth in employment. Capital and technology budgets remain largely flat as some companies spend only out of necessity while others take advantage of lower costs to purchase better IT equipment. The outlook remains guardedly optimistic with an expectation for slow but positive growth in the next year in the absence of geopolitical risks. One respondent is expecting to break even in the first quarter of 2003 and two others expect slight or lackluster growth. Return to top Summary New York