June 13, 2001 Federal Reserve Districts First District - Boston

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Conversations with business contacts in the First District had a decidedly more pessimistic tone at the end of May than in previous months. Retailers, manufacturers, temporary employment firms, and software makers report sales or revenues mostly flat or down from year-earlier levels. Contacts in commercial real estate also report softer markets. Retail Most retail contacts report March through May sales even with or below their year-earlier levels. Weak sectors include department stores, upscale retail, tourism, building materials, and technology products. Apparel and furniture retailers report low but positive sales growth. Because of the generally weak sales, a few contacts are accumulating unplanned inventories. Employment levels are generally said to be holding steady, but some contacts report laying off employees. Wage growth is moderating. With one exception, retail contacts indicate that they are not raising prices; the weakest retail sectors are extensively discounting prices to move inventory. The exception is lumber prices, which are reportedly rising. Some sectors that are heavily discounting prices report eroding profit margins. Otherwise, profit margins are said to be holding steady, with productivity improvements continuing to contain overall costs despite rising energy prices. Most contacted retailers say they are continuing with previously planned expansions of their operations. Looking forward, their mood has turned pessimistic. Retail respondents no longer believe the economy will pick up during the second half of 2001; most expect flat to negative economic growth through the remainder of the year. They are hopeful that a recovery will begin during 2002. Manufacturing and Related Services About two-thirds of First District manufacturing contacts report that recent sales or orders are little changed from a year earlier. Most of the remaining one-third report sizeable declines. Makers of various consumer products cite sluggish consumer spending and inventory-reduction efforts on the part of retailers. Manufacturers supplying the automotive, steel, electronics, and telecommunications industries report that business has fallen sharply. Contacts also say their revenues are being hurt by weak air traffic, both freight and passenger, and decreased exports to Asia. The only bright end-markets mentioned are pharmaceuticals, oil and gas, do-it-yourself home renovations, and some niche food products. Respondents indicate that they are paying more for petroleum-based products, seafood, energy, and transportation, but most materials costs are flat to down. Some companies have made modest upward adjustments in selected selling prices. However, most say current market conditions make it impossible to raise prices. Customers in the retail and automotive industries, in particular, are pushing for price reductions, resulting in abnormally low margins. About two-thirds of manufacturing respondents have major cost-cutting programs underway. Their plans include layoffs, temporary plant shutdowns, shorter work weeks, pay freezes, and sharp reductions in capital spending and inventories. Most firms that are not aggressively cutting overall costs are nevertheless reducing their labor usage through attrition or automation. In describing the economic environment they face in coming months, manufacturers often used words such as "tough" and "difficult." The consensus is that conditions are unlikely to improve before late in the third quarter or in the fourth quarter. Software and Information Technology Services Almost all of the IT respondents report softening demand for their products. Companies that market to larger corporations have been hit particularly hard as their client base has frozen most of their technology spending. One firm has seen increased demand for its service maintenance division and hypothesizes that its clients are attempting to use maintenance to extend the useful lives of their earlier technology investments. Most respondents do not believe that they are losing market share, but that demand is lower throughout their industry. Generally, this leads them to be somewhat optimistic about the future, believing that demand will come back. All of the contacts say the market for all levels of tech workers has softened dramatically. One reports being inundated with resumes from out-of-work computer engineers. As a result, wage pressure and turnover are said to be down as well. Most of the respondents are holding employment levels steady as they wait out this period of slowing demand. One responding firm has cut its work force by about 5 percent. In addition to freezing employment, about half the respondents are "clamping down on capital spending" until demand picks up. Temporary Employment All respondents at personnel supply firms report considerable weakening of demand since last contacted in late February. Revenues have dropped 20 percent from a year ago, on average, owing mostly to lower volume. According to one contact, "clients are able to find workers on their own, if they are hiring at all, that is." The decline in revenues is steeper for permanent placements than for contract workers. Most respondents agree that the slowdown is across the board although IT workers are having the most difficult time finding jobs. Many contacts cite unexpected layoffs, hiring freezes, or termination of contracts at client companies. The labor market has loosened in recent months and many contacts have more candidates than jobs available -- something unimaginable a year ago. Most respondents report no increase or a slight decline in wages from a year ago. Some say pressures from clients to lower prices are squeezing profit margins. Most contacts are increasing their sales force in order to sell harder. Commercial Real Estate Commercial real estate markets in New England continue to soften. Contacts report noticeably lower levels of activity throughout the region. The biggest change has occurred in markets that had extreme space shortages until recently, mainly downtown Boston and Cambridge. Vacancy rates have increased substantially in those markets and rents have dropped. The sublease market is more active than a year ago, and unoccupied space and very short-term occupancy have become more common. However, most contacts still consider the market to be solid, with vacancy and rental rates back to early 2000 levels. Price levels are now "reasonable" according to some. The outlook is uncertain; most contacts say it is too early to tell where the market is going. Return to top Summary New York