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Federal Reserve Districts

First District - Boston

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The First District economy continues to slow. A majority of contacts in the retail and manufacturing sectors report declines in business activity compared with a year ago. Insurance companies say demand has slowed but not declined. Residential real estate contacts say housing markets across New England are strong although softer than a year ago. Prices for most goods other than housing are reported to be flat to down compared with a year ago. Most respondents indicate that they are stepping up efforts to cut costs.

Most retail respondents report that sales were flat or down during the May through July period compared with a year earlier. These results were generally worse than expected, yet inventories are mostly said to be close to desired levels. Most contacted sectors (discount retail, tourism, home and office furniture, computer and office technology products, office and art supplies) say consumer demand is anemic. However, sellers of building materials and hardware report modest growth in sales.

Employment levels and wage rates are mostly said to be holding steady. However, some retailers say that they plan to shrink employment through attrition or shift more toward part-time help. Most report that it is now much easier than last year to hire replacement help and seasonal workers. Retail contacts say that they are not raising selling prices and they are seeing only sporadic increases in vendor prices. Most indicate that their profit margins are holding; however, retailers selling technology products are discounting prices, which has reduced profit margins slightly compared with last year.

Retail respondents expect little growth in the economy in the next year, and most say that they are not expanding their operations in 2001. The mood is cautious; while they no longer expect a rebound in the second half, they hope for some improvement late this year.

Manufacturing and Related Services
Close to two-thirds of First District manufacturing contacts report that recent sales or orders are down from a year earlier; only about one-third report increases. Expectations about future revenues vary considerably, but virtually all contacts are taking new steps to reduce costs.

Reports from makers of computer hardware, communications gear, and semiconductor-related equipment have deteriorated noticeably, and some of these contacts are not expecting much recovery until late 2002. Manufacturers of other types of equipment are less gloomy but nevertheless cite examples of customers eliminating discretionary purchases or demanding concessionary terms. One contact that sells a broad range of parts and supplies to manufacturers describes the environment as the worst in 30 years. On the other hand, several manufacturers are heartened that their business, while down from a year ago, does not appear to be deteriorating further. These include makers of paper products and residential construction components.

By contrast with the general trends, demand for pharmaceuticals, medical equipment, publications, aircraft parts, and defense equipment has continued to increase. However, several contacts point to vulnerabilities in aviation-related business, and one producer of medical equipment has noticed a recent weakening. Across a range of industries, manufacturers are concerned about deteriorating conditions in foreign markets, particularly Europe and Latin America.

Respondents say their selling prices and materials costs generally are flat or down. Some indicate that their corporate customers are pressuring them for more favorable terms. They in turn are applying similar pressures on their suppliers.

Almost all manufacturing respondents report initiatives to control or reduce labor costs. Actions vary from company to company but include layoffs, furloughs, controls on new hires, and restrictions on pay increases. Most contacts say that capital spending is slated to be reduced this year. Many report efforts to cut back on information technology expenditures.

Residential Real Estate
Residential real estate markets in New England are still strong, although signs of softening are emerging. The number of listings has begun to grow slowly, while the number of sales is starting to decline. Real estate contacts indicate that the lower half of the market still enjoys very robust activity because low interest rates stimulate demand among potential buyers, while the level of activity at the top of the market has slowed.

Contacts in Rhode Island report that the market is as strong as ever, with most new listings selling very quickly and the average sales price up from last year. In Vermont, the average sales price is slightly higher than a year ago, but prices of new properties coming on the market are the same as those of existing properties, indicating that prices have stabilized. New Hampshire contacts say the average selling price rose 10 percent over the past year, but the number of sales dropped 12 percent during the same period. Some respondents attribute the slowdown to seasonal rather than cyclical changes.

Insurance respondents report modest sales growth in the second quarter of 2001, similar to first-quarter growth. In some cases, demand was generally off, while in others, falling demand for financial products such as annuities and mutual funds offset increased insurance demand. One respondent sums up the reasons for the slowdown as "the general economy, uncertainty over estate and other taxes, and volatility in the financial markets." One major health insurer reports a large fall-off in revenues as they reevaluate their service offerings in light of profitability changes.

Most insurance contacts seem relatively downbeat about their company's outlook. One respondent said that they are "more uneasy" now than three months ago because they had expected to see evidence of an upturn in the economy by now. Another said that they are "no more pessimistic" now than earlier this year. Because of falling or lower-than-expected revenues, most respondents are in the process of cutting costs. Some companies have made large workforce cutbacks (3 to 12 percent), while others are instituting employment freezes with the possibility of cutbacks in the near future. Most insurance contacts say capital and technology spending is relatively flat.

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Last update: August 8, 2001