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Federal Reserve Districts

First District - Boston

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The First District economy remains slow but some brighter spots are visible. While revenues or orders are generally down from year-earlier, manufacturers note some signs of stabilization. And some firms, notably those making medical or security-related products, are seeing demand rise. Most retailers report a disappointing holiday sales season, although auto dealers and stores selling home-related products ended the year with sales gains. Residential real estate contacts concur that housing markets in the region are holding up well. While the consensus centers on a weak recovery beginning by mid-year, most contacts are very uncertain about its timing and strength and many are budgeting conservatively for a longer downturn.

Most contacted retailers report that sales during the October through December period were flat to declining compared with a year earlier. Respondents indicate that these results were somewhat worse than expected. Discount retailers, tourism agencies, and sellers of home and office furniture, computer and office technology products, office supplies, and art and architectural supplies report sluggish demand. Automobile sales are said to be up substantially, because of zero percent financing promotions. In addition, sectors related to the housing market (building materials and hardware) cite modest to strong growth in sales.

Employment levels and wage rates are mostly said to be holding steady. However, the tourism sector is still reducing employment. Selling prices are being discounted to boost sales, and most contacts report either steady or declining profit margins. Capital expansion plans of most retailers have been put on hold. The mood in the First District retail sector is downbeat; most retailers expect a weak turnaround starting in the third or fourth quarter of 2002. Contacts in tourism and discount retail are even more pessimistic; they expect bad times to last through all of 2002.

Manufacturing and Related Services
Most First District manufacturing contacts report that fourth quarter revenues or orders were down from a year ago. Sellers of machine tools, semiconductor equipment, and most aircraft equipment said that business remained depressed. By exception, demand increased relative to a year earlier for biotech products and medical devices, as well as for equipment related to national defense, air safety, and emergency back-up systems.

Despite the prevalence of year-over-year declines, manufacturers indicate that demand for consumer goods improved late in the fourth quarter. For example, several contacts report a recent pickup in orders for home appliances and furnishings, and a maker of automotive parts said that the fourth quarter did not turn out to be as bad as management had feared. Some of these firms attribute the improvement to temporary promotional activity.

Most makers of capital goods and other business products also see signs that business is stabilizing. However, they expect sales to remain weak in the first half of 2002 and to show only modest recovery in the second half.

Contacts report that selling prices and materials costs are flat or down. Sellers of machinery, equipment, information systems, and paper indicate that prices are falling because of competition and requests for discounts (especially on the part of customers in the airline, computer hardware, and financial services industries). Some respondents report that their aggressive supply management efforts have contributed to holding down costs. The only significant cost increases are for insurance, both health and property and casualty.

Manufacturers are budgeting conservatively for 2002. About one-half expect to implement further layoffs or furloughs, and an equal number are freezing pay for all or part of their workforces. The majority of respondents report that capital spending will be tight or reduced significantly. Several publicly held companies indicate that these actions are responses to external pressures to conserve cash.

Residential Real Estate
Residential real estate markets in New England continue to be active, although contacts note slowdowns in some areas. Massachusetts, New Hampshire, and Vermont respondents report that activity levels are lower than a year ago and houses stay on the market longer. However, Maine and Rhode Island contacts say they have not experienced a slowdown to date. Although inventory has increased throughout the region during the past few months, the buildup has been minimal and many areas continue to report an insufficient stock of houses on the market. Supply is now considered more closely aligned with demand, but not excessive. As the pace of activity has moderated, prices either have remained flat or have shown single-digit increases. Most contacts expect the first quarter to be slower than usual, but sales are expected to pick up again in the second quarter.

Almost all contacts report strong sales and pricing at the end of 2001. Life insurance sales were strong in the fourth quarter and made up for some of the lost sales following September 11. Specifically, sales of term life insurance have risen in the last few months and application requests for traditional life have also increased. Disability insurance contacts report improving sales but also increases in the number of submitted and paid claims (signs of a weak economy). Property and casualty insurance providers had the most upbeat reports. Rates have increased by 15 to 20 percent from "severely underpriced" levels last year and are expected to continue to rise as more annual contracts are renewed. The one negative report came from a health insurance contact that announced major restructuring for 2002. The company's health plan membership is expected to fall sharply, in part because it is raising its membership premiums dramatically to match rising costs and pulling out of some unprofitable market segments where it cannot compete with local providers.

With the exception of the health insurance contact, insurance companies expect to hold capital spending and employment levels mostly flat in 2002. A couple of contacts mention a new focus on cutting costs by more fully utilizing technology already put in place. Generally, insurance respondents view 2002 with "guarded optimism." Most expect the economy to begin to improve at mid-year.

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Last update: January 16, 2002