June 15, 2005
Federal Reserve Districts
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Business contacts report continued growth in the New England economy, although some sectors are lagging the overall pace. Retailers cite healthy increases in sales, while manufacturers and software and information technology (IT) services firms indicate that results range from "okay" to robust. Staffing firms also report increasing demand, but some say the pace is slower than last quarter. While comments about rising prices are less at the forefront than in the last report, high input costs remain a concern. Commercial real estate markets in the region remain sluggish.
Inventory levels are up slightly according to most contacts, but are in line with sales. Multiple respondents report rising vendor prices for petroleum and steel-related products; lumber and television prices are falling and appliance prices are increasing. Most vendor price changes are being passed on to consumers, although selling prices for clothing have continued to fall due to competitive pressures. Gross margins are slightly up for most contacts. Wage growth and employment are mostly stable, although some retail contacts report increased headcount due to acquisitions, new stores, or increased sales. Most contacts are increasing capital spending in order to upgrade distribution methods or outdated information technology equipment, and they have the cash on hand to do so. Those who aren't currently upgrading their equipment did so recently.
Retail respondents are now more optimistic about their business than they were last quarter, and they all expect sales in coming months to be as strong as their April numbers, if the weather is decent. The one serious source of concern for several contacts is rising health insurance costs.
Manufacturing and Related Services
On the whole, manufacturers remain quite concerned about the high costs of raw materials, energy, and transport. Various respondents indicate that although they no longer face escalating costs for metals or petroleum products, they need to increase their selling prices further to restore margins to acceptable levels. Manufacturing contacts express doubts that large retail chains and other business customers would accept price increases, or that their competitors would follow suit. Only those firms producing unique or technologically advanced products seem largely unconcerned about margin pressures.
Companies continue to explore outsourcing and other methods to reduce production-worker and back-office employment. Pay for these types of jobs is said to be rising at a rate of 2.5 percent to 3 percent. Markets for professional, technical, and managerial employees are said to have tightened, resulting in salary increases of 3.5 percent to 4 percent and some delays in filling positions.
Manufacturers tend to be holding their capital spending constant or increasing it slightly. They are investing in new capacity overseas while concentrating mostly on improving efficiency and automation or developing new products at domestic facilities.
Respondents are mostly guardedly optimistic about their business through the end of 2005, although several note the adverse effects of high input costs on their profitability. Compared to past conversations, manufacturers express greater concern or uncertainty about longer-term strategies.
Temporary Employment Firms
Prices are steady or rising slightly. Unemployment insurance costs are increasingly worrisome, and health insurance continues to be a concern. Worker's compensation insurance costs are flat or slightly down in the past few months. While more hesitant to give concrete predictions of future performance than they were three months ago, staffing respondents are fairly confident about the recovery, and believe 2005 will be a better year than 2004.
Commercial Real Estate
At the same time, office buildings in Boston continue to sell at what contacts call "exorbitant" prices. One respondent expressed concern that high building prices raise the probability of new construction of office buildings, which would further raise vacancy rates.
Software and Information Technology Services
Over half of contacted firms are increasing their headcounts, generally modestly, via selective hiring of technology workers and marketing/sales personnel. One software firm is focusing its additional hiring in India; another is recruiting aggressively in Massachusetts. Most respondents report that wage increases are moderate, notwithstanding some perceived tightening in technology labor markets.
Software and IT services contacts indicate they are holding capital spending fairly level. One respondent explained that they are increasing the number of computers and servers in proportion to increases in personnel, but declining computer prices allow them to do so without raising spending.
The outlook among software and IT services contacts is cautiously positive, with most expecting a continuation of their current pace of growth. The economy is viewed as somewhat uncertain; it is said to be currently steady--not robust, not deteriorating--but with more downside than upside risks.