November 26, 2003
Federal Reserve Districts
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Business contacts in the First District report improving conditions at the end of the third quarter and early in the fourth quarter. While results are mixed from month to month, retailers cite fairly consistent sales increases from a year earlier. Contacted manufacturers and software firms indicate that demand seems to be improving. While retailers and manufacturers mention only scattered employment increases, most staffing firms report growing demand for labor. Contacts express concern with increases in input prices and other business costs such as insurance, while selling prices are generally level.
The consensus among contacted retailers is that sales will improve moderately in the next six months. Several store executives said they expect sales this Christmas season to surpass those of last year, while one respondent expects the upcoming season to be very "promotional."
Manufacturing and Related Services
Manufacturers report that rising demand is leading-or will soon lead-to higher prices for certain inputs such as metals, silicone wafers, and hardwoods. Fuel surtaxes and plastics costs remain high, and insurance costs continue to increase. Equipment manufacturers say that their selling prices continue to decline. Paper companies and some consumer goods manufacturers are offering discounts in order to boost sales. Apart from these cases, other materials costs and selling prices are generally flat.
Most of the contacted manufacturers expect to hold domestic employment fairly flat in coming months, although some are adding engineers and temporary factory help. Base pay increases for 2004 are projected to be 2.5 percent to 4 percent. Companies are about equally divided as to whether they will be increasing capital spending in the U.S. or keeping it steady. Several respondents are planning overseas expansions, particularly in Asia.
In discussing the sales outlook for the holiday season and 2004, manufacturing contacts tend to be more upbeat than they were earlier in the year. Most firms predict rising revenues for 2004. However, they say they are guarding against increasing production too much in response to positive projections, and they continue to make concerted efforts to use their working capital and other resources as efficiently as possible.
Some respondents believe labor supply is tightening. Bill rates and pay rates are stable. Non-payroll related costs are said to be under control, except for medical insurance.
Respondents are more optimistic than three months ago, with most anticipating that growth in labor demand will be sustained through 2004. While contacts are pleased by rising labor demand, the performance of the stock market, and recent GDP and payroll employment reports, they express concern about shifts in IT employment abroad, rising healthcare costs, federal budget deficits, and terrorism.
Commercial Real Estate
The rest of New England is stable. Contacts report little activity in commercial markets. Office vacancy rates have increased somewhat in the Portland area, and dropped slightly in Providence. Elsewhere, vacancy and rental rates remain steady. The retail sector is relatively strong throughout the region (in greater Boston, the only new development is in the suburban retail sector). Contacts do not anticipate that commercial markets will rebound for at least a year, and some believe that the Boston office market will not improve until 2007 or 2008, when most leases will be rewritten.
Software and Information Technology Services
The outlook of software and IT services firms has moved from cautious to optimistic, even for companies who previously said they were uncertain about the economy's future course. While revenue expectations for the first quarter of 2004 range from flat to double-digit increases, the prevailing opinion is that gradual improvements in the software sector will persist.