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Federal Reserve Districts

First District--Boston

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According to business contacts in the retail and manufacturing sectors, economic activity in the First District is largely stagnant. Most merchants report sales in September about level with a year ago, while the majority of contacted manufacturers indicate that third-quarter revenues were below year-earlier levels. Insurance contacts say revenues are level, except for some property and casualty insurers who indicate their business continues to grow. Demand for residential real estate throughout the region is still strong. Respondents are not increasing employment levels; retailers are holding headcounts steady while most manufacturers continue layoffs. The outlook remains cautious.

Retail and Tourism
Retailers in New England report sales in September are mostly flat compared to year earlier, with some pockets of strength. Contacts in the lumber and home-builder sector indicate residential construction and home improvements continue to positively affect their business. A furniture retailer reports that sales continued to be strong through September, slightly exceeding expectations. An entertainment equipment retailer notes a slowdown in September following an up-tick in August. A major department store indicates sales are mostly flat, with some increases in women's apparel but softening sales of home products.

According to travel and tourism contacts, the hospitality industry remains sluggish. Respondents in the Boston area report some slight improvements, including a modest pick-up in business travelers. Contacts indicate leisure travelers continue to favor drive-to destinations for day or weekend trips. Prices remain extremely competitive, with many travelers choosing to book reservations online for the lowest prices. One contact notes future bookings in northern New England are particularly weak, with higher-than-usual vacancy rates for the upcoming Columbus Day weekend.

Most retail respondents indicate they are maintaining lean inventory levels and modest capital spending plans. Employment is said to be stable and any wage increases are minimal. Vendor prices are reportedly mixed, with notable increases in plywood and lumber prices. Many retail contacts note slight decreases in selling prices, particularly in the travel and tourism sector, but others say their price changes are mixed. Overall, most retail respondents expect slow growth over the next six months.

Manufacturing and Related Services
A majority of First District manufacturing contacts say that their third quarter revenues were below year-earlier levels. Demand for aerospace products reportedly continues to weaken, apart from items used by the military. Sales of metal products also are down from a year earlier. A textile manufacturer indicates that sales have been falling because of inventory reductions at retail. By contrast with the general trend, a publishing firm reports spotty improvement, a computer hardware firm indicates continued gains relative to 2002 sales, and some other contacts are experiencing rising sales of home and automotive products.

Manufacturers report that they are paying more for energy, insurance, and euro-denominated inputs. Other materials costs remain under control. Most contacts indicate that they have little if any scope for increasing their selling prices, with the possible exception of new product introductions.

Most of the contacted manufacturers are continuing to pare back employment through selective layoffs. Pay increases for 2003 are mostly in the range of 2.5 to 3.5 percent. A couple of firms report that their overall capital spending will be up this year, but most are holding the line. Some companies are undertaking significant IT projects, but simultaneously cutting other investments.

In discussing the outlook for 2004, manufacturing contacts indicate that their customers are likely to remain cautious. To the extent that they foresee improvements in their business, manufacturers expect them to be due largely to their success in increasing market share through cost cutting or product innovation.

Residential Real Estate
Residential real estate markets in New England remain active. Contacts continue to report low inventory levels, although high-priced houses are staying on the market longer. Lower- and mid-priced houses sell very quickly in all parts of the region. Demand remains strong, spurred by low interest rates. One contact reports that the number of single-family homes sold in Massachusetts in August was 17 percent higher than a year earlier, and the number of condominiums sold increased by 27 percent. The average sale prices rose as well, with the average price for condominiums reaching a record high level in August. Contacts expect housing markets to remain steady, with lower activity levels in the winter. Most anticipate the markets will become busy again in the spring, as long as interest rates stay low.

Contacts from the property and casualty insurance industry report positive or flat top line growth, while annuity and traditional life insurance sales have stayed level with little potential for change. Respondents observe that revenue growth rates have moderated, in part because of increased price competition and in part because equity markets have stabilized somewhat, allowing companies to generate more operating capital. Most contacts are optimistic about the current state of the industry and think that pricing in the property and casualty market has largely equilibrated.

While generating many small claims, the power outage in August did not have a large financial impact on contacted insurance firms. Some companies, however, report extending the workweek to 70 hours to meet client needs after the outage.

Employment and capital budgets remain largely flat, although one company plans to expand substantially its capital budget for 2004. The majority of insurance contacts is optimistic and expects a continuation of gradual improvements.

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Last update: October 15, 2003