December 1, 2004
Federal Reserve Districts
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The First District economy continues to expand. Retailers saw somewhat mixed results in October and early November, although tourism continues to improve. Manufacturing firms report business continues to pick up. Demand for temporary employees as well as for software and IT services is said to be expanding solidly. Commercial real estate markets remain sluggish.
Retail and Tourism
Inventory levels are up slightly according to most contacts. A number of respondents report increasing vendor prices, particularly for food items, and petroleum- and steel-based products, but changes in selling prices are reportedly mixed. Clothing prices declined as lower priced items were included in the product mix, casual dining prices increased modestly, and increases for other retailers were minimal. Employment levels are said to be mostly steady, while acquisitions and seasonal hiring have resulted in some headcount increases. Most respondents report capital spending is in line with plan, some below year-ago levels and some above due to store openings, acquisitions, or increased spending on technology.
Travel and tourism revenues in northern New England were reportedly stronger in September and October than a year earlier, a result of nice weather and long-lasting, bright foliage. Travelers continue to come mostly from driving distances, while international travel increases at a moderate pace. According to respondents, increasing business travel and the opening of several quality hotels have helped boost tourism revenues in Boston this fall. Occupancy rates and prices are said to be on the rise.
Most contacted retailers anticipate that sales will improve slowly in early 2005, while some expect no change. Respondents express uncertainty and caution about rising fuel, energy, and commodity prices, consumers' price-sensitivity, and declining consumer confidence.
Manufacturing and Related Services
Makers of semiconductors and related equipment report that incoming orders softened considerably starting in the third quarter. They attribute much of the new weakness to greater caution among customers serving consumer electronics markets, and they expect the slowdown in orders to remain in effect until early 2005. Furniture manufacturers and their suppliers also suffered major slowdowns in the third quarter, but they disagree about whether these markets are likely to reverse course in the coming months.
Manufacturers report continuing, major cost increases for steel, natural gas, and petrochemicals. Prices have also risen substantially for copper and paper. Most respondents say that in recent months their customers have become more tolerant of price increases attributable to rising materials and energy costs. Nevertheless, the recent pricing adjustments typically do not compensate manufacturers for the increases in input costs that they experienced earlier in the year.
Most manufacturers are holding their U.S. headcounts fairly flat except for acquisitions. Contacts with rapidly growing sales are adding employees, while those in the semiconductor and furniture industries are laying off. Pay increases in 2005 are expected to remain in the 3 percent to 4 percent range, but engineering pay is rising more rapidly. Respondents report difficulties in finding skilled technical and accounting professionals, as well as skilled machinists and toolmakers. Manufacturers generally expect their domestic capital expenditures to rise in the coming year, albeit to varying degrees. The added capital is usually aimed at improving productivity and developing and manufacturing new products.
Most contacts are at least moderately encouraged by their company's prospects in 2005. Some express concerns about possible further increases in energy prices, competitive pressures to reduce selling prices or spend more on marketing, or the down cycle that has started in semiconductors.
Commercial Real Estate
Software and Information Technology Services
Contacted software and IT services companies' overall outlook is cautiously optimistic. Some respondents have highly positive assessments, reporting increasing backlogs and strong pipelines, while others are quite cautious, especially in relatively mature segments such as networking software.