September 8, 2004
Federal Reserve Districts
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First District businesses contacted near the end of August generally report economic activity is increasing. Most contacted retailers and two-thirds of responding manufacturers say sales during the summer months were up from a year earlier. Temporary employment firms cite healthy increases in demand. By contrast, some firms selling software and information technology services indicate that the pace of growth has been slowing. And commercial real estate markets, while no longer deteriorating, have yet to show improvement. Except for commercial real estate, contacted sectors' expectations for the coming 12 months center on moderate growth.
Retail and Tourism
Most contacted retailers in New England report improvements in July and August, as year-over-year sales range from flat to 25 percent gains. Products that sold particularly well this period include new office technology, women's accessories, paint, and lumber.
Inventory levels are generally in line with plans, with about half of the contacted retailers maintaining levels higher than the previous year. Vendor prices and selling prices are mostly stable, although several respondents report price increases for European goods and on some commodity goods, like paper and lumber. Employment is generally steady, with some areas of growth, and wages are even. Contacts note some limited increases in capital spending, mostly on technology and new stores.
Travel and tourism revenues are said to be stronger in July and August compared to a year ago, although some pockets of weakness remain. Domestic travel increased moderately, while international travel climbed 40 percent compared to last year. Revenues in the Boston area rose, as anticipated, during the week of the Democratic National Convention; however, expectations were not met during the weeks before and after the convention. Rainy weather has had a negative impact on business in some areas, particularly Cape Cod and the coast of Maine, though summer tourism revenues in Newport, RI were reportedly 12 percent higher than last year. Some large resorts note employee shortages because many foreign workers were unable to obtain visas for seasonal employment, a result of homeland security restrictions.
Overall, retail respondents are upbeat about the remainder of 2004. While expectations of growth in the next four months range from flat to double-digit increases, many contacts express concern about the consequences of the November election and rising gas prices.
Manufacturing and Related Services
Two-thirds of First District contacts in manufacturing and related services report that sales were above year-ago levels by from 4 percent to 60 percent in the second quarter and early part of the third quarter. For the remaining one-third, sales were flat to down by as much as 10 percent. Demand from the defense sector, the commercial aircraft industry (for parts and services), and the semiconductor industry is notably robust. By contrast, firms serving the auto makers and selling construction-related products and household durables say demand in those sectors is soft. Almost half of the respondents describe business as better than expected or above plan, but several note new weak spots in recent weeks.
Over half of the contacted firms mention rising prices for energy, petrochemicals, and some metals and report that they have been, at best, only partly successful in passing these increases on to customers. Just one-third of respondents have raised their selling prices from year-ago levels, with the increases spanning 2 percent to 5 percent. However, most indicate that selling prices are flat to down year-over-year, reflecting "brutal" price competition in some consumer goods industries and "expectations" of ongoing price declines in electronics.
At half of the responding companies, third-quarter employment is flat to down year-over-year, with two firms planning further reductions. The other half report increasing their headcount from year-ago levels--from "selectively" to as much as 12 percent. A minority anticipate additional hiring, with two reporting difficulty finding engineers. Wage gains range from 2 percent to 4 percent, and up to 5 percent in a few cases. Rising health insurance costs remain a general cause for concern.
Just over half of the contacted manufacturers report they are increasing capital spending above plan or recent experience--generally just modestly. As one noted, it is hard to spend a lot on equipment if it is largely electronics. This spending reflects the need to improve efficiency, introduce new products, or relocate parts of the business. Only one firm is adding capacity.
Most manufacturing respondents report feeling upbeat--in several cases, more upbeat than in many months. These firms generally expect further gains in 2005 in the context of continued moderate growth in the U.S. economy.
Demand for temporary employees across New England continued to grow at a healthy pace in Q2 and the beginning of Q3. Growth is strongest in technical, information technology, manufacturing, and light industrial employment; demand for financial and business services workers is also strong, while medical employment demand seems to have slowed somewhat. Permanent and temporary-to-permanent hiring continues to increase.
Downward pressure on bill rates has abated and contacts report some success in raising prices. Pay rates have grown only slightly, amid the decreasing but still ample supply of applicants. Most respondents express concern about high insurance costs, especially unemployment insurance.
Respondents at temp firms are content with the current rate of growth, which they expect to continue throughout the remainder of the year. While they are optimistic, contacts are concerned about the threat of terrorism, high oil prices, and election uncertainty.
Commercial Real Estate
Commercial real estate markets in New England have not improved during the summer months. Contacts report moderate activity levels, but lack of demand for new space. Office vacancy rates remain in the mid-teens in Boston, and exceed 20 percent in the suburbs. There has been negative absorption of office space in recent months. Following recent mergers, contacts expect about 1 million square feet of office space to be vacated in the Boston market later this year. While rental rates have not changed during the past three months, potential tenants can make "terrific deals," especially if they are willing to lease space in lower buildings, where vacancy rates are much higher than in high-rise office buildings. At the same time, buyers continue to pay "incredibly high" prices for commercial building purchases.
Markets in the rest of New England perform similarly. Contacts describe the markets as "slow but steady." Office vacancy rates are either constant or somewhat higher than at the beginning of the summer, while rental rates are flat to slightly softer. There has been little market absorption. Retail is the only strong segment of the market in most areas. Contacts do not expect any improvement in the remainder of 2004.
Software and Information Technology Services
Business activity in software and IT services is said to be slowing down. Contacts' year-over-year revenue growth in their most recent reporting period (mostly second quarter) ranges from somewhat negative to positive double digits. Excluding growth by acquisitions and the impact of currency, however, most contacts say their sales have been stagnant compared to the year-earlier level. Foreign demand is reportedly much stronger than domestic, which most exporting respondents attribute to the weak dollar. In general, contacts report that their clients' IT investments are restrained; some are choosing to put off big projects and implement smaller ones. Competition from new entrants and staffing firms persists in low-end segments.
As of late August, headcounts remain flat at most software and IT firms; they say they are reluctant to expand their workforces except for seasonal workers. Pay raises are generally keeping up with inflation. Increasing health care costs continue to be a big concern for most companies. Capital spending and technology development are running "as usual."
A new tone of caution has emerged regarding the short-term outlook for software and IT markets. In spite of strong orders in the pipeline, companies generally expect revenues to grow only gradually. The war and the federal budget deficit remain the top two issues affecting their assessments of the future.