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Federal Reserve Districts

First District - Boston

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Although retailers report some rebound from September lows, most business contacts in the First District report sales or revenue in October and early November below year-earlier levels. Many have cut or are cutting jobs. Capital spending is said to have steadied at a low level. Most respondents express great uncertainty about the timing of the recovery.

Most retail contacts say sales bounced back partially in October and early November after steep September declines, but overall sales for the September through early November period were below year-earlier levels and below expectations. Sales of surplus merchandise, an "inverse barometer" of the economy, boomed during the same period.

Employment levels are reported to be either flat or declining as wage rates continue to rise at a 3 to 4 percent pace. Most retail contacts say they are holding prices steady and their profit margins are steady as a result. By exception, computers and footwear are being heavily discounted in order to move inventories. Some vendors are said to be reducing prices.

Retailers' expectations have adapted to current conditions. Only those selling construction supplies and home furnishings expect sales to improve in the near term. Most expect flat to negative results through next summer, with a turnaround in the economy in the third or fourth quarter of 2002.

Manufacturing and Related Services
First District manufacturing contacts report that third-quarter and early fourth-quarter revenues are largely down from a year ago. The few firms whose sales are flat or rising slightly describe their results as subpar and say they are under pressure to discount their products in order to maintain or increase their market share. The sharpest sales declines are reported by companies selling equipment and supplies to the semiconductor, telecommunications, and aerospace/airline industries.

Many manufacturers note that their receivables are rising or that customers appear to be having cash flow problems. Concerns are especially pronounced among contacts selling to retailers (with the notable exception of Wal-Mart). Most manufacturers are still reducing their inventories. However, many say that most of the reductions are behind them or that this will be the case by year-end.

Contacts report that selling prices are flat or under downward pressure. Materials costs are largely flat and energy costs have fallen. However, quotes for property and casualty insurance are "going through the roof."

Many manufacturers reduced employment during 2001, some as recently as September and October. Most are now waiting to see whether these measures are adequate to contain costs, although a few plan furloughs around the upcoming holidays or are still implementing scheduled head count reductions. Similarly, the general stance with respect to capital spending is to "hold the line" rather than cutting further. Manufacturers frequently mention that they have frozen wages and salaries or are granting only minimal increases. Several point to a need to contain fringe benefit expenses, especially in light of rising health insurance costs.

Preliminary forecasts for 2002 are uncertain but mostly assume that revenues will be similar to 2001 levels. Most contacts expect that the first half of the year will be tough, with a recovery taking hold in the second half.

Temporary Employment
The temporary employment industry continues to weaken. Overall revenues are reported to have dropped 30 to 40 percent from a year ago. Client companies are increasing pressure to reduce billing rates, but profit margins are holding; nevertheless, profits have fallen with volume. The weakness is widespread, with contacts supplying technical and IT workers hit the hardest, but respondents report some growth in demand for workers in customer service, pharmaceuticals, bio-sciences, mortgage and banking, securities, and non profit organizations. This quarter, traditionally busy because of the holidays, shows no surge in business to date. On the supply side, the market is overflowing with inquiries from job seekers. Client companies are interviewing more candidates and taking longer to fill positions. Wages are generally holding steady. Contacts expect that the current quarter and the first quarter of 2002 will be soft. Many predict a rebound in the second or third quarter of 2002.

Commercial Real Estate
Commercial real estate markets in New England have deteriorated significantly during the past few months. Boston area contacts report double-digit vacancy rates, with most of the newly vacant space subleased by tenants who do not need space they had committed to pay for. Besides low demand, developers say it is difficult to insure new buildings following the terrorist attacks. While available inventory is rising, rental rates have been declining. In Boston, the decline in rents has been modest so far, but in the suburbs, rates are reported to have halved. The rest of New England is experiencing milder weakening, albeit from much lower peaks. A Rhode Island contact reports "a bit of a downturn," with basically flat vacancy and rental rates. Most contacts expect the market to remain weak for quite some time, noting that real estate is typically last to recover from a recession.

Software and Information Technology Services
According to most respondents, demand for software products has returned to expected levels in October after falling off in September; overall, demand is "flat to up slightly." Some report that potential customers are still too "distracted" by September's events to move forward on planned software upgrades. Contacts that are doing well offer a range of explanations, including their competitors going out of business, improving "sentiment" toward technology, and introduction of a new product.

All are uneasy about the future. While most believe that the national economy has "bottomed out," none will venture a guess as to when the recovery will begin. One respondent said that uncertainty prevented the company from writing a business plan more than two quarters into the future. Generally, respondents reported that they are planning on keeping employment level. Capital spending also continues to be only by necessity, with a few exceptions. One company is in the process of acquiring competitors, distribution outlets, and some additional application providers whose capabilities they want to add to their software. Another firm will upgrade its internal software because a supplier offered an 80 percent discount and 180-day payment schedule. Both say these moves position them for the recovery.

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Last update: November 28, 2001