November 28, 2001
Federal Reserve Districts
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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.
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
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.
Commercial Real Estate
Software and Information Technology Services
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.