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Beige Book logo links to Beige Book home page for year currently displayed November 26, 2003

Federal Reserve Districts

First District--Boston

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Business contacts in the First District report improving conditions at the end of the third quarter and early in the fourth quarter. While results are mixed from month to month, retailers cite fairly consistent sales increases from a year earlier. Contacted manufacturers and software firms indicate that demand seems to be improving. While retailers and manufacturers mention only scattered employment increases, most staffing firms report growing demand for labor. Contacts express concern with increases in input prices and other business costs such as insurance, while selling prices are generally level.

First District retailers cite mixed month-to-month changes in September and October, but most of the surveyed merchants report year-over-year gains, ranging from 5 to 9 percent. A contact from the office supply sector reports particularly strong sales of durable goods, such as computers and office furniture, and expects technology-based products to be big sellers in the upcoming months. A surplus merchandise respondent notes that a pickup in big-ticket sales, such as furniture, compensated for a decline in customer count in October. According to auto dealers, imported automobile sales are strong, while domestic sales are mixed. Many dealers expect manufacturers' incentives to spur domestic sales growth this winter season. Most retail respondents indicate that they are maintaining lean inventory levels. Several contacts report increases in headcount with the opening of new stores and some respondents plan to hire seasonal workers in the upcoming months. Wages are reportedly steady. Selling prices and vendor prices are mostly even, though one contact expresses concern about upward price pressure due to increasing costs in transporting products once new trucking regulations are implemented.

The consensus among contacted retailers is that sales will improve moderately in the next six months. Several store executives said they expect sales this Christmas season to surpass those of last year, while one respondent expects the upcoming season to be very "promotional."

Manufacturing and Related Services
A majority of First District manufacturing contacts note signs of recovering demand in the third and fourth quarters. Semiconductor manufacturers indicate a solid upward trend in sales, boosted by customers' upbeat projections of demand for PCs, printers, and cell phones. Military purchases are reportedly rising at a double-digit rate. Some consumer goods makers are selling more than a year ago as a result of promotional efforts or restocking at retail. However, other firms report that business is choppy or remains in the doldrums. For example, a paper company is taking selected downtime, a manufacturer of commercial aircraft is keeping production low, and a beverage firm says November sales are coming in lower than a year earlier.

Manufacturers report that rising demand is leading-or will soon lead-to higher prices for certain inputs such as metals, silicone wafers, and hardwoods. Fuel surtaxes and plastics costs remain high, and insurance costs continue to increase. Equipment manufacturers say that their selling prices continue to decline. Paper companies and some consumer goods manufacturers are offering discounts in order to boost sales. Apart from these cases, other materials costs and selling prices are generally flat.

Most of the contacted manufacturers expect to hold domestic employment fairly flat in coming months, although some are adding engineers and temporary factory help. Base pay increases for 2004 are projected to be 2.5 percent to 4 percent. Companies are about equally divided as to whether they will be increasing capital spending in the U.S. or keeping it steady. Several respondents are planning overseas expansions, particularly in Asia.

In discussing the sales outlook for the holiday season and 2004, manufacturing contacts tend to be more upbeat than they were earlier in the year. Most firms predict rising revenues for 2004. However, they say they are guarding against increasing production too much in response to positive projections, and they continue to make concerted efforts to use their working capital and other resources as efficiently as possible.

Temporary Employment
A majority of responding temporary employment agencies in New England report growing labor demand in Q4 2003. While reports on year-over-year revenue growth are mixed, a sizable majority of contacts say revenues are higher than three months ago. Some respondents report an increase in permanent placements. Gains in information technology, software, and other technical openings were greatest, with respondents also noting demand improvements in manufacturing, light industrial, administrative, construction, and financial employment. Labor demand grew most along Route 128 in Massachusetts, in southern New Hampshire, and southern Maine, while Vermont remains weak.

Some respondents believe labor supply is tightening. Bill rates and pay rates are stable. Non-payroll related costs are said to be under control, except for medical insurance.

Respondents are more optimistic than three months ago, with most anticipating that growth in labor demand will be sustained through 2004. While contacts are pleased by rising labor demand, the performance of the stock market, and recent GDP and payroll employment reports, they express concern about shifts in IT employment abroad, rising healthcare costs, federal budget deficits, and terrorism.

Commercial Real Estate
The Boston area office market is not showing any signs of recovery. Vacancy rates are very high and rental rates remain low. Because there has been almost no new construction, vacancy rates have not risen. Notwithstanding low rents, the market for office building sales is very strong. Downtown Boston office towers, in particular, command very high prices per square foot, with sale prices substantially above replacement cost.

The rest of New England is stable. Contacts report little activity in commercial markets. Office vacancy rates have increased somewhat in the Portland area, and dropped slightly in Providence. Elsewhere, vacancy and rental rates remain steady. The retail sector is relatively strong throughout the region (in greater Boston, the only new development is in the suburban retail sector). Contacts do not anticipate that commercial markets will rebound for at least a year, and some believe that the Boston office market will not improve until 2007 or 2008, when most leases will be rewritten.

Software and Information Technology Services
Demand for software products has improved since August 2003. Companies selling software development tools and custom application software, as well as medical, human resources and telecom software firms report various degrees of improvement from the second to the third quarter, although software sales in the telecom sector remain below last year's levels. Companies with the steepest revenue growth continue to hire, with a few other firms citing flat employment. One respondent reports a 35 percent increase in his company's capital budget, while the majority of interviewed firms have kept their capital expenses flat. After heavy capital budget cuts, the telecom sector continues to restrain capital spending.

The outlook of software and IT services firms has moved from cautious to optimistic, even for companies who previously said they were uncertain about the economy's future course. While revenue expectations for the first quarter of 2004 range from flat to double-digit increases, the prevailing opinion is that gradual improvements in the software sector will persist.

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Last update: November 26, 2003