Boston: December 2004

Retail and Tourism
Most First District retailers cite little growth in October and early November. Respondents report a slowdown in casual dining compared to previous months and year-ago levels. Several store chains report sales increases in October and early November in the 4 percent to 8 percent range year-over-year. Within this group, however, a seller of health and beauty products says month-to-month comparisons have been on a downward trend throughout the year, and a clothing retailer says sales picked up markedly in November. Furniture stores report sales are flat to down 8 percent compared to last year, and hardware sales are slightly behind year-ago levels.

Inventory levels are up slightly according to most contacts. A number of respondents report increasing vendor prices, particularly for food items, and petroleum- and steel-based products, but changes in selling prices are reportedly mixed. Clothing prices declined as lower priced items were included in the product mix, casual dining prices increased modestly, and increases for other retailers were minimal. Employment levels are said to be mostly steady, while acquisitions and seasonal hiring have resulted in some headcount increases. Most respondents report capital spending is in line with plan, some below year-ago levels and some above due to store openings, acquisitions, or increased spending on technology.

Travel and tourism revenues in northern New England were reportedly stronger in September and October than a year earlier, a result of nice weather and long-lasting, bright foliage. Travelers continue to come mostly from driving distances, while international travel increases at a moderate pace. According to respondents, increasing business travel and the opening of several quality hotels have helped boost tourism revenues in Boston this fall. Occupancy rates and prices are said to be on the rise.

Most contacted retailers anticipate that sales will improve slowly in early 2005, while some expect no change. Respondents express uncertainty and caution about rising fuel, energy, and commodity prices, consumers' price-sensitivity, and declining consumer confidence.

Manufacturing and Related Services
Most First District contacts in manufacturing and related services report that sales in the third and fourth quarters of 2004 have been ahead of year-earlier levels and remain on an upward trajectory. Equipment manufacturers serving defense, medical, automotive, and construction markets are doing particularly well. Some respondents have been able to capture market share by offering more comprehensive or innovative products to their customers.

Makers of semiconductors and related equipment report that incoming orders softened considerably starting in the third quarter. They attribute much of the new weakness to greater caution among customers serving consumer electronics markets, and they expect the slowdown in orders to remain in effect until early 2005. Furniture manufacturers and their suppliers also suffered major slowdowns in the third quarter, but they disagree about whether these markets are likely to reverse course in the coming months.

Manufacturers report continuing, major cost increases for steel, natural gas, and petrochemicals. Prices have also risen substantially for copper and paper. Most respondents say that in recent months their customers have become more tolerant of price increases attributable to rising materials and energy costs. Nevertheless, the recent pricing adjustments typically do not compensate manufacturers for the increases in input costs that they experienced earlier in the year.

Most manufacturers are holding their U.S. headcounts fairly flat except for acquisitions. Contacts with rapidly growing sales are adding employees, while those in the semiconductor and furniture industries are laying off. Pay increases in 2005 are expected to remain in the 3 percent to 4 percent range, but engineering pay is rising more rapidly. Respondents report difficulties in finding skilled technical and accounting professionals, as well as skilled machinists and toolmakers. Manufacturers generally expect their domestic capital expenditures to rise in the coming year, albeit to varying degrees. The added capital is usually aimed at improving productivity and developing and manufacturing new products.

Most contacts are at least moderately encouraged by their company's prospects in 2005. Some express concerns about possible further increases in energy prices, competitive pressures to reduce selling prices or spend more on marketing, or the down cycle that has started in semiconductors.

Temporary Employment
Demand for temporary workers in the New England region grew at a solid rate in Q3 and early Q4, across a wide range of job types and geographic locations. The supply of available candidates is reportedly dwindling and is starting to affect business in some cases. Downward pressure on prices continues, but temp firms are holding the line or even gaining small increases in some cases. Most costs are under control, but medical, worker's compensation, and state unemployment insurance expenses continue to rise. Respondents are largely positive in their outlook and expect demand growth to settle in at a "moderate but healthy" rate in 2005. They cite continuing increases in permanent and temporary-to-permanent job placements and the end of election-related uncertainty as reasons for optimism, but tightening labor supply, the war in Iraq, and high fuel prices as causes for concern.

Commercial Real Estate
Commercial real estate markets in New England remain sluggish. Contacts report few changes over the past quarter. Although some areas have experienced positive market absorption, continuing slow job growth in the region has generally failed to help the already lackluster markets. Boston has experienced the fourth consecutive year of negative market absorption, its worst streak on record. Office vacancy rates remain in the mid-teens in Boston, and exceed 20 percent in the suburbs. Recent mergers have raised vacancy rates by 2 to 3 percentage points, according to some estimates. While office rental rates have not changed during the past three months, buyers of office buildings continue to be willing to pay "exorbitant" prices. Contacts do not expect conditions to improve markedly until the region's economy strengthens and job growth picks up.

Software and Information Technology Services
Business activity is said to be speeding up at First District software and information technology services firms. All respondents report positive year-over-year revenue growth in the third quarter, ranging from single to high double digits. Headcounts remain flat, with a little hiring in sales and services; almost all contacted companies have started to raise pay. They say that voluntary turnover is increasing, indicating the labor market is improving. Capital and technology spending is reported at the usual level.

Contacted software and IT services companies' overall outlook is cautiously optimistic. Some respondents have highly positive assessments, reporting increasing backlogs and strong pipelines, while others are quite cautious, especially in relatively mature segments such as networking software.