September 19, 2001 Federal Reserve Districts First District - Boston

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Economic activity continues to be slow in New England. First District business contacts report sales or orders during the summer months even with or below year-earlier levels. Some respondents in manufacturing, temp help, and software say business appears to be stabilizing at low levels, but others in those industries and retailing continue to see deterioration. None of the contacted firms expect conditions to improve until next year, a rather "bleak" consensus outlook. Retail Most retail contacts report that sales were either flat or declining during the June through August period compared with a year earlier. While department stores, firms in the tourism sector, and stores selling furniture, building materials, computer and office technology products, and consumer electronics report flat or declining demand, back-to-school apparel sales were up from last year. An inverse barometer of the economy, sales of surplus merchandise exhibited very strong growth. Employment levels are reported to be either flat or declining, with wage rates mostly rising at a 2 to 3 percent pace. Retail contacts say that they are discounting prices in order to move inventories; as a result, profit margins are being eroded. Retailers expect more of the same--flat to negative growth--for the next 12 months. They expect no turnaround in the economy until third quarter 2002. One retailer describes the outlook as "grim." Manufacturing and Related Services First District manufacturing contacts report that recent business is slow. Most say sales or orders in the current quarter are down from a year earlier. Although some detect signs that business may be beginning to stabilize, respondents say overwhelmingly that they or their customers are still seeking to reduce inventories. Thus, most manufacturers expect recovery to be gradual and to be deferred until the first half of 2002; some in technology-dependent sectors anticipate further delay. Makers of consumer goods are anxious about the upcoming holiday season. They say that consumers appear hesitant to make discretionary purchases and that retailers are ordering very sparingly in order to avoid the costs associated with excess stocks. A manufacturer of consumer instruments is responding to these conditions by not adding any temporary production help to gear up for its heaviest quarter of the year. However, one firm supplying computer printer components is encouraged by signs of fairly robust customer projections for the holidays, following weak sales for the year to date. Makers of capital goods continue to report weakness. They cite a lack of purchases by the semiconductor, steel, domestic automotive, and telecommunications industries in particular and a general tightness in capital budgets because of economic uncertainty and a desire to conserve cash. New orders relate mostly to sectors that are relatively strong--such as biotech, pharmaceuticals, aerospace, and oil and gas--and to customers developing improved products. However, contacts in semiconductor-related industries cite a lack of successful new technology products as a major obstacle to their recovery. Respondents say their selling prices and materials costs generally are flat or down. They cite downward pricing pressures as a result of intensified use of Internet-based auctions, competition from imports, and customer-initiated contract renegotiations. Energy costs are said to be higher than a year ago but stabilizing or coming down. Manufacturers continue to keep a tight lid on labor and capital costs, although in some cases they feel they have already made appropriate reductions. About three-quarters of contacts see employment holding at current levels through the end of the year, while only one-quarter anticipate layoffs or furloughs. About one-half of respondents have intensified efforts to reduce capital expenditures since last contacted for the Beige Book. Software and Information Technology Services Most software and IT respondents report some improvement in demand for their products in the current quarter. For some firms, demand is leveling after a few quarters of softening; for others, demand slowed less rapidly in the most recent quarter. Respondents' opinions are mixed on whether sales have hit bottom or still have a few quarters before they level off. A few contacts report that products targeted for middle to small firms are performing much better than those for large corporations. Respondents who report rising demand generally say their results reflect specific client industries or product initiatives, not the economy as a whole. Although some contacts are downbeat about the near term, almost all feel that the long-term outlook is positive. Software and IT respondents report level employment and capital spending. Most do not expect to reduce employment further in the near future. They are waiting for improvements in demand before going ahead with expansion plans. Temporary Employment Most contacts in the temporary employment industry continue to report very slow business. Overall revenues in this or the previous quarter are said to have dropped 30 to 40 percent from a year ago, with more severe declines for permanent placements. Contacts indicate that demand fell more steeply between February and May than since June. Most respondents say demand has been flat since June, but some firms that provide temporary office support and light industrial workers report a pickup. In high tech sectors such as IT, manufacturing, engineering, and telecom, large layoffs and hiring freezes continue; very few clients are hiring tech workers. Office support and accounting are doing better than high tech, but most contacts report negative growth in these areas as well. Many contacts report increasing pressure from clients to lower prices and mark-ups, and hourly rates for IT workers are down. Finding workers is not a problem; contacts are flooded with resumes. But some clients are demanding more specific skills and requirements, making matches more difficult. Many contacts are cutting costs aggressively and some have laid off up to 25 percent of their own staff, especially recruiters. Commercial Real Estate Commercial real estate markets continue to slow. Contacts report that the most desirable office locations, such as downtown Boston and Portland, are still faring relatively well; vacancy rates are higher than a year ago, but at reasonable levels. However, suburban Boston and Cambridge vacancy rates have increased considerably, driven in part by the contraction of both large and small high-tech firms. The acquisition market is in a wait-and-see period, with many customers on the sidelines. Most contacts expect commercial markets to remain slow until at least second quarter 2002. Return to top Summary New York