August 6, 1997 Federal Reserve Districts First District - Boston

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The First District economy continues to expand at a moderate pace. Most retail and manufacturing contacts report rising revenues and little change in prices. Employment is steady or up slightly, and wages are generally said to be rising at a 2 to 6 percent annual pace; the exceptions are specific occupations in short supply, mostly technical and highly skilled jobs, which command greater wage increases plus other rewards. Commercial real estate continues to improve in New England, with the Boston market very strong. Insurance companies' revenues are rising, but they are cutting employment. Retail Most retail contacts report that sales are increasing at a steady, moderate pace. Sales gains in the second quarter are said to be in line with expectations. Some inventory buildup occurred, largely because of weather-related slowness in April and May, but sales growth has since rebounded to its pre-April pace. Reported areas of strength include women's and high-end apparel, building materials, office supplies, and tourism, all of which reported mid to upper single-digit growth rates. Areas of weakness, with modest sales declines, include hardware and men's apparel. Appliance sales have been weak throughout the year, but office and home computers are said to be rebounding from earlier depressed levels. An additional area of weakness is the discount retail sector, which is undergoing significant consolidation with many bankruptcies and store closings recently reported. Employment is reported to be either steady or increasing in line with sales. Contacts mention pockets of labor market tightness, including jobs in construction, tourism, and highly skilled occupations. Low-skill workers still appear to be abundant. Wages are reported to be growing at a 4 to 6 percent pace. All respondents report that competitive pressures are keeping both their suppliers' and their own prices steady. Profit margins are also holding steady. Across the board, contacts say that efficiency improvements (better inventory control, automation, and purchasing efficiencies) are required to maintain profitability. Most respondents have moderated their capital expansion plans, but tourism and office supply firms are expanding rapidly. Looking forward, retailers expect steady growth with low inflation continuing through 1997. While contacts evince nervousness that the good times can't last forever, they express cautious optimism about 1998. Manufacturing Revenue results vary widely among the First District manufacturers contacted. One-third report double-digit percentage increases from a year ago, another one-third report single-digit increases, and the remaining one-third report flat or declining business. Aircraft-related, biotech, and non-automotive consumer durables products are showing the most rapid growth. Results for automotive suppliers are highly variable because production trends differ across vehicle makes and because of extensive realignments of purchasing relationships. Most manufacturers indicate little if any pressure from materials costs, although furniture-grade lumber and copper costs are said to be rising. Selling prices are also largely stable. Contacts across a wide spectrum of industries mention that large firms are using their market power to contain costs. A majority of respondents report that their overall employment is unchanged or up a little from a year ago. Several mention difficulties filling openings in information and health technologies, engineering, and skilled blue-collar occupations; in most cases, improved compensation packages or up-front bonuses are necessary to attract candidates. More generally, however, manufacturers tend to describe labor availability as adequate and appear satisfied with paying wage and salary increases in the range of 2 to 4 percent. In addition, one-quarter indicate they are expanding their use of variable, performance-based compensation. About one-half of the manufacturing contacts report making heavy capital investments this year. These projects include additions to capacity (in some cases, to introduce new products) and expenditures on management information systems. Most other respondents say that capital spending levels remain normal. Several manufacturers express satisfaction with prospects for continued macroeconomic growth and low inflation, although others mention the challenges of operating in a highly competitive environment or the risks of further appreciation of the dollar. Several contacts are focused on particular industry trends such as improving demand in computer-related markets or prospective declines in automotive-related business. Commercial Real Estate Commercial real estate markets in New England continue to improve. The Greater Boston area, driven by rapid growth in financial services and software, is extremely strong. Vacancy rates have reached historic lows, pushing rents up sharply for scarce office and industrial space. There are signs of new office development in the suburbs and talk of two projects downtown, although it will be some time before any substantial increase in inventory materializes. Conditions in the rest of New England are improving, for the most part. Much of Connecticut continues a slow recovery, although downtown Hartford still has substantial unoccupied office space. Maine has shown improvement and modest price increases are reported in Portland, Camden, and Bangor, but Aroostook county is still doing poorly. Rhode Island continues its recovery, especially in the industrial sector, where new buildings are under consideration. Several contacts express concern about the retail market, which had been improving but is now girding for major bankruptcies that will free up several million square feet of space across New England. Nonbank Financial Services Respondents at insurance companies report revenue increases in the range of 5 to 20 percent in the second quarter compared to a year earlier. Growth was highest in health care and in investment products with returns tied to the stock market, such as variable life insurance, variable annuities, and mutual funds. Employment was down at the majority of respondents and this trend is expected to continue. Respondents note wage pressures in selected occupations, particularly in technology and investment management. Return to top Summary New York