May 2, 2001 Federal Reserve Districts First District - Boston

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Economic activity is slowing in the First District. With the exception of the tourist industry, contacted retailers say sales in the first quarter were flat to down from a year ago. Similarly, more than one-half of manufacturing respondents indicate recent sales or orders are down or flat compared with a year earlier. The residential real estate market remains healthy, constrained mostly by lack of inventory. Contacts report that hiring has become somewhat easier and wage pressures have lessened. Both retailers and manufacturers say they are not raising prices. Retail Retailers report that sales were flat to declining slightly in the first quarter of 2001 compared with the year-earlier quarter. These results were worse than expected, yet inventories are generally said to be at desired levels. Contacts in consumer durable goods sectors (hardware, furniture, building materials, autos) say demand is weak. Discount retailers claim demand has softened because their lower-income customers are facing a fuel price squeeze. By contrast, tourism continues to be a bright spot, with no evidence of a slowdown in spending. Employment levels are mostly said to be holding steady, with only a few retailers selling discount goods or autos reporting lay-offs. Labor markets have loosened and wages are now said to be flat, no longer rising. Retail contacts say they are holding their prices level and they are seeing only sporadic increases in vendor prices. Efficiency improvements are reducing costs for many retailers, with margins said to be increasing slightly. Retailers have turned cautious, with the majority of contacts saying that they do not intend to expand their operations in 2001. Contacts expect economic growth to be slow for the entire first half. Looking ahead to the second half of 2001, retailers are uncertain and anxious. They are concerned that recent stock market declines could severely affect consumer sentiment, yet they see consumers continuing to be buoyed by New England's high employment levels. Manufacturing and Related Services About one-half of First District manufacturing contacts report that recent sales or orders are down relative to a year earlier. The remaining one-half indicate that business is flat or up. Half of the firms contacted express concern about excess inventories. Most respondents say they are uncertain or concerned about the outlook for the remainder of 2001. Manufacturers supplying the semiconductor industry report that demand has weakened; they are bracing for a continued slump in the second half of the year. Makers of automotive parts say revenues are down as much as 15 percent from a year ago, but some see evidence of business stabilizing at these lower levels. Consumer products companies say sales are flat or down; overseas business is particularly weak. By contrast with these declines, orders for aircraft parts, medical equipment, and products for the electric power industry are said to be increasing at strong double-digit rates. Sales of some types of computer-related equipment are up considerably from a year ago, but the increases are not as strong as they were last year. Citing a weakening in revenues or the risk of an economic downturn, many manufacturers report new efforts to reduce costs. Roughly two-thirds are tightening their belts with respect to capital spending. They are adopting more stringent criteria for payback periods and stretching out or deferring investment projects. The majority of contacts have implemented layoffs or are considering layoffs in the near future. Firms that are hiring generally say that the number of available applicants has increased and their compensation expectations have become more reasonable, although some engineering and information technology positions remain challenging to fill. Respondents indicate that materials costs are generally flat or down; far fewer express concern about energy or transportation costs than in the last Beige Book. Selling prices are said to be mostly flat or down. Large customers in the retail, automotive, and aircraft industries are pushing for price reductions. Residential Real Estate The residential real estate market in New England is doing well. All contacts report moderate or high levels of activity, but complain about inventory shortages. If more properties were on the market, sales would be higher, as there is excess demand in many parts of the region. Although high-end home sales have slowed somewhat, low-end single-family homes and condominiums sell very quickly and, according to a Vermont contact, "there is nothing to sell." In Massachusetts, the pace of shrinkage in inventory has abated. Most contacts report moderate price increases. The average sale price in Massachusetts rose by 10 percent between February 2000 and February 2001, less of a year-over-year increase than in previous months, mainly as a result of fewer high-end sales. Contacts hope to see an increase in supply and anticipate an active market in the next few months. Insurance Most contacts in the insurance industry report modest growth in sales in the first quarter of 2001, but some mention a loss of revenue as many people are pulling out of equity products. One referred to the situation as "trying to fill a bucket with a hole in it." All of the contacts that offer equity-based products note a dramatic shift from variable-income to fixed-income products. All respondents say their employment levels are stable but one mentions a potential need for cutbacks if the general economic outlook does not improve. The labor market for information technology workers seems to be loosening slightly, which has also relieved wage pressure. One contact was quick to add that the market is still tight, just not as tight as last quarter. Capital spending plans have not changed much since our previous conversations in January. One contact says that they are taking advantage of soft demand for computers and accompanying reduced prices to replace all of their office computers. Another large company, by contrast, indicates that all capital projects are going to be put on hold because of questions about the economy. The rest say that they are not making any changes to their short-term or long-term capital expenditures. Return to top Summary New York