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Federal Reserve Districts

First District--Boston

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The First District economy continues to expand, with the exception of New England-based retailers. Contacted retailers say sales are flat or down compared with a year ago. By contrast, most responding manufacturers are enjoying year-over-year revenue growth, as are advertising and consulting firms in the region. Both retailers and manufacturers report cost increases that they are unable to pass along fully to their customers. New England's residential real estate markets are still going strong, although the pace of activity and rate of increase in home prices in Massachusetts are moving toward normal from "hot," and region-wide inventories of homes for sale are rising somewhat toward more normal levels.

First District retailers cite flat or poor sales results in the second quarter. According to one contact, furniture sales are sluggish compared to this period last year, and slowed in June and early July compared to May, possibly because of good vacation weather and soaring gas prices. Another respondent reports a slowdown in casual dining compared to previous months and year-ago levels but remains unsure of the cause. A contact selling discount apparel and home fashions relayed that business has been "okay," but still slightly below year-earlier levels and below plan. Another contact selling apparel notes that year-over-year sales are down, but believes that the decrease is due to poor merchandising decisions and not a lack of consumer demand.

Inventory levels remain flat or have decreased according to most respondents. One exception is the apparel retailer who has increased inventories in order to shift to more-salable merchandise. Several retail contacts note cost increases for utilities, steel-based items, and paper; they remain hesitant to pass these increases on to customers. Employment levels are mostly steady, with increases occurring only in connection with the opening of new stores. Respondents also report increased capital spending associated with these new store openings, as well as for improvements in distribution and technology.

Most contacted retailers are less optimistic than in previous months, and remain cautious in their outlook. Many hope that sales will at least remain flat compared with a year ago. Respondents also express uncertainty and caution about consumer demand, rising healthcare costs, and geopolitical instability.

Manufacturing and Related Services
First District contacts in manufacturing and related services mostly report that sales and orders remain on an upward trajectory, with levels in the second quarter of 2005 higher than a year earlier. Makers of aircraft, medical equipment, pharmaceuticals, chemicals, and IT and information-related products used by the financial services industry are doing particularly well. However, a fabric manufacturer indicates that business is falling off, while a fabricated metals firm reports a temporary downturn in sales to the automotive industry.

Prices for some materials and services continue to increase. Respondents cite cost pressures from freight and transport, energy, and petrochemicals and other synthetic products in particular. In general, manufacturers cannot fully pass along these higher costs to their customers. Some have managed to offset margin pressures by introducing greater efficiencies in purchasing and production.

Companies are mostly keeping their domestic headcounts steady. A few are laying-off employees or shortening the factory workweek. Hiring generally is restricted to sales and marketing and high-end technical positions. Labor markets typically are tight for these types of positions, but contacts do not complain of hiring delays except for positions requiring government security clearance. Wage and salary increases are mostly in the range of 3 to 3.5 percent. Most companies are increasing their capital spending, but they describe their added investments as modest or careful.

Respondents tend to characterize the revenue outlook in terms such as "satisfactory," "decent," or "on plan." Companies in information-related businesses stress that they expect to grow more slowly than in the 1990s. Manufacturers say they intend to remain focused on cost containment, especially given their limited ability to pass on high oil prices and competition from producers in low-cost locations such as China.

Selected Business Services
New England advertising and management consulting companies experienced healthy demand growth in the second quarter of 2005. Most companies believe clients are now more liberal with their discretionary spending than they were in 2004. Although still generally cautious, these clients seem to be shifting toward strategies of growth and expansion, rather than focusing on efficiency. Responding companies have earned moderate price increases over year-ago levels, but costs are also increasing, most notably for labor. Headcounts are growing in response to demand, but at a slightly slower rate than revenues. Looking forward, most respondents call themselves optimistic and expect revenue growth in the second half of 2005 to continue at the first-half pace or to go higher. Nonetheless, contacts see the possibility of a general economic slowdown, higher oil prices, or terrorism as sources of risk to their positive outlook.

Residential Real Estate
Residential real estate markets in New England remain strong and active. Contacts report that brokers are busy throughout the region, even though markets typically slow down this time of year. In Massachusetts, the number of sales of single-family homes declined in April and May compared with year-earlier levels, but the number of condominiums sold reached new record highs for both months. However, inventory of both types increased and sale prices rose by only single digits compared to last year--a more moderate rate of appreciation than in the last few reports. Contacts in other states have not observed much slowdown in price appreciation. Average sale prices have increased in Connecticut, Maine, New Hampshire and Vermont. Nevertheless, some contacts report that there is "finally" a little more inventory for buyers to choose from. Most contacts expect prices to continue rising for the rest of the year.

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Last update: July 27, 2005