Business conditions are improving in the First District. Manufacturers and retailers report more positive results in mid-February than they did at the beginning of the year, and software contacts say business is picking up. The commercial real estate market is said to be on the bottom, no longer moving down, and staffing firms are seeing some improvement, but business is still very slow. Most contacts expect activity levels to improve very modestly later this year.
Retailers report generally improving sales results in early 2002. Sellers of furniture, lumber and home improvement products, shoes, and surplus merchandise indicate that sales through mid-February were above year-earlier levels, though mostly by small amounts. Even a computer retailer with sales down 20 percent from a year earlier says business in recent weeks has been "less bad than it was."
Employment is reported to be stable at most retail firms; head counts are generally level with year-earlier. One company with "major, major" layoffs in the last year is not currently planning further cuts. Wage trends are mixed, with one firm planning "the usual" 3 percent pay hike this summer, another seeing costs jump because of a rise in the minimum wage, and a third instituting a wage freeze.
Retailers say vendor prices are fairly stable. In most cases, their selling prices are also steady, although one firm is raising prices on selected products. The computer retailer reports that the pace of price declines increased in the last half of last year but has attenuated in the last three months.
Contacted retailers are expecting the economy and their businesses to improve in 2002. One respondent says he foresees "something between dead flat and the beginning of a very modest recovery." Most see the improvement concentrated in the second half and none expects a strong upturn.
Manufacturing and Related Services
Most First District manufacturing contacts report that revenues in the fourth quarter of 2001 and early 2002 were fairly flat relative to a year ago. By exception, demand for biopharmaceutical equipment and supplies remains on a solid growth path. Manufacturers indicate that discretionary spending by business customers remains depressed. This weakness affects sales of a variety of products, from corporate gift and promotional items to major office equipment. To the extent that their business has improved of late, manufacturers describe the changes as limited. For example, a firm in the semiconductor industry attributes the pickup in orders since mid-January to a replenishment of stocks by distributors--not (yet) to a rise in final demand. A manufacturer of paper products reports that some of its customers seem to be enjoying resumed sales growth, but others are simply restocking.
Contacts report that selling prices and materials costs are generally flat. In a variety of industries, respondents indicate that they are not even considering higher price quotes because they would not stick. Contacts continue to express concern about steep increases in insurance rates.
Manufacturers remain intent on controlling costs. They are avoiding higher input costs by pressuring their vendors or shifting to lower-cost sources. Most contacts reduced employment in 2001, and most anticipate that their headcounts will be steady or drifting downward in the remainder of 2002. Pay raises will be nonexistent at some firms and limited to 2 to 3 percent at others. Most contacts reduced inventories last year and are contemplating no buildup from current levels. In describing capital spending plans, manufacturers expressed a "do with what we have" mentality, especially with respect to technology investments. Many say they will focus on maintaining their existing capital and investing to develop new products.
Revenue expectations for 2002 generally are muted. Although the consensus continues to be that business will improve, manufacturers remain doubtful that they will see any substantial pickup until sometime in the second half of the year.
Respondents in the staffing industry report mixed results in the first quarter of 2002 (to date), but most are performing better now than in the fourth quarter of 2001. Some contacts say that the current market is the worst they have seen; others are more upbeat because orders are starting to come in. Almost all report lower revenues than a year ago. Even with some signs of a pickup for temporary work, permanent placement is still lackluster. Responding firms in northern New England are doing better than those located in Massachusetts and Connecticut. On the supply side, temp firms continue to be inundated with job seekers. Most contacts predict a modest turnaround later this year.
Commercial Real Estate
Commercial real estate markets in New England have maintained their slow pace over the past quarter. Vacancy rates remain high and rents have declined somewhat, although contacts report that "the worst is behind us," and the pace of deterioration has slowed markedly. The Greater Boston market is still in "bad shape," but vacancy rates have stopped increasing and contacts predict that "we have reached the bottom." The level of activity is much slower than a year ago, but has not changed much over the past quarter. Other parts of New England have been stable, with no noticeable changes in vacancy or rental rates. Contacts in Connecticut, Rhode Island, and Maine report increased activity levels relative to the last quarter of 2001. Most contacts do not anticipate any significant improvement before the end of 2002.
Software and Information Technology Services
A majority of technology respondents are beginning to see signs of improving demand for software products and services. Respondents who provide infrastructure software report particularly strong fourth quarters, while those who provide products more closely related to consumer services are not faring as well. Large customers are said to have activated plans and finalized agreements that they had put on hold for almost a year, while small companies are still holding back on some technology investments. Contacts servicing the healthcare and insurance industries have particularly strong sales. The improving technology environment has made most of the respondents more optimistic than in the recent past, but they are still very cautious regarding the future. One of the best performing respondents still believes that the technology industry is "scary as hell." Most contacts plan to keep employment level until their prospects are more certain; only one company expects to increase its workforce significantly. A couple of respondents report plans to upgrade their job mix while keeping their headcounts constant by increasing the number of research and development workers while reducing customer service positions and installers. Capital and technology spending also appears to be level for most respondents.