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Federal Reserve Districts

First District--Boston

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Economic activity continues to grow in the First District. Retail and manufacturing contacts mostly say sales or revenues are ahead of year-earlier levels. Manufacturers express concern about rising costs. Software and information technology services cite rising demand, while staffing firms continue to report job growth. Employment is also generally rising, albeit modestly, among respondents in manufacturing and software and IT services. Only commercial real estate markets have failed to improve.

Retail and Tourism
Most First District retailers report positive sales growth in January and February, although the severity of the winter is hurting casual dining and helping pharmacies. Year-over-year sales ranged from down 4 percent to up 8 percent among respondents. Sales of children's and sports apparel are strong, and sales of lumber continue to be especially strong.

Inventories are slightly up or beginning to level off according to contacts. Vendor prices are generally stable, with some exceptions (both up and down modestly) for food-related items. On the retail side, clothing prices are falling slightly and casual dining prices are up modestly. Employment and wages are steady. Respondents report flat or rising capital spending, with the spending concentrated on upgrading technology and opening new stores.

Tourism-related contacts say travel this winter to New England, with the exception of Boston, has been slow compared to a year ago, largely because of heavy snowfall in Massachusetts and lower-than-average snowfall in the northern states. Respondents expect the weak dollar to encourage international travel. They also hope that improved consumer confidence will boost demand for luxury activities and venues, which have been outpaced by moderately priced hotels and restaurants during the past year.

Most retailers believe the economy is strong and consumer confidence is recovering. They anticipate modest 3 percent to 5 percent gains in 2005. Multiple contacts express concern over health care costs, gasoline prices, and competitive pressures.

Manufacturing and Related Services
Almost all First District contacts in manufacturing and related services report that sales and orders in late 2004 and early 2005 have been above year-earlier levels. Companies cite particularly strong gains for defense-related equipment and exports of various kinds. Demand for semiconductors appears to be recovering after falling into a slump, but sales of some categories of consumer nondurables are said to be sluggish.

While demand for manufactured goods is generally strong, many firms are concerned about sustained increases in materials costs, the declining purchasing power of the dollar in foreign markets, or sharply higher utility bills. Contacts complained of double-digit cost increases for steel, ceramic products, petrochemicals, rubber, plastics, electricity, and natural gas. Some respondents have managed to raise their selling prices and productivity enough to offset margin pressures, but others have not. Several manufacturers report that their customers have become more willing to pay higher prices. By contrast, a couple of contacts indicate they are being more choosy in taking on business out of concern that margins may be inadequate. Selling prices for technologically sophisticated products continue to be flat to down compared to a year earlier, and these types of firms are not as affected by rising input costs as other respondents.

A majority of contacted manufacturers are increasing their U.S. headcounts, mostly in professional and technical positions. Pay increases are generally running in the range of 3 percent to 4 percent. Most respondents intend to keep capital spending roughly unchanged from the amounts spent in 2004, but some that had recently invested in major productivity enhancements report that they are bringing capital spending back down to a "normal" level.

Manufacturers tend to see positive business trends continuing in the coming year. Their biggest concerns relate to margin pressures associated with rising materials costs and uncertainty about their own pricing power.

Temporary Employment
Temporary employment agencies in the First District continued to experience decent rates of demand growth in late Q4 and the first two months of 2005. Employment in technical, manufacturing, financial, and defense-related occupations is up strongly. Respondents are further pleased that the volume of permanent and temporary-to-permanent employment continues to grow. The available supply of labor seems to be declining somewhat, particularly in skilled areas. Most responding temp firms are achieving modest price increases, or at least an end to downward price pressure. Health insurance, worker's compensation, and state unemployment insurance costs are rising. Despite other ongoing concerns such as outsourcing, respondents are generally optimistic about 2005 and beyond.

Commercial Real Estate
Not much changed from November through January in New England commercial real estate markets. Vacancy rates remain high and rents are low, albeit without substantial deterioration in the past quarter. Although some contacts report that markets in Boston are "beginning to firm," others report no improvement. Some parts of the region have experienced positive market absorption, but several large mergers have led to large amounts of office and industrial space being added to the Boston market. In 2004, Boston experienced the fourth consecutive year of negative market absorption, its worst streak on record. Office vacancy rates remain in the mid-teens in Boston and exceed 20 percent in the suburbs. Nevertheless, demand for purchasing office buildings remains strong and sale prices for high-rise office buildings are still very high. Contacts do not expect commercial markets to improve until the region's economy strengthens and new jobs are added.

Software and Information Technology Services
Business results range from flat to "going well" for First District contacts selling software and information technology services. Revenues in the most recent quarter (generally ending in December or January) were 8 percent to 20 percent higher than a year earlier, but several respondents indicate that all or much of the growth reflects special factors such as foreign currency gains or acquisitions. All contacts report that their industry is above its recent bottom, but most note that customers are still very selective; they are watching costs carefully and buying mission-critical, business-driven, or very high return-on-investment items.

Contacted companies are adding technology workers and sales staff, although not hiring aggressively. One firm is continuing a "moderate pace" of hiring, while another indicates its plans include "only a handful" of net new hires. One responding company just eliminated a wage freeze that had been in place for over three years; several other firms report 3 percent annual pay increases. Contacts cite little change in capital and technology spending.

Looking forward, software and IT respondents say the situation is favorable. They expect more of the same in the next few quarters--revenues and profits are generally projected to continue growing at current rates.

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Last update: March 9, 2005