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Federal Reserve Districts

First District--Boston

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The First District economy shows few signs of improvement. Retailers cite disappointing December results, although some gained in January and February. Most manufacturing contacts report weak demand. Commercial real estate markets in New England remain very slow. Most software and information technology providers say demand is declining. The outlook is highly uncertain and virtually no contacts are making plans based on expectations of an upturn.

Most retail contacts in New England report lackluster sales in December, although some contacts report a slight uptick in January and February. Art and graphics supplies reportedly sold well, while electronics sales slowed and inventories rose. Conditions in the travel and tourism sector remain weak; contacts report hotel occupancy rates in the Boston area continue to be low because of soft corporate and international travel. Furniture sales did not meet expectations in December, but reportedly picked up in January and February. A surplus merchandise contact experienced record-high sales in December, having obtained unusually good inventory from big retailers. Hardware stores report double-digit increases in sales compared with a year ago; the harsh weather and fear of terrorism--consumers purchasing items such as duct tape and plastic--have helped boost sales.

Most retailers are holding employment levels steady; two contacts, however, are implementing slight decreases in head count. Wages are mostly constant, although Maine's minimum wage increase has led to some raises even in above-minimum pay rates. Most capital spending plans continue to be minimal. Overall, vendor prices and selling prices are level or falling.

Some retail contacts expect sales to increase slightly over the next six months, while others foresee little improvement. Most contacts are hopeful for a turnaround if the geopolitical uncertainties are resolved in the next six months.

Manufacturing and Related Services
First District manufacturing contacts continue to report few, if any, signs of a pickup in demand for their products in early 2003. Most makers of capital goods and other business products indicate that business is weak, especially for aircraft and power equipment. Makers of consumer products say business is soft or, at best, just meeting plan. Some consumer goods companies indicate new signs of deterioration. For example, one furniture company observes that consumers became more cautious in early February and a label maker says that sales to retailers have been running below expectations in the new year. However, others say that conditions are basically similar to what they observed in late 2002 or even a little better. In contrast to the general trend, sales of supplies and equipment to health-related sectors continue to rise. Contacts in the semiconductor industry anticipate that first-quarter revenues will be up at a double-digit rate from a year ago; however, one firm is continuing to see good momentum quarter to quarter, while another calls the quarterly pattern "flattish."

Selling prices remain under competitive pressure. Although materials costs are generally in check, contacts express concern that rising oil prices will raise costs for items such as plastics and chemicals.

About one-half of the manufacturing contacts expect to shrink their workforce in coming months. Most of the remaining firms are either holding staffing steady following layoffs in recent months or hiring selectively. In 2003 merit pay increases are or will be modest, ranging from zero percent to 4 percent at most firms. Capital spending budgets for 2003 generally are similar to last year's. The few companies planning significant increases cite the need for efficiency improvements or new product development.

Most manufacturers are either anticipating or hoping for a modest improvement in conditions during 2003. However, they remain cautious in the face of economic and geopolitical uncertainties. Contacts variously describe their companies as "focusing inward" � "not spending with confidence, not taking a lot of chances" � "just muddling along" � "[having] absolutely no visibility right now."

Temporary Employment
Conditions in the staffing industry are mixed, with most companies experiencing flat or modest year-over-year growth in revenues and profits during the fourth quarter of 2002 and early 2003. Labor supply remains abundant. Wages and billing rates are largely unchanged, although many respondents express alarm at steady increases in employee insurance costs. Temp hiring in manufacturing and light industry is particularly weak, with Vermont reportedly lagging behind the other New England states. Staffing firms are keeping their own payroll and capital spending low, with few instances of further restructuring or reorganization. Most respondents anticipate modest growth in 2003, particularly during the second half.

Commercial Real Estate
Commercial real estate markets in New England remain sluggish. Respondents report little change in activity since our last contact in November, with any new leasing activity being spurred predominantly by consolidation rather than by expansion or growth. While demand for building purchases continues to be strong, lack of demand for rental space has led to lower rental rates and higher vacancy rates in office markets throughout the region. In the Boston area, the published vacancy rates are around 15 percent in the city and 30 percent in the suburbs, but substantially more space is actually available for rent, as some companies make deals for space that is not even listed for sublease. Rental rates for Class A space have dropped to what Class B or Class C buildings commanded two years ago. With little expectation that the economy will improve in the near future, contacts predict a third consecutive year of negative absorption.

Software and Information Technology Services
The demand for software and information technology services has continued to weaken in early 2003. With some exceptions, contacts in the software industry report flat or negative first-quarter revenue growth ranging from zero percent to minus 12 percent compared with last quarter. January is said to have been atypically slow for several custom applications and network software firms. Providers of telecom-related software and services report soft sales along a continuing downward trend, while firms selling software development tools say demand has been level since November. By contrast, several contacts producing human resources and health-care software report annual revenue growth of more than 10 percent.

Software producers seeing revenue gains continue to add labor. The rest are still adding no jobs, with some firms having reached optimal size and others beginning to struggle to avoid layoffs. Capital spending is level across the sector with few plans for change in the coming months. Companies continue to spend only out of necessity or to complete previously postponed investment projects.

Software and information technology contacts indicate that the outlook has deteriorated since the last quarter of 2002 and is marked by considerable uncertainty. The majority of respondents expect flat to deteriorating demand for the next quarter, partly reflecting increased geopolitical risk.

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Last update: March 5, 2003