October 23, 2002 Federal Reserve Districts First District - Boston

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The economy remains soft in New England. Most manufacturers report sluggish revenues. Some retailers, by contrast, indicate sales picked up modestly in September. Residential real estate markets are holding up well, although slowing in spots. Insurance respondents report strong demand. Retail First District retailers generally report flat to declining sales in July and August compared to a year earlier, with a modest pick-up in September. An office supply store says that a late start for back-to-school shopping caused some alarm, but sales began to improve in mid-August and continue to grow. Furniture and electronics retailers report a slight increase in sales in September; however, computer sales are down. Lumber and hardware store sales are generally flat or down, although one contact specializing in smaller home improvement projects indicates sales are on target and ahead of last year. Some retailers have intentionally raised inventories slightly, displaying caution over the West Coast strike; having greater stocks available to customers has reportedly helped boost sales. Employment remains mostly flat; however, one contact is eliminating positions through attrition and another undertook layoffs in July. Wages are increasing at about a 3 percent to 4 percent annual rate, but some contacts are reporting more selective increases than in the past. Vendor prices and selling prices remain stable, although lumber prices are said to be low because of oversupply. Most retail contacts are keeping capital spending to a minimum, postponing major projects until next year or until sales pick up. Profit margins are generally stable, although some respondents cite increases from last year. Most New England retail contacts remain uncertain about the future. They say soft consumer confidence is the primary cause of weakened sales, so a confidence turnaround will be the determining factor for improvement. Many respondents foresee no significant pick-up until spring of 2003. Manufacturing and Related Services Most First District manufacturing contacts report that business conditions continued to be tough through the third quarter, with revenues not much changed from a year earlier. Manufacturers say that their retail and restaurant customers are struggling, causing them to skimp on stocking products and modernizing equipment. One maker of upscale consumer instruments reports that retailer demand finally picked up in September, but the company does not know yet whether this represents positive expectations about the holiday season or mere restocking. Manufacturers say that commercial demand for aircraft parts, computer hardware, and electronics remains depressed, with some contacts saying that September orders came in weaker than anticipated. Companies in the semiconductor industry report mixed patterns, with one firm enjoying record revenues on the strength of overseas demand, and another firm saying that its own third quarter was "decent" but that the industry as a whole is headed for a double dip. By contrast with downbeat sectors, manufacturers say that demand for defense and medical equipment is continuing to rise, and contacts in a variety of industries indicate that, except for Japan, Asia is an improving or strong market. Selling prices are mostly flat to down. Many firms comment that they have no pricing power. Materials costs are largely flat, except for increases for steel and oil-related products. Most manufacturing contacts have recently announced or will soon announce employment cutbacks. They are undertaking layoffs in order to restore or improve profitability or as a response to weaker demand in particular segments (especially aircraft and financial services). The few firms that need additional labor are relying largely on temporary help and outsourcing. Most respondents plan to reduce their capital spending in 2003. Many say they face cash flow constraints (exacerbated, in some cases, by the need to make added pension fund contributions). Some makers of high tech and aircraft products indicate that they have so much excess capacity they will not need to increase capital spending until 2005 at the earliest. Residential Real Estate New England residential real estate markets are still strong, although contacts report slowdowns in some parts of the region. Low interest rates continue to stimulate demand, which outpaces supply in many areas. However, uncertainty about the economy and lack of consumer confidence have damped sales activity in some states; properties stay on the market longer than they did in the first half of the year, and inventory is building up in some price ranges. In Massachusetts, "empty nesters" compete with first-time buyers for condominiums and low-end single-family homes, generating substantial price increases--condo prices were reportedly 20 percent to 30 percent higher this summer than a year ago. Single-family home prices increased as well, albeit at a more moderate pace. However, the number of home sales in the state during each of the summer months was lower than a year earlier, and contacts predict that price appreciation will slow by the end of the year. In Vermont and Rhode Island, the markets are slowing and low-end inventory is said to be building up. However, Connecticut and New Hampshire report active markets and continuing inventory shortages. Contacts across the region anticipate that residential markets will remain stable as long as interest rates stay low. Insurance Life insurance companies continue to see strong demand, with year-to-date sales growth of 30 percent to 40 percent. Respondents say rising demand is explained by a variety of factors, including introduction of new products, increased awareness of risk after September 11, and marketing efforts. Employment and capital spending remain roughly flat, with only selective investments aimed at improved productivity. The near-term outlook is positive, with companies projecting sales growth of 25 percent to 30 percent. Property and casualty insurers also report strong demand together with substantial increases in rates, ranging from 10 percent to 25 percent for this year. Total revenues are up 8 percent to 20 percent year-to-date. Respondents in this sector note that property and casualty rates had been underpriced and are now returning to normal, as last year's terrorist attacks and the low stock market uncovered problems with underwriters, previously masked by stock market gains. Capital spending is generally flat, although one firm reports a 12 percent increase to replace software. Employment is also flat, with one respondent planning a 5 percent increase in 2003. The outlook remains favorable, with prices expected to continue to rise and an estimated future revenue growth in the range of 10 percent to 20 percent. Return to top Summary New York