March 3, 2004 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

Economic activity is picking up, according to most business contacts in the First District. Retailers say sales are improving moderately, manufacturers indicate that revenues have stabilized or increased as the recovery takes hold, and demand for selected business services--both temporary workers and software and IT services--is on the rise. The exception is commercial real estate markets, which respondents report are still weakening in the Boston area and stable, at best, elsewhere in New England. Retail Most retailers in the First District report moderately improving sales in January and early February. Same-store sales compared to a year earlier range from flat to gains of 17 percent. Discount store contacts note that sales are slightly stronger than in previous months. Other contacts report that sales of big-ticket items, such as furniture, flooring, and electronics, are strong. According to auto dealers, sales were hindered by cold weather in January, but picked up in early February. High-end automobile sales are said to be strong, and used car sales increased over Presidents' Day weekend. Contacts anticipate improvements as the weather warms. Most retail respondents indicate that inventories are in line with sales, while several note that inventories are turning over rapidly. Merchants report they are mostly holding selling prices stable, with some pockets of vendor price pressure, including the rising price of paper and the increasing cost of European imports due to the rising value of the Euro. A couple of respondents plan to hire, adding IT and product development positions, while the majority foresee little change in their overall headcount, except for sales floor personnel to be added as new stores open in 2004. The majority of contacted retailers anticipate slow, steady growth over the next six to twelve months, while two respondents expect 2004 to be a record-setting year. Manufacturing and Related Services About two-thirds of First District contacts in manufacturing and related services such as R&D, equipment rentals/servicing, and publications report that demand in late 2003 and early 2004 is fairly flat from a year ago. The prevailing mood among these firms is one of relief that a recovery has taken hold in recent months, even if it is not dramatic. The remaining one-third report increases in sales from a year earlier, especially in biopharmaceuticals and semiconductors. Selling prices are mostly flat, although prices for equipment, instruments, and semiconductors are under continued downward pressure. Contacts report high or rising prices for a variety of metals and petrochemicals. In addition, the depreciating dollar serves to increase the costs of foreign purchases. Roughly equal numbers of manufacturing respondents plan to increase their U.S. headcount, decrease it, or leave it unchanged in coming months, with one particularly large firm planning cuts. Most adjustments will be small, except for companies transferring more of their production overseas. Pay increases are expected to average 2.5 to 3.5 percent in 2004. About two-thirds of respondents plan to increase capital spending in 2004, mostly projects to upgrade production equipment or IT systems. Most of the remaining manufacturing and related services companies will hold capital expenditures flat. Expectations for 2004 seem to be on a firmer footing than in prior reports. Many manufacturers describe themselves as cautiously optimistic, although one went so far as to state that his caution has evaporated and he is "just plain optimistic." On the disappointing side, some firms note that demand in markets such as aircraft and telecom has yet to turn the corner. Temporary Employment Responding temporary employment firms witnessed noticeable labor demand growth in Q4 2003, with revenues up 5 to 23 percent over year-ago levels. Reports on demand during the first six weeks of 2004 are mixed, however. Manufacturing and light industrial are adding jobs, as are software and government. Contacts also report greater availability of permanent and temporary-to-permanent positions. Labor supply remains stable, although some respondents cite difficulty in filling low-end positions, and an increasing number of applicants are reporting multiple job offers. Bill rates are holding steady, despite some reports of downward pressure. Pay rates are unchanged in most cases, although one contact believes international competition is pushing down software wages, while another cites upward pressure from a January increase in Connecticut's minimum wage and from prevailing wage laws. Respondents also express concern over growing workers' compensation, medical, and state unemployment insurance costs. Most contacts are upbeat about 2004, expecting demand growth to pick up over the course of the year. They cite positive 2003 results, some shift toward permanent employment, and perceived improvements in business confidence as reasons for optimism. A number of respondents nonetheless express concern about the employment effects of offshore contracting. Commercial Real Estate The Boston office market has not improved during the past quarter. There has been almost no growth or demand for new space. Contacts report high downtown vacancy rates, and even higher availability rates, due to a persistently active sublease market. Rents continue to decline, at about a 10 percent annual pace. At the same time, real estate transaction prices remain very high, exceeding their replacement cost or lease value. By contrast with downtown, suburban Boston markets seem to have stabilized, with sublease activity declining, in part because more leases are expiring. The rest of New England shows a similar lack of activity. Non-Boston contacts report little or no demand for office space and steady or declining rental rates, with inventory flat or even up slightly in some spots. Respondents across New England anticipate no improvement in commercial real estate markets in 2004; their hope is that office markets will not deteriorate any further. Software and Information Technology Services The demand for software products and IT services is reportedly strengthening. Most contacts report year-over-year revenue growth of 10 to 15 percent as of the end of December 2003 or January 2004. However, sales shifts from third to fourth quarter range widely among responding companies, partly on account of seasonal patterns and partly because their markets differ. One company reports a 10 percent decrease in sales of human resources software and considers it normal; another cites a 26 percent increase in sales of banking software and says it is "on the right track." A medical software company reports a phenomenal fourth quarter, with sales up 70 percent. Meanwhile, companies engaged in custom application development and network integration see fierce competition and high price pressures leading to relatively slow revenue growth. Companies selling overseas, especially in Europe, say they are being helped by the weak dollar. Although firms with the strongest demand growth continue to add employees, the majority reports no net hiring; at the same time, none reports job cutbacks. Most companies say they are keeping their capital expenses flat. The outlook is "cautiously optimistic," as most software and IT contacts are encouraged by a growing backlog. Firms expect revenue growth in 2004 about the same as in 2003, with gradual increases in employment. Beyond 2004, respondents retain a positive outlook, but express more uncertainty. Return to top Summary New York