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Beige Book logo links to Beige Book home page for year currently displayed October 24, 2001

Federal Reserve Districts

First District - Boston

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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 retail contacts report very large sales declines in September. During the weeks of September 10 and September 17, sales were off 20 to 30 percent from the same period last year. However, by the end of September, sales were said to have generally reverted to the patterns that prevailed before the terrorist attacks on September 11--even with or slightly below year-earlier levels. By contrast with generally sluggish consumer demand, sectors related to the housing construction market (building materials, hardware) report modest to strong growth in sales.

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
Some First District manufacturing contacts report that business has recovered somewhat from what they experienced immediately following the September 11 terrorist attacks. However, almost all respondents say that sales or orders are weaker than in the period prior to September 11 and remain below year-ago levels. Contacts offer varying views on the length and depth of the downturn, but as a group they express heightened caution about 2002--especially the first half.

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
Although contacts report slowdowns in residential real estate markets throughout the region, many say the markets are stronger than they expected. These slowdowns follow a strong summer. For example, Massachusetts contacts report increases in sales of single-family homes of 12 and 17 percent from year-earlier in July and August. Activity remains robust in most areas, although the number of listings has increased during the past quarter and, on average, listings stay on the market longer. Some contacts consider recent slowdowns as temporary effects of the September attacks and anticipate that low interest rates, moderate prices, and increased inventory will soon attract prospective buyers. Prices continue to appreciate, although at a slower rate. Contacts emphasize that there is typically a 90- to 120-day lag between the time an offer is made and when a home sale takes place. It is therefore too soon to see the effects of September events in sales data.

Most contacts in the insurance industry report that third-quarter sales and revenue were as expected. Contacts in both property-casualty and life insurance are expecting increased sales in the near term as a result of the September 11th terrorist attacks. One life insurance provider believes that people have become more aware of their families' long-term financial needs; this awareness will soon result in more policies. Contacts in property and casualty insurance have been able to raise prices on their products after a period of "suicidal" price competition. These contacts had earlier been trying to implement price increases but the terrorist attacks allowed them to increase pricing faster without much loss in retention. One respondent believes that customers are now focusing more on quality than on pricing. Contacts also mentioned other industry changes resulting from the terrorist attacks such as separate terrorism and war clauses for policies (at additional cost) and closer scrutiny of the solvency of re-insurance providers. Most contacts report steady employment levels as they focus on keeping costs flat; they indicate they have seen a marked improvement in the quality of available labor for those few positions they need to refill. Contacts say they are hesitant about starting any new capital and technology initiatives.

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Last update: October 24, 2001