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Federal Reserve Districts

First District--Boston

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First District businesses contacted in early April report that activity continues to expand. Most retailers say first quarter sales were up from a year ago; responding manufacturers' revenues and orders are generally ahead of year-earlier levels. Some retailers and manufacturers, however, suggest they are keeping a tighter rein on capital spending recently than in previous quarters. Advertising and business consulting firms report strong demand. Residential real estate markets in some parts of the region remain robust; other areas are leveling off.

Retail and Tourism
Most First District retailers report positive sales growth in the first quarter compared to a year earlier, and a strong recovery in February and March from the poor weather in January. Year-over-year first quarter sales ranged from down 6 percent to up 9 percent, and respondents with lower sales attributed them to strong results in 2004. Flat panel televisions, MP3 players, lumber, and furniture remained particularly strong sellers and apparel sales were still strong.

Vendor prices are mixed; for example, dairy prices are said to be up, television prices are falling, and lumber remains volatile. Most retailers are passing price increases along to consumers, but in the restaurant business, competitive pressures are keeping prices stable. Inventories are steady or higher than expected among contacts. Employment levels vary as some respondents increase headcount for new stores or to emphasize service, while others keep head count low reflecting increased productivity. Employment is flat or falling at the corporate level, and wages are steady. Respondents report holding back on capital spending more now than in recent quarters.

Travel and tourism revenue is said to be strong in comparison to a weak base from 2004. Boston area first quarter hotel revenue per room was up double-digits from a year ago; while business travel increased and international travel was up 8 percent, most of the change came from an increase in room rates. Pent-up demand from waning geopolitical turbulence as well as a lower dollar are expected to boost international travel, although increases in fuel prices may temper the growth.

Most retailers are optimistic about the economy and expect modest or strong growth in the coming year. However, they remain concerned about the effects of energy prices on consumers' discretionary income. Those in the furniture and lumber industries are also wary about the effects of rising interest rates on housing starts.

Manufacturing and Related Services
Most First District contacts in manufacturing and related services report that sales and orders in the first quarter were moderately above year-earlier levels. Demand for aircraft, energy-related, and defense-related equipment rose more than average. By contrast, respondents in the furniture industry say their sales have slumped below year-earlier levels, perhaps the result of import competition.

Contacts continue to indicate that they are paying more for energy, transportation, petrochemicals, and some metals. There is also new mention of firming prices for telecommunications services. On the other hand, some companies have seen their input costs fall as a result of increased sourcing in Asia, and one company says that the upward pressure on steel costs has abated. Respondents generally say that their selling prices are steady or increasing a little. They note that customers are more understanding of the causes for price increases or that competition has become somewhat less intense than it had been during the last several years.

Manufacturers are hiring for sales, marketing, and R&D positions. They are continuing to shed other positions as a result of efficiencies introduced through new technology or acquisitions. The net changes are usually small. Some respondents mention that tighter labor markets are resulting in slower hiring or higher attrition in certain professional and technical fields. Merit pay increases generally are expected to average 2.5 percent to 4 percent in 2005.

Contacts are managing their capital expenditures closely, and a capital goods producer indicates that its customers are adding more "checks and balances" into the capital spending process. Several respondents need to add capacity, although not necessarily in the United States.

Most of the contacted manufacturers indicate that they expect to stay "on track" throughout 2005. However, they tend to be planning carefully, on the assumption that the general economy or their markets are unlikely to experience rapid growth this year.

Selected Business Services
Advertising and management consulting companies enjoyed healthy demand growth in Q1 2005, building on gains made in 2004. Respondents believe client companies' budgets are less constrained than in the recent past, and that the strategic focuses of these companies have shifted somewhat from cost-cutting and productivity to augmenting sales and revenue. Within advertising and marketing, demand for data and market analysis services is growing notably well. Demand from clients in technology-related industries appears healthiest, while reports on healthcare demand are mixed, and government-related demand is said to be weak.

About half of responding business services companies have been able to raise prices in the past year, while the remaining companies are managing with steady prices and improving market conditions. Business costs are under control, although competition for employees seems to be pushing up labor costs in some cases. Most responding companies are adding to their headcounts and raising wages, although not aggressively. All respondents express positive views, expecting revenue growth to remain the same or accelerate slightly over the course of 2005.

Residential Real Estate
Residential real estate markets in New England remain active. However, contacts report softening markets in some parts of the region, even though the slowdown is not yet noticeable in the number of sales or in average sale prices. Lower- and mid-priced homes continue to sell quickly in most areas, and the inventory in those price ranges remains low. Markets in Massachusetts, New Hampshire, and Vermont continue to prosper. In Massachusetts, the number of sales and median sale prices exceeded last year's values in January and February, and the number of condominiums sold in the state beat all previous records for those two months. Contacts attribute some of the strength to anticipated increases in mortgage interest rates. By contrast, one market in Rhode Island, for example, saw the number of listings priced below $300,000 rise to 60 from 14 a year ago. Time on the market has also increased in many areas, especially for high-priced houses. Some of the slowdown is said to be due to sellers' reluctance to lower their asking prices. Contacts anticipate further moderation of activity levels, especially if interest rates rise in the next few months.

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Last update: April 20, 2005