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Federal Reserve Districts

First District--Boston

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The First District economy lacks forward momentum. Retail contacts report sales below plan in recent months, and manufacturers cite disappointing results in the year to date. However, both residential real estate markets and insurance companies remained strong in the first quarter. When characterizing the outlook, respondents have substituted "significant challenges" for their earlier "cautious optimism."

Retail contacts in New England report that sales were generally below plan in February, March, and early April. Most respondents indicate that bad weather--rain, snow, and low temperatures--has had a considerable effect on sales, while the ongoing war in Iraq has diverted the attention of prospective customers.

Demand in the travel and tourism sector has reportedly dropped below year-ago levels. Hotel rates in the Boston area have declined dramatically as the slowdown in business travel continues. Home-building supply contacts report sales were as much as 20 percent lower in February than a year earlier and improved little in March. Apparel sales are described as weak, though gift items performed better than other categories. Some decline in same-store sales has been attributed to the shift of the Easter shopping season from March to April. Furniture sales are reportedly flat compared with last year, but contacts report an increase in foot traffic during the past month.

Capital spending budgets are said to be in line or slightly above actual spending in 2002; information technology upgrades account for the largest portion of most budgets. Contacts report that inventories are being carefully managed; however, some are slightly higher than anticipated. Most retail contacts say they are holding employment steady, while some report slight reductions. Vendor prices are mostly stable, and selling prices are reportedly flat to down.

Most retail respondents are cautious about their outlook for the remainder of the year, anticipating only modest improvements. Retail contacts are hopeful that a break in the weather will boost sales in the upcoming months, while many are optimistic that an end to the war in Iraq will reinforce a pick-up in the general economic climate.

Manufacturing and Related Services
Many First District manufacturing contacts express disappointment with first-quarter sales and orders. Business has been down from a year ago or has grown at a slower rate than anticipated across a wide variety of products. A couple of contacts indicate that demand for aircraft parts has plummeted from a year ago, despite higher sales to the Pentagon. Another says that Asian customers are expected to cancel some recent orders in light of the SARS-induced decline in air travel.

Companies producing computer hardware, semiconductor-related equipment, and machine tools say that first-quarter business was up from the depressed levels of a year ago. However, each expresses uncertainty about the sustainability of the recovery. For example, one said sales came in later in the quarter than normal, as customers hesitated before spending. Another is still taking steps as needed to restore profitability.

Most selling prices remain flat to down. Materials costs remain in check except for petroleum-based products and euro-denominated items. Insurance costs continue to escalate.

Most manufacturing contacts expect their domestic employment to be stable or shrink slightly in coming months. Several are shifting operations overseas, especially to China. Merit pay increases for 2003 are mostly in the 2.5 percent to 3.5 percent range.

Capital budgets for 2003 are mixed, with about half the firms planning increases and the remaining half mostly holding spending flat. Those anticipating higher capital investment cite the need to introduce more efficient Information Technology systems or improve manufacturing processes. A couple of respondents have scrapped some planned capital spending projects in the last several months.

Manufacturers anticipate only a modest, gradual improvement in the business climate in 2003, even if the Iraq war ends soon and successfully. They cite a whole list of obstacles to a quick turnaround--geopolitical uncertainties, SARS, an overhang of airline capacity, stock market weakness, and "the economy."

Residential Real Estate
Residential real estate markets in New England remain very strong. After substantial increases in 2002, prices have either leveled off or have increased at a moderate rate this year, according to contacts. Most respondents continue to complain about lack of inventory. The shortage of supply is especially severe in the lower- to midprice range. In most areas, such houses sell as soon as they are listed and often at or even slightly above their asking prices. Houses in the upper-price range stay on the market longer, but even in that segment, demand exceeds the available inventory and prices have not yet declined. Sales remain robust throughout the region, limited only by the lack of inventory. In Massachusetts, sales in January and February were slightly lower than the same months in 2002, but those were the strongest months on record for the state. Some contacts predict that uncertainty about the war and about local economic conditions may limit potential buyers' offers in the near future, but most expect the market to remain solid, as long as interest rates stay low.

Contacts from the insurance industry report strong first-quarter performance but static employment and capital spending levels as confidence in the economy remains fragile. While their own near-term outlook has improved, some firms do not expect the economy to recover until mid-2004.

Respondents cite very strong demand for annuities and fixed-income assets, reflecting consumers' increased aversion to stock market risk. However, results in traditional life insurance are mixed, and pipeline activity for institutional funding agreements has been weak. Property and casualty insurance rates have started to moderate around their January levels, but companies in this market niche still enjoy robust, often double-digit, top-line growth.

Employment remains largely static, with some insurance companies announcing modest additions and others selective cuts from less-efficient areas. Capital budgets remain flat, with little investment in new physical capital beyond necessary upgrades of computer equipment. One of the few companies expanding its capital spending reports a slight upward revision for 2003.

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Last update: April 23, 2003