January 14, 2004 Federal Reserve Districts First District--Boston

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The economy appears to be improving in the First District. Retail activity reportedly picked up in the closing months of 2003, and travel and tourism are said to be strengthening. Demand for products of most contacted District manufacturers was higher in the fourth quarter than a year earlier. With the exception of cost increases for some metals, wood products, and oil and gas-related items, prices are generally stable or falling. Residential real estate markets in New England remain strong. Insurance activity has leveled out. Hiring plans in most sectors are modest, but contacts report no planned layoffs. Retail and Tourism A majority of First District retail contacts report an increase in sales, ranging from 6 percent to 15 percent, in the fourth quarter compared with prior-year sales. A furniture retailer notes a slowdown in business due to snow storms in the first half of December, but strong sales later in the month made up for the losses. According to contacts in the lumber and homebuilder sector, residential construction and home renovations continue to positively affect their business. Responding companies report that employment and wages are mostly stable. Vendor prices are generally holding steady; with the exception of lumber and plywood prices, which declined slightly after a dramatic increase in the third quarter. Inventories are in line with sales and capital spending is on target with plans, as some companies prepare to replace equipment and software in 2004. Leisure travel has reportedly picked up in northern New England, as skiing attracted many travelers in December. Contacts note that international bookings look positive for the upcoming months, as the weak dollar attracts travelers and airlines offer promotional fares. Domestic travelers continue to favor drive-to destinations and last minute trips. Though occupancy rates in the accommodations sector have reportedly improved compared to recent months, revenues are not increasing at the same rate -- most travelers are choosing moderately priced motels with "package" deals over pricier accommodations. In the Boston area, corporate entertaining is said to have strengthened in December compared to a year earlier, and bookings for corporate meetings in early 2004 have also improved. Most retail contacts are optimistic about 2004 and foresee continued improvements in the coming months. While some respondents are pleased by the stock market and consumers' willingness to make big-ticket purchases, they express concern about potential terrorist attacks and rising interest rates. Manufacturing and Related Services About two-thirds of First District manufacturing contacts report that demand in late 2004 is up from a year ago. Various firms say they have been pleasantly surprised by upticks in the fourth quarter. For example, a diversified durable goods manufacturer whose business had been "bouncing along the bottom" had a double-digit increase in orders in November. Companies making supplies and equipment for the semiconductor industry indicate that their customers' purse strings appear to be loosening. And a computer hardware firm notes improved order patterns in the fourth quarter. On the other hand, a manufacturer of office equipment has yet to see any positive signs, and a publisher says demand for publications remains fairly sluggish. Most selling prices remain flat to down. In some cases, manufacturers have been able to counteract downward pressures by introducing innovative products. By contrast, costs for copper and oil and gas derivatives are reportedly sharply higher than a year ago. A biotech company is making large additions to its workforce, but most other contacts are making only modest increases or modest decreases to their U.S. headcounts. Any new hiring tends to be focused on professional and technical positions, and is often connected to new product development, sales, or support. Pay increases are expected to average 2 percent to 4 percent in 2004, about the same as in 2003. Most manufacturers anticipate that their capital spending will be modestly higher in 2004 than in 2003. Although life sciences companies are adding to their overall capacity, most contacts' capital plans are motivated by the desire to lower the cost of production, improve maintenance of their capital stock, or change their product mix. Various contacts report that they are continuing to be cautious in their capital spending. Manufacturing respondents are generally anticipating that revenues will increase in the coming year, but despite their increased optimism they remain uncertain about the strength or durability of the recovery. Contacts in textiles and paper products express particular concern about their sectors. Residential Real Estate Residential real estate markets in New England remain strong. In Massachusetts, the number of sales of both detached houses and condominiums increased by double digits in each of the past four months and the number of sales beat the previous record for the state. Prices have increased as well, although price increases have been more modest, with the average sale price rising at a rate of 7 percent to 10 percent a year. Markets in the rest of New England have been stable; most contacts report steady prices and modestly active markets. Inventory has started to build in some areas, creating more "normal" markets, compared to extreme shortages many states experienced in the past couple of years. High-end homes, in particular, remain on the market longer, while low- and mid-priced homes sell quickly in most places. Contacts report typical seasonal slowdowns and expect that activity will pick up pace in the spring. Insurance Contacts indicate that overall demand for insurance has not changed much since October 2003. While demand for property and casualty insurance is still good, pricing in large property insurance has declined by as much as 10 percent as fewer risks are expected, so revenue growth from domestic sales has slowed down. Demand for life insurance remains roughly unchanged, with only long-term care products selling better than average. While no layoffs loom in the first quarter of 2004, hiring remains subdued; however, capital budgets are beginning to expand as companies start to renew postponed capital projects. Respondents expect the first quarter of 2004 to be largely flat due to slower sales growth in the continental U.S. No major price changes are expected in 2004, in contrast to much of the past year. Return to top Summary New York