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Federal Reserve Districts

First District--Boston

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Business contacts in the First District continue to be fairly upbeat. Retailers enjoyed higher sales in the year-end quarter than a year earlier, for the most part, and tourism strengthened measurably. Manufacturers in many sectors report growing fourth quarter revenues year-over-year. Residential real estate markets remain strong. Insurers say demand is increasing at a slow to moderate pace. Across all sectors, contacts are positive about prospects for continued expansion in 2005.

Retail and Tourism
Overall, retail respondents in the First District report sales are ahead of last year in the quarter ending in December; same-store year-over-year sales ranged from flat to up 13 percent. Holiday shopping was generally slow until two weeks before Christmas. Clothing, shoes, flat panel televisions, and MP3 players were said to be strong sellers, while renovation and lumber materials sales were also up.

Contacts report mostly steady vendor and selling prices, with the exception of decreases in flat-panel television prices and increases for home appliances and lumber-based products. Inventory levels are mixed, and employment levels are said to be mostly steady, as seasonal hiring was minimal in November and December. About half of the respondents note increased capital spending plans in 2005, while the remainder report no changes or decreases.

According to contacts, travel and tourism in the Boston area continued to improve in the fourth quarter, ending above year-ago levels. Increased business travel, corporate spending, and city-wide conventions all contributed to the pick-up. In addition, international travel reportedly increased 11 percent. As a result of this growth in activity, hotel occupancy and rates are up, and the revenue per available room increased by double digits. In December, client and corporate holiday parties boosted revenues for restaurants and special event businesses, exceeding last year's levels.

Most of the contacted retailers anticipate further improvements in 2005. Though contacts expect only moderate gains, unlike earlier reports, they expressed little concern about external factors, such as fuel prices, consumer confidence, and the war in Iraq.

Manufacturing and Related Services
Most First District contacts in manufacturing and related services report that sales and orders in the fourth quarter of 2004 were above year-earlier levels. The number of firms indicating that their revenue growth is accelerating is about the same as the number reporting deceleration. Contacts generally express the view that the economy will provide moderate positive support for their business in 2005.

Demand for ground transportation equipment is surging, and one large company notes that its trucking firm customers are having a hard time finding drivers. Biopharmaceutical businesses say that industry revenues continue to grow at a double-digit rate, but their own sales tend to be bumpy because they are driven by patterns for individual drugs. On the other hand, manufacturers of some consumer products report that demand has been muted.

A number of manufacturers mention that they are paying substantially more for metals, petroleum-based chemicals, and energy than they did one year earlier. In addition, some express heightened concern about the possibility of further cost hikes for transportation and distribution, as well as foreign inputs. Respondents tend to agree that cost increases from 2004 are likely to result in further attempts to raise prices in 2005, but they have differing views on customer receptivity and they are giving considerable thought to appropriate strategies. For example, one manufacturer met unexpected resistance to its attempt to raise selling prices on one category of products in late 2004 but is nonetheless considering raising prices for another category in 2005. Another is intent on trying to pass through cost increases "before the window closes." However, a couple of other firms have decided to hold off on increasing prices until their newer technology products gain a foothold in the marketplace. Prices for innovative drugs are on the rise, reflecting producer market power.

Most manufacturers are making only minor adjustments in their U.S. headcounts. Their continued drive for cost containment is putting downward pressure on employment, but some need new employees to generate added sales. Pay increases for 2005 are expected to be in the range of 2.5 percent to 4 percent, but firms are more likely to express concern about escalation in non-wage costs such as medical insurance and workers' compensation insurance. Most respondents intend to keep capital spending roughly unchanged from the amounts spent in 2004.

Residential Real Estate
Despite the usual seasonal slowdown, residential real estate markets throughout New England remain strong. Contacts report high levels of activity in most parts of the region, diminished somewhat by lack of inventory. Shortages of lower-end homes are especially noticeable. Indeed, houses in lower price ranges continue to sell quickly, while those with higher prices stay on the market longer than in the past. However, the longer time on the market is not substantial enough to cause price declines and the overall level of inventory has not changed markedly, according to most contacts.

In most areas, the number of sales in the last quarter of 2004 was similar to the last quarter of 2003, while sale prices increased. In Massachusetts, the number of sales in November was record-high, especially for condominiums, with November sales 27 percent higher than a year earlier. At the same time, the median sale price increased by double digits compared to November 2003. Vermont recorded similar price gains, while contacts in other states cite more modest price increases. Most contacts anticipate that the markets will remain stable in the next few months as long as interest rates stay low.

Responding insurance companies in New England report slow-to-moderate demand growth in the fourth quarter of 2004. Sales of property and casualty insurance were healthy, especially in foreign markets, although the rate of growth may be slowing. Disability sales were flat in the fourth quarter, but claims continue their downward trend. Demand for individual life insurance continues to grow at a fair pace. Most contacts report intense price competition, resulting in slower rates of price growth or decreases in some cases. Employment and capital spending strategies remain conservative, reflecting modest rates of demand growth and limited needs to increase capacity. Respondents are generally optimistic, expecting Q1 2005 to be similar to 2004; at the same time, they remain somewhat concerned about a handful of issues related to price competition, terrorism, and interest rates.

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Last update: January 19, 2005