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Federal Reserve Districts

First District--Boston

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The First District economy remains soft, but business contacts appear to be somewhat more confident that they can cope with a period of slow activity than they were earlier in 2002. Most New England manufacturers report no increase in demand for their products. Retail respondents indicate sales were below expectations in the October-December period. Residential real estate markets are slowing but perhaps only seasonally. Insurance companies cite gains.

First District retailers report mostly flat sales in October, November, and December compared to the previous quarter. Many contacts' results are lagging behind their forecasts, most of which were revised downward earlier in 2002 as expectations of an economic turnaround diminished.

Home furnishing retailers experienced a pickup in sales in November, but sales weakened through December; the timing of the holidays and the weather are said to be among the causes of the slowdown. An electronics retailer continues to experience soft sales, while an office supply store indicates sales are steady. Wireless, digital, and imaging products are reported to have sold well this quarter. A high-end shoe retailer says sales were strong in first quality retail stores, while outlet stores failed to meet expectations. Lumber and home building suppliers, in a seasonal lull, experienced mixed fourth quarter results, as low lumber prices continue to hinder profits. Auto sales are slower, as is typical at this time of year. However, car sales in 2003 are expected to be disappointing compared to 2002.

Most retailers are keeping inventories tight, but some auto dealers report inventories are slightly higher than anticipated. Overall, capital spending is limited to required IT upgrades and purchases. With the exception of two contacts who cut their headcounts 5 percent or less, retailers say employment is steady. Wage increases, where they are occurring, are reported to be minimal--below 3 percent. The more optimistic retail contacts do not expect sales to pick up until the third quarter of 2003, while others see no signs of improvement.

Manufacturing and Related Services
First District manufacturing contacts report few if any signs of a pickup in demand for their products in late 2002. Most makers of capital goods and other business products indicate that business remains soft. Their sales are generally flat to down slightly from a year ago. Despite a pickup in Pentagon spending, overall demand for aircraft and parts remains considerably below year-ago levels. A manufacturer of pharmaceutical and biotech equipment reports continued growth, albeit at a rate that falls short of earlier expectations. A maker of specialized machine tools cites an increase in orders, but the industry as a whole is continuing in a slump. Makers of consumer products indicate that holiday sales were either "okay" or fell short of expectations.

Selling prices remain under competitive pressure. Contacts increasingly mention competition from foreign suppliers, particularly Chinese, which they expect to be a long-term phenomenon. Nevertheless, some firms indicate that they will attempt to raise selling prices in an effort to cover higher costs for items such as insurance, plastics, and steel.

Most manufacturing contacts say they are reducing employment or holding it steady, although some are cautiously undertaking selective hiring. Several firms report plans to ease restrictions on pay increases in 2003, resulting in merit raises in the range of 2 percent to 4 percent.

Capital spending plans for 2003 are mixed. Some respondents indicate that weak demand, excess capacity, and profit pressures will result in curtailments relative to earlier plans. However, others report some "loosening of the purse strings," including capital spending initiatives to increase productivity.

Manufacturers are anticipating that conditions will improve somewhat in 2003. Some say that their business results could exceed their conservative projections, barring unexpectedly severe shocks to the economy emanating from international events.

Residential Real Estate
New England contacts report slowdowns in several markets, but there is no consensus as to whether the change is seasonal or the markets "have started to soften." Lower-end homes and condominiums continue to sell quickly and at close to their asking prices. Higher-end homes stay on the market longer. As a result, inventory of higher-priced homes has begun to build up, but some contacts continue to report lack of inventory, especially at the entry level. Although a few markets have experienced modest price declines, most contacts report that selling prices remain stable so far. Double-digit price appreciation in Massachusetts, seen throughout most of 2002, is likely to slow down, as sellers realize that their asking prices are "no longer realistic." Single-family home sales in Massachusetts did not change much in October or November, but because of robust sales earlier in the year, 2002 is likely to be the strongest year in the state's history. Most contacts expect residential markets to be slower in 2003, but do not foresee drastic deterioration, as long as interest rates remain low.

Respondents in the insurance industry report strong financial results, combined with continuing rate increases for the fourth quarter of 2002. Companies in the property and casualty sector continue to see strong demand and robust revenues, as rates are up 12 percent to 25 percent from 2001. While most firms remain unaffected by the economy's slow recovery, uncollectible receivables from the manufacturing sector are becoming a source of concern. Low interest rates and weaker investment performance have also put pressure on earnings, resulting in downward revisions to capital spending and employment, effectively freezing hiring. Nevertheless, contacts say the short- and long-term outlook remains positive as they anticipate strong sales.

Life insurance providers report strong results in traditional life insurance despite rising compensation costs and flat product pricing. Employment remains level and capital budgets are static. Providers of disability insurance report higher levels of disability claims; these together with low interest rates are squeezing profits. Revenues are slightly below target, with a consequent slowdown in planned capital spending and hiring. According to most respondents, the risk of war with Iraq creates demand uncertainties, as clients in troubled sectors may further cut spending. Apart from external risk, respondents expect gradual growth similar to that in last quarter.

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Last update: January 15, 2003