September 3, 2003 Federal Reserve Districts First District--Boston

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Conversations with First District business contacts again have a positive tone. Retailers say sales were up modestly during the summer months, and manufacturers report second quarter demand improvements in selected areas. Temp firms and software and IT companies also see some pickup. Commercial real estate markets are said to be stabilizing. Contacts in all sectors indicate that they remain cautious. Retail Most retail contacts in the First District report modest improvements, with increases in sales ranging from 3 to 6 percent compared to a year earlier. Surplus merchandise and discount furniture sales are reportedly slightly ahead of expectations, with furniture sales accelerating in August. Rainy weather is said to have hampered sales in the hardware sector, particularly paint products, in June and early August, while sales in July were up 6 percent year-over-year. Office supply sales continue to build momentum, with increasing demand for durable goods and back-to-school items, as low prices help drive sales. By contrast, sales of graphic art supplies are reportedly below year-ago levels. Automobile contacts indicate sales have continued to exceed expectations, particularly in July. Most contacts report employment is steady, though two retailers expect their headcount to increase by at least 100 over the course of the year. Some respondents recently implemented annual salary increases, ranging from 2.5 to 3 percent, while the majority report no changes. Vendor prices are mostly stable, with selling prices flat to down. Capital spending plans are mixed among contacted retailers, with about half holding spending steady. New store openings account for most increases, while decreases reflect computer-related cutbacks. Looking forward, most surveyed retailers anticipate slow sales growth over the next six months. Most contacts express greater optimism about the future of the economy than in the recent past. However, some retailers note concern about high unemployment rates, the possibility of rising interest rates, and the continued threat of terrorism. Manufacturing and Related Services Most manufacturing contacts report areas of improved demand in the second quarter but say they are unconvinced that the upturn is sustainable. For half of these firms, sales are up by 2 percent to 20 percent from year-ago levels, with new products and currency translation contributing in some cases. For the other half, year-over-year comparisons are weak, with sales flat to down by as much as 20 percent. Sources of strength include sales to the military and the semiconductor industry. Demand for commercial aircraft also shows signs of stabilizing. By contrast, demand for paper products and furniture is reportedly soft. Contacts continue to cut inventory--in a few cases from problematic levels--and note renewed pressures from retailers trying to reduce stocks. Manufacturers also report that retailers and other major customers continue to demand price concessions although a few contacts have achieved small increases in selected prices. Downward price pressures reflect manufacturers' excess capacity and customers' increased use of online bidding. With prices for materials, other than petrochemicals, also flat to down year-over-year, respondents plan to improve margins through ongoing efforts to cut production costs. Labor demand appears to be stabilizing at surveyed manufacturers. A majority reduced employment in recent months, but most hope to avoid further layoffs. A few have increased overtime or are hiring for specific divisions. One noted that experienced engineers are scarce. A few firms are increasing their capital spending markedly in 2003 from 2002 levels as they "chase" technology or install long planned lean manufacturing systems. But over half are spending "carefully"--below last year, below budget or below norm. Most point to idle capacity. A majority of contacts express cautious optimism about future prospects, with several noting that the outlook for profits or sales is better than expected recently and may even be improving. However, most view the improvements to date as modest and the challenges as daunting. Thus, they continue to plan conservatively and to hunt aggressively for savings. Temporary Employment Respondents from temporary employment agencies in New England report slowly growing labor demand in the second quarter, and a noticeable pickup early in the third. Demand for manufacturing workers remains weak, while demand for technical workers--in telecommunications, software, and electronic assembly--has grown significantly in some cases. Respondents report employment is weaker in Connecticut, Vermont, and some parts of western Massachusetts, while southern New Hampshire and Maine are said to be performing better. Several staffing companies report that some applicants have received multiple job offers, which respondents interpret as a sign of demand growth. Some contacts report a decline in labor supply, both skilled and unskilled. However, the number of permanent positions available remains small, with clients still preferring to hire on a temporary basis. Downward price pressure continues, with some companies reducing both bill rates and wages in response. Most respondents express concern about rising costs, particularly for medical and worker's compensation insurance. Contacts are positive about the remainder of 2003, anticipating modest demand growth during this period. But after a healthy July and August, some respondents say they will wait to see what September has in store before committing to the idea of an economic recovery. Commercial Real Estate Commercial real estate markets in New England are holding steady. Contacts report no substantial improvement, but no material deterioration either. High office vacancy rates continue to prevail throughout the region. Even though Boston experienced positive market absorption in the second quarter for the first time in over two years, the area's vacancy rates increased as a result of new office space added to the market. Office rents continue to decline in the Boston area and are "nowhere near building replacement cost." Consequently, new construction is being put on hold until it becomes cost effective, which will likely take "a long time." Activity levels are low in all markets, although some contacts attribute that to usual seasonal slowdowns and anticipate more activity in the fall. Others expect the high vacancy rates to persist for quite a while, insisting that substantial employment growth is necessary to improve conditions in commercial real estate markets. Software and Information Technology Services Contacts cite renewed optimism in the software sector, with most firms recording either revenue gains or no deterioration from first quarter to second. The majority of contacts, even those with flat current results, are encouraged by pipeline activity, since software sales are typically stronger at year end. A few companies that were struggling to avoid layoffs in the first quarter are now beginning to hire; however, one contact reports a 10 percent layoff. Capital spending across the sector is still uneven, with some companies spending substantial amounts on technology and others freezing expenditures until the end of the year. The outlook is beginning to change from flat to positive in the near term as contacts throughout the software and IT sector are buoyed by recent inquiries. Respondents report increased interest in custom applications and banking software. Return to top Summary New York