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Federal Reserve Districts

First District--Boston

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Most business contacts in the First District report year-over-year growth in sales or revenues in the third quarter, with some sectors enjoying a pick-up in the pace compared with earlier quarters and others seeing slower growth. Some retailers cite recent reductions in consumer spending resulting from high gasoline prices, which they predicted earlier, but had not yet observed six or 12 weeks ago. Manufacturers are facing cost increases, but vary considerably in their ability to raise their own prices. Residential real estate markets in New England are becoming "more reasonable" as they cool slightly from record highs.

Retail respondents in the First District report mixed results for the quarter ending in September. While the quarter's sales were mostly ahead of year-earlier levels, several contacts note a marked slowdown in the closing weeks.

According to one contact in the apparel industry, same-store sales were up more than 4 percent in the third quarter partly due to better merchandising decisions, but year-to-date sales are virtually unchanged from last year. Another apparel contact noted that same-store sales were either up marginally or flat compared with a year ago in the months of August and September, with overall year-to-date sales still up just slightly from last year. Both respondents emphasized the negative impact skyrocketing fuel prices are having and threaten to continue to have on consumer spending. A contact in the surplus merchandise market echoed this sentiment and remarked that sales were okay until gasoline hit the $2.00 mark, with "the bottom falling out" once prices surpassed $2.50. An automobile dealers' group indicates that sales were strong in the summer months due to a successful employee-pricing incentive, but have now slowed dramatically compared to year-ago levels. Sales in the lumber business were strong according to one contact, but he also expected 2005 sales to end up flat compared to last year.

Inventory levels are mixed, but generally in line with plans. Vendor prices and selling prices are mostly stable, although several respondents report price increases for petroleum-based products. Capital spending is focused on new store openings. Some respondents note increased staff turnover; they are hesitant to hire other than for replacement or to staff new stores until business is better.

Almost all contacted retailers are less optimistic than in previous months; they remain cautious in their outlook, with many revising previous forecasts. Concerns include rising oil prices, the war in Iraq, and interest rates.

Manufacturing and Related Services
For the most part, First District manufacturing sales are continuing in line with first and second quarter trends. Slightly more than one-half of First District contacts in manufacturing and related services report that sales are currently running near-zero to 5 percent higher than a year ago. The others report greater growth, mostly as a result of strong demand for defense and aircraft products and biopharmaceuticals. Contacts characterize any negative revenue impacts of Hurricanes Katrina and Rita as relatively minor--in all cases less than 2 percent in the third quarter--and some capital goods makers foresee added business associated with the reconstruction of damaged areas.

Many respondents describe metals costs as high but no longer rising, and some mention that paper prices have not subsided after increasing earlier in the year. Distribution and transportation costs are said to have risen in the last several months. Reports on selling prices vary considerably. At the high end, a paper products company reports that its prices are up 7 to 25 percent from levels in the second quarter. On the other hand, some other firms indicate that competition or long-term contracts have left them with no ability to pass cost increases on to their customers for the time being. Most contacted manufacturers are between these extremes. For example, a housewares company has managed to improve margins by increasing selling prices since mid-year, and a couple of publishing companies describe their customers as being willing to pay a little more for value.

Companies generally report domestic headcounts are flat or up a little in response to growing needs for professional and technical workers. Wage and salary increases are in the range of 3 percent to 4 percent, with many manufacturers citing bonuses as a means of accommodating temporary situations.

Capital spending is reported to be increasing somewhat, with a couple of contacts indicating that they plan to ramp up IT spending in 2006. On the whole, however, manufacturers' attitudes are cautious in light of a perceived need to contain costs or to react to business uncertainties.

Manufacturers generally see "more of the same" for the remainder of 2005 and in 2006. Several mention downside risks associated with federal government budget or regulatory policy, and some express concern that higher energy prices could constrain their customers' spending.

Selected Business Services
Almost all First District advertising and management consulting contacts report third quarter revenues above year-earlier levels. While the majority of companies say clients continue to increase their discretionary spending, a handful of contacts note a recent pullback. Demand from clients in technology-related industries appears robust, while reports on healthcare demand are mixed, and government-related demand is said to be weak.

Nearly all responding companies have kept prices flat relative to a year ago. Labor-related costs have increased modestly, and marketing firms note a rise in fuel expenses. Companies are making only minimal adjustments to headcounts to accommodate demand, with typical wage and salary increases in the range of 3 percent to 5 percent.

Residential Real Estate
Housing prices across New England continue to rise, with contacts reporting year-over-year price appreciation on the order of 5 percent to 9 percent. Most respondents call these price increases more reasonable than in quarters past. Sales volume continues to increase, although several contacts mentioned that year-over-year price and volume increases may mask a flattening during the most recent quarter.

In the Greater Boston market, condominium inventory is up 50 percent while single family inventory is up about 25 percent. Similarly, inventory is increasing or stable in other New England markets due to construction and trade-up selling. Affordable inventory attractive to first-time buyers is low, particularly single-family houses.

Although many markets are still seller-oriented, with lower than normal selling times, the balance may be shifting somewhat towards buyers. Contacts say buyers are making fewer full price offers and negotiating harder. Times on the market are creeping up as sellers struggle to maintain high initial prices.

Moving into the winter months, respondents expect the region to see a seasonal slowing as cold weather and holidays dampen activity.

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Last update: October 19, 2005