September 11, 2002
The New England economy is moving sideways, on net, with some sectors level to down and others up modestly. Manufacturers report flat revenues; retailers and tourism contacts say business is slow. Commercial real estate markets are depressed in the Boston area and flat elsewhere in the region. Software and IT markets are still "tough." The outlook remains uncertain.
Retail
Most New England retail contacts report sales in the June-August
period level or down from a year earlier. A high-end retailer
with sales down 20 percent plans to close several stores in
the next six to nine months. Tourism contacts continue to report
declines in international and long-distance travelers. The number
of business travelers in the Boston area was significantly lower
than expected, resulting in one of its weakest summers in years.
An upbeat report came from a surplus discount store with sales
12 percent above last year's level; they expect to open three
additional stores next quarter.
Retail contacts are mostly holding headcounts level, although some are choosing not to fill open positions. Wages are generally steady, but one respondent implemented an increase of 3 percent. Vendor prices and selling prices are mostly flat. New England hotels, restaurants, and tourism companies continue to offer special pricing and package deals. Capital spending remains modest. Many respondents are being cautious, with some scaling back marketing expenses and one putting large-scale IT projects on hold indefinitely.
Overall, contacted retailers have low expectations for the remainder of the year. Many hope the upcoming months will be profitable, but few anticipate growth.
Manufacturing and Related Services
First District manufacturing contacts report that business conditions
have been difficult in the third quarter, with revenues largely
flat from a year earlier. Manufacturers of consumer goods and
nondurable business products tend to indicate that sales were
disappointing in the July-August period, compared to trends
earlier in the year or to budgets. Manufacturers of commercial
and industrial equipment saw only glimmers of improvement, at
best, during these months; sales at firms making aircraft parts
and equipment used in commercial construction remain on a downward
trajectory. The only bright spots mentioned are residential
appliances and military equipment.
Selling prices and materials costs are mostly flat to down, and contacts report that they and their customers are bargaining for extended payment terms. Responding firms face ongoing sharp increases in insurance costs and recent increases for steel and plastics. Manufacturers raising their selling prices to cover rising costs say the increases have been less than desired because of competitive pressures.
The majority of manufacturers have reduced employment during the past year and expect to make only minor adjustments in headcounts during the remainder of 2002. Some companies lifted pay freezes or reversed reductions at midyear or have plans to do so in 2003. Where they are occurring, pay increases are typically 2 to 3 percent. Responding companies generally report that capital spending remains modest. Most seem reluctant to spend while the economy remains weak or uncertain. The only exception—a company embarking on the largest initiative in its history—is doing so to save on labor inputs.
Most contacts believe their sales will be fairly flat over the next six to 12 months and that they will face pressure on net income. A couple of capital goods producers indicate that conditions are unlikely to turn around before late 2003 or sometime in 2004.
Temporary Employment
The staffing industry reports modest improvement. Cutbacks in
hiring that occurred during the second quarter have subsided.
Some contacts report slight growth in the third quarter, usually
the strongest quarter in the year. Contacts in Boston and Hartford
report signs of recovery after a long period of inactivity.
Respondents in Vermont, where labor demand has been weakened
by layoffs at IBM, continue to struggle. Certain occupations
and industries display pulses of activity, including sub-assembly
manufacturing, low- technology consumer goods manufacturing,
health care, non-profits, customer service, and office and clerical.
By contrast, professional sectors such as information technology,
finance, law, and telecommunications remain in the doldrums.
One positive sign is that assignment durations are lengthening,
in some cases from a few days or weeks to indefinite.
Temp industry profits are depressed as costs for workers' compensation, unemployment insurance, and wages move up while clients maintain downward pressure on bill rates. Both year-round and seasonal labor remain plentiful. Most contacts were overwhelmed with summer job inquiries from students but had few openings for them. Respondents are cautiously optimistic that business will pick up in the fourth quarter; they expect to inch rather than surge forward for the remainder of the year.
Commercial Real Estate
Commercial real estate markets in New England remain sluggish.
Contacts report very low activity levels throughout the region,
with Greater Boston continuing to trail other major metro areas.
Commercial markets outside of Boston are said to be steady;
vacancy and rental rates have been flat. Boston-area contacts
report virtually zero demand for additional rental space in
either the city or the suburbs. They indicate that rental rates
for available space have decreased 15 to 20 percent over the
past year, to approximately half of their 2000 levels. Office
vacancy rates in the Boston area continue to rise. In addition,
companies occupy substantial unutilized space that is not included
in the published rates. Respondents anticipate that vacancy
rates will rise further in the near future when a number of
large leases expire and unutilized and sub-leased space is returned
to owners, possibly further depressing rents. At the same time,
however, respondents report strong demand to purchase office
and apartment buildings, which they suggest is spurred by low
interest rates, volatile stock market conditions, and confidence
that the space market will eventually recover.
Commercial real estate respondents do not anticipate any major changes during the next six months, provided there is no deterioration in overall economic conditions. Boston-area contacts do not see signs that the market will improve this year.
Software and Information Technology
Services
A majority of respondents in the IT and software sector report
modest to average growth in sales and revenues over the summer
months. By exception, companies producing health care systems
and information software report revenue increases of 15 to 18
percent compared to last year, but note that their performance
reflects regulations coming into effect in 2003 (the Health
Information Protection Act) that will drive hospitals to upgrade
the security of their software systems. Contacts in the rest
of the IT sector report sales growth of about 2 percent from
year-earlier. One respondent, however, notes an unexpected sharp
decline in sales in August after a very successful June and
July.
Producers of human resources software, custom applications development, and program development tools report either flat or 5 to 10 percent growth in employment. All cite significantly reduced turnover rates, with one company claiming one-quarter of the turnover in the past few years. None of the responding firms plan to cut back their capital budgets. While the contacted companies are generally gaining, their senior executives note that sales and profits of some competitors are down by as much as 20 to 50 percent. Thus, they believe the market for IT and software products is still "tough," with the rebound slower than expected. Most respondents express cautious optimism for growth in the next 12 months, but admit that their outlook has either remained unchanged or been revised down since May.