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Federal Reserve Districts

First District--Boston

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The First District economy remains stalled. While retail respondents report sales meeting expectations, manufacturers, especially those producing consumer durables, cite further softening. Some staffing firms indicate demand is rising, but commercial real estate markets remain in the doldrums and software firms see little cause for optimism.

Retail contacts in New England report sales are mostly in line with expectations in April and May. Many respondents say sales were down in early March because of the war, but made a slow recovery later in the month. Some contacts indicate the very recent wet weather has positively affected sales and foot traffic.

Auto sales are said to be down slightly compared to a year ago, but better management of inventories and internal cost-cutting have raised profits. Imaging products such as digital cameras and printing materials are reportedly selling well in the office-supply sector. The seasonal pickup associated with academic graduations combined with business conventions produced strong sales for the travel and tourism sector in May.

Contacted merchants report that employment is mostly steady, with a recent rebound in the tourism sector. Wages are level, with minimal annual increases. Vendor prices are said to be stable, although a firm dependent on imports reports slight price increases because of the weaker U.S. dollar. Selling prices are mostly steady; however, there is some upward pressure. Capital budgets for 2003 are mixed, with about half reducing spending and the remaining half mostly holding spending flat.

Many respondents continue to focus on becoming more efficient, attempting to maintain lower internal costs and improve their marketing strategies. Most contacts are less concerned about economic uncertainties than in previous months and anticipate sales will increase modestly in the next few months.

Manufacturing and Related Services
First District manufacturing contacts see little if any evidence of a recovery in their sector. Makers of consumer and commercial nondurables report that current quarter sales are running below expectations and are flat to down from a year ago. Furniture makers have seen more store traffic in the last month or two, but they are divided on whether this has translated into higher sales. Aircraft and transportation-related sales remain depressed. Two companies in the semiconductor industry say their sales are up 10 percent or more from a year ago; although one characterizes business as continuing to be very good, the other says conditions are still gloomy. In contrast to general trends, defense-related business is up strongly.

Most selling prices remain flat to down. Materials costs mostly remain under control. About one-half of the sample say that they or their customers are trimming inventories or preventing further buildup. More than half are reducing employment.

Capital spending plans for the coming six to twelve months are mixed. Some companies are making large investments in more modern production technologies. Others need to restructure their operations or expand capacity in specific lines. About one-half plan to decrease capital spending or leave it unchanged. They cite factors such as ample capacity, low sales growth, and a need to preserve cash.

Manufacturers appear to be basing their expectations about the coming six to twelve months on trends for the year to date. Those that have not yet seen a pickup are inclined to believe that the economy will not turn around until 2004.

Temporary Employment
About half of responding temporary employment firms report 2003:Q1 revenues higher than those of 2002:Q1, with increases ranging from 5 percent to 20 percent. The remaining agencies' revenues were flat or down by as much as one-fourth over the same period, with some companies posting negative profits in 2003:Q1. Health-care-related employment is said to be still strong, as well as employment in selected financial services such as mortgage and insurance. Some respondents see signs of a rebound in technology employment. Contacts say employment in light industry and other manufacturing continues to be weak, facing intense competition from overseas, while traditionally stable areas of employment like academia and consumer goods have been disappointing of late.

Amidst sluggish labor demand and abundant labor supply, many respondents say client companies have pressured them to reduce bill rates, and they have reduced pay rates to maintain profit margins. Others have kept prices and wages unchanged, aiming to keep the quality of their personnel high and investing in long-term client relationships. With many companies restructuring in 2002, employment and capital spending levels in 2003 are steady.

Some contacts at temporary employment agencies are hopeful about the future, expecting revenues to be higher during the second half of 2003 than in the first half. Those who anticipate a recovery expect it to be modest and slow, and say they need to see more tangible signals before changing their strategies. Respondents express much less concern with geopolitical issues than when contacted last quarter, and more concern about rising insurance costs and the possibilities of a double-dip recession or deflation.

Commercial Real Estate
Commercial real estate markets in New England continue to perform poorly. Contacts report high and rising office vacancy rates and declining rents throughout the region. Although some respondents point out that the pace of increase in vacancy rates has slowed, there are few bright spots and no signs of recovery so far. As companies throughout the region continue to have layoffs, the demand for office space is weakening. At the same time, there is strong demand by institutional investors for office buildings, and sale prices of buildings with tenants remain high. As a result, new office construction continues, further raising the inventory of available rental space. As existing leases get closer to their expiration dates, the sublease market is diminishing in importance. Contacts expect the market to continue to deteriorate as long as layoffs continue. No turnaround is expected until 2004 or even three to five years out.

Software and Information Technology (IT) Services
The recovery of the software sector remains stalled after a disappointing January and February and a somewhat busier March and April. Less cyclical businesses such as health-care and human resources software continue to outpace the rest of the sector, which has seen little pickup attributable to economy-wide conditions. Although exchange rates have provided a modest boost to software exports, contacts say the domestic software market has not improved.

While the March pickup helped prevent imminent workforce reductions, several companies signal that they may reconsider if stagnation persists. Medical and human resource software firms, which are still adding labor, report downward revisions to their hiring targets. Further cuts in capital spending are planned or expected by wireless IT services, network software, and custom applications providers; they cite negative cash flow, low sales, and low capacity utilization as reasons for the contraction. Contacts agree that the recovery depends on aggressive increases in capital spending that they have not seen so far.

The short-term outlook remains flat and technical contacts suggest that they see no reason for the current pattern to change in the medium term. Most respondents point to mid-2004 as the earliest date for an economy-wide expansion but caution that clear signs supporting that expectation are lacking.

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Last update: June 11, 2003