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Federal Reserve Districts

First District--Boston

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Business contacts in the First District are somewhat more upbeat currently (mid-July) than in the last round of information-gathering (end of May). Retailers report demand growth for a range of housing-related products, while other merchandise and tourism remain soft. Manufacturers' results are also mixed, but they note improvements in some sectors. While slowing from record highs, residential real estate markets remain strong.

Second quarter reports are mixed among retail contacts in the First District. On a comparable same-store basis, homebuilder and lumber contacts report recent improvements, with June sales up 4 to 11 percent from year-ago. Second quarter sales in the furniture sector are said to be in line with expectations for the first time this year, slightly ahead of the previous quarter. Computer product sales are reportedly down double-digits compared to year-earlier, primarily because of a slowdown in federal government orders. A department store indicates second quarter sales are about 6 percent below year-ago levels, a slight improvement from the previous quarter. Home products, cosmetics, shoes, and accessories are reportedly selling well, although apparel sales are down double-digits. Sales in the tourism sector are said to be disappointing, about in line with previous year. State budget cuts have hurt many tourism firms, leaving little to no marketing budgets to help push sales. International travel has more than doubled compared to last year, but still does not meet expectations.

The majority of retailers are holding employment levels steady, although two contacts report recent layoffs. Wage rates are mostly level among contacted firms, with one company freezing a 2 percent merit increase. Selling prices are mixed, with about half reporting decreases and the remaining half holding prices steady. Most contacts report no change in capital spending plans, but one firm is cutting spending.

Retailers anticipate slow to moderate improvements in sales in the next six months. Most contacts feel slightly more optimistic about the outlook for the economy than last time we contacted them and sense that the marketplace is more stable than in recent months.

Manufacturing and Related Services
The overall sentiment among First District manufacturing contacts was well summarized by one respondent: "Things aren't getting worse and may be getting marginally better, but it's too soon to tell." Biotech business is increasing or appears due for an increase as more new drugs are approved. A computer hardware firm notes that market conditions remain tough, but revenues are up from a year ago as corporate customers are no longer aiming to spend less than they budgeted. The aerospace market remains depressed overall, although contacts mention pickups in some pockets of their business. Some firms making consumer products, home appliances, or automotive equipment indicate that demand is weak, which will likely lead to production cutbacks and further restructuring. Changes in exchange rates have caused favorable currency translation for multinationals.

Most selling prices remain flat to down. Materials costs generally remain under control, but energy and health care costs are rising, and some firms are concerned that the depreciation of the dollar will result in higher costs for foreign purchases.

Manufacturers of health- and medical-related products are hiring, but most other respondents continue to trim their headcounts. Contacts indicate that the need to cut overhead costs is leading them to seek out locations with lower-cost or more efficient labor, introduce labor-saving technologies, or consider opportunities for consolidation and outsourcing. Most companies reporting increases in capital spending say they are motivated by the need to reduce operating costs. Some contacts indicate that they are reducing overall capital spending because of weak revenue growth or cash flow pressures.

Most manufacturers expect their business to show muted growth in the next six to twelve months. While they are generally hopeful, they remain cautious because of signs that the overall economy or particular segments remain sluggish.

Residential Real Estate
Although residential real estate markets in New England remain strong, there are a few signs of weakening. Following inventory shortages in almost every part of the region, the number of listings is beginning to build up in some areas. Most contacts still report that appropriately priced homes sell quickly, but buyers have more to select from. Bidding wars and multiple offers are now rare. Lower-priced homes continue to sell fast and contacts report lack of inventory of entry-level homes. The upper end of the market is also strong, but the middle market segment is slowing down. In Massachusetts, the number of sales in April and May was lower than a year ago, although both months were strong by historical standards. Price appreciation has been more moderate than in the past, with average sale prices remaining flat in Connecticut, Maine, and Rhode Island, and rising somewhat in Massachusetts and New Hampshire. Low interest rates continue to help spur demand throughout and contacts expect the market to remain robust as long as interest rates stay low.

Contacts from the insurance industry report strong results in property and casualty insurance and slightly weaker demand for traditional life insurance. Most contacted executives expect continued improvement in their business over the next several quarters, reflecting long-run prospects for economic growth.

Higher prices continue to drive double-digit revenue growth rates in the property and casualty sector, even though the pace of increases began moderating in the second quarter. Despite several cases of uncollectable receivables and a few modest credit losses, companies in this sector continue to expect gradual improvement in their bottom lines. Results in traditional life insurance are less strong, as some companies are hitting the minimum interest rate floors required for some life and annuity products.

Employment among insurance contacts remains largely static, with stronger-performing firms adding modestly while others implement workforce reductions. Some companies have delayed a few capital spending projects; others continue to spend on new IT equipment and infrastructure.

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Last update: July 30, 2003