June 11, 2003
Federal Reserve Districts
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The First District economy remains stalled. While retail respondents report sales meeting expectations, manufacturers, especially those producing consumer durables, cite further softening. Some staffing firms indicate demand is rising, but commercial real estate markets remain in the doldrums and software firms see little cause for optimism.
Auto sales are said to be down slightly compared to a year ago, but better management of inventories and internal cost-cutting have raised profits. Imaging products such as digital cameras and printing materials are reportedly selling well in the office-supply sector. The seasonal pickup associated with academic graduations combined with business conventions produced strong sales for the travel and tourism sector in May.
Contacted merchants report that employment is mostly steady, with a recent rebound in the tourism sector. Wages are level, with minimal annual increases. Vendor prices are said to be stable, although a firm dependent on imports reports slight price increases because of the weaker U.S. dollar. Selling prices are mostly steady; however, there is some upward pressure. Capital budgets for 2003 are mixed, with about half reducing spending and the remaining half mostly holding spending flat.
Many respondents continue to focus on becoming more efficient, attempting to maintain lower internal costs and improve their marketing strategies. Most contacts are less concerned about economic uncertainties than in previous months and anticipate sales will increase modestly in the next few months.
Manufacturing and Related Services
Most selling prices remain flat to down. Materials costs mostly remain under control. About one-half of the sample say that they or their customers are trimming inventories or preventing further buildup. More than half are reducing employment.
Capital spending plans for the coming six to twelve months are mixed. Some companies are making large investments in more modern production technologies. Others need to restructure their operations or expand capacity in specific lines. About one-half plan to decrease capital spending or leave it unchanged. They cite factors such as ample capacity, low sales growth, and a need to preserve cash.
Manufacturers appear to be basing their expectations about the coming six to twelve months on trends for the year to date. Those that have not yet seen a pickup are inclined to believe that the economy will not turn around until 2004.
Amidst sluggish labor demand and abundant labor supply, many respondents say client companies have pressured them to reduce bill rates, and they have reduced pay rates to maintain profit margins. Others have kept prices and wages unchanged, aiming to keep the quality of their personnel high and investing in long-term client relationships. With many companies restructuring in 2002, employment and capital spending levels in 2003 are steady.
Some contacts at temporary employment agencies are hopeful about the future, expecting revenues to be higher during the second half of 2003 than in the first half. Those who anticipate a recovery expect it to be modest and slow, and say they need to see more tangible signals before changing their strategies. Respondents express much less concern with geopolitical issues than when contacted last quarter, and more concern about rising insurance costs and the possibilities of a double-dip recession or deflation.
Commercial Real Estate
Software and Information Technology (IT) Services
While the March pickup helped prevent imminent workforce reductions, several companies signal that they may reconsider if stagnation persists. Medical and human resource software firms, which are still adding labor, report downward revisions to their hiring targets. Further cuts in capital spending are planned or expected by wireless IT services, network software, and custom applications providers; they cite negative cash flow, low sales, and low capacity utilization as reasons for the contraction. Contacts agree that the recovery depends on aggressive increases in capital spending that they have not seen so far.
The short-term outlook remains flat and technical contacts suggest that they see no reason for the current pattern to change in the medium term. Most respondents point to mid-2004 as the earliest date for an economy-wide expansion but caution that clear signs supporting that expectation are lacking.