October 24, 2001
Federal Reserve Districts
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First District manufacturing and retail firms report that business activity is generally below year-earlier levels, notwithstanding some recovery at the end of September and early October from the severe slowdown that followed the terrorist attacks on September 11. Many of these contacts are anticipating, if not currently planning, employment reductions. By contrast, business at insurance companies and in New England residential real estate markets has been steadier. Most respondents express uncertainty about the outlook; few expect improvement before the second half of next year.
Most retailers report they are holding employment levels steady. However, some say they are shrinking employment through attrition; others indicate that decisions on future layoffs depend on fourth-quarter sales results. Retailers hiring replacement help report that they are able to upgrade labor quality. Prices are being discounted to move inventories, with the result that profit margins are declining.
Before September 11, the mood of retail respondents was cautious; the terrorist attacks have shifted their outlook to complete uncertainty. When pressed, most contacts are pessimistic about the fourth quarter of 2001 and unsure of what to expect in 2002. They express hope that an economic rebound will occur sometime during the second half of 2002 or early in 2003.
Manufacturing and Related Services
Manufacturers of aircraft parts and equipment say their customers are issuing stop work orders and cancellations. The ongoing weakness in air travel is leading to a grounding of older and commuter aircraft, which will cause further curtailments of production. Contacts say that the anticipated defense buildup is unlikely to result in new business this year, and they are tentative about increases next year.
Makers of capital goods other than aircraft consistently describe business as weak, and some indicate they will report losses for the third quarter. Exporters express concern about deterioration in foreign markets. One contact supplying equipment and parts to the semiconductor industry is encouraged that orders did not fall further in the third quarter, but he does not anticipate a turnaround in sales until the second half of 2002. In the area of consumer products, auto parts manufacturers say orders are down from a year ago but holding steady. One firm is seeing a reduction in sales of products connected with travel and tourism. A furniture maker is cutting production sharply because of slumping sales.
Contacts report downward pressures on selling prices as their business customers seek to negotiate more favorable terms. Pressures from automakers remain intense; one contact said that, in essence, suppliers are being asked to fund car-buying incentive programs and other auto company expenses.
Believing the economy is in recession, manufacturers are taking new steps to reduce labor and capital costs. Most are planning or at least anticipating reductions in employment. Some are reducing salaries, furloughing employees, or cutting benefits. Capital budgets have become very tight at most firms. Respondents frequently say that their company is eliminating any purchases not needed immediately or undertaking only those projects with a very short and certain payback.
Residential Real Estate