April 20, 2005
Federal Reserve Districts
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First District businesses contacted in early April report that activity continues to expand. Most retailers say first quarter sales were up from a year ago; responding manufacturers' revenues and orders are generally ahead of year-earlier levels. Some retailers and manufacturers, however, suggest they are keeping a tighter rein on capital spending recently than in previous quarters. Advertising and business consulting firms report strong demand. Residential real estate markets in some parts of the region remain robust; other areas are leveling off.
Retail and Tourism
Vendor prices are mixed; for example, dairy prices are said to be up, television prices are falling, and lumber remains volatile. Most retailers are passing price increases along to consumers, but in the restaurant business, competitive pressures are keeping prices stable. Inventories are steady or higher than expected among contacts. Employment levels vary as some respondents increase headcount for new stores or to emphasize service, while others keep head count low reflecting increased productivity. Employment is flat or falling at the corporate level, and wages are steady. Respondents report holding back on capital spending more now than in recent quarters.
Travel and tourism revenue is said to be strong in comparison to a weak base from 2004. Boston area first quarter hotel revenue per room was up double-digits from a year ago; while business travel increased and international travel was up 8 percent, most of the change came from an increase in room rates. Pent-up demand from waning geopolitical turbulence as well as a lower dollar are expected to boost international travel, although increases in fuel prices may temper the growth.
Most retailers are optimistic about the economy and expect modest or strong growth in the coming year. However, they remain concerned about the effects of energy prices on consumers' discretionary income. Those in the furniture and lumber industries are also wary about the effects of rising interest rates on housing starts.
Manufacturing and Related Services
Contacts continue to indicate that they are paying more for energy, transportation, petrochemicals, and some metals. There is also new mention of firming prices for telecommunications services. On the other hand, some companies have seen their input costs fall as a result of increased sourcing in Asia, and one company says that the upward pressure on steel costs has abated. Respondents generally say that their selling prices are steady or increasing a little. They note that customers are more understanding of the causes for price increases or that competition has become somewhat less intense than it had been during the last several years.
Manufacturers are hiring for sales, marketing, and R&D positions. They are continuing to shed other positions as a result of efficiencies introduced through new technology or acquisitions. The net changes are usually small. Some respondents mention that tighter labor markets are resulting in slower hiring or higher attrition in certain professional and technical fields. Merit pay increases generally are expected to average 2.5 percent to 4 percent in 2005.
Contacts are managing their capital expenditures closely, and a capital goods producer indicates that its customers are adding more "checks and balances" into the capital spending process. Several respondents need to add capacity, although not necessarily in the United States.
Most of the contacted manufacturers indicate that they expect to stay "on track" throughout 2005. However, they tend to be planning carefully, on the assumption that the general economy or their markets are unlikely to experience rapid growth this year.
Selected Business Services
About half of responding business services companies have been able to raise prices in the past year, while the remaining companies are managing with steady prices and improving market conditions. Business costs are under control, although competition for employees seems to be pushing up labor costs in some cases. Most responding companies are adding to their headcounts and raising wages, although not aggressively. All respondents express positive views, expecting revenue growth to remain the same or accelerate slightly over the course of 2005.
Residential Real Estate