June 16, 1999 Federal Reserve Districts First District - Boston

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The First District economy continues to expand. Retailers report strong sales growth while manufacturers' results are mixed, with business up compared with a year earlier at about half the contacts and down at half. Business continues to grow at temporary employment firms and insurance companies and in most of the region's commercial real estate markets. Retailers report that vendor prices and prices to consumers are mostly steady; manufacturers also indicate their input costs and selling prices are mostly flat or down, but a few say they are able to raise prices to customers slightly. According to respondents, most workers' pay increases are in the 3 to 5 percent range. Retail All retail contacts report strong growth during the March through May period relative to the same period last year, with sales expanding at a 5 to 10 percent pace. Only one sector, office and architectural supplies, said sales growth was below expectations, with some signs of a recent slowdown. Employment is said to be holding steady, with very tight labor markets impinging on merchants' ability to find and hire new help. Retailers also report a recent increase in the use of higher wages as a recruiting device. Nonetheless, overall wage growth is said to be in the same 3 to 5 percent range that has existed for most of the last two years. Most respondents report that retail prices are holding steady, primarily because of competitive pressures. Supplier prices are also said to be holding steady. One exception is construction supply retailers, who say that materials prices are rising dramatically, as supply is short relative to construction demand. Most retail contacts say gross margins are holding steady. Contacts report that little or no capital expansion is planned for the remainder of this year, and some moderate capital expansions are planned for the year 2000. Looking forward, respondents express continued optimism about the economic outlook, although they expect the rate of economic growth to slow during the second half of 1999. Manufacturing and Related Services First District manufacturing contacts are about equally split as to whether recent business is up or down from a year ago. Demand is growing most strongly for biotech instruments, publishing, office equipment, and goods and services related to construction. Equipment suppliers say the semiconductor industry is rebounding from its slump. Demand for industrial machinery reportedly remains weak. A maker of apparel textiles reports negative trends, largely because of competition from imports. Manufacturers report that input costs are mostly flat or down. The sharpest declines are for integrated circuits and computer components. By exception, prices for corrugated cardboard and plastic packaging are said to be starting to rise. Some contacts anticipate that paper prices may increase soon, although none are paying higher prices yet. One-quarter of the contacts report being able to raise prices slightly. The remainder report that selling prices are flat or down, with some equipment makers reporting sizable decreases as a result of technological improvements or customer pressures. The majority of companies report that they are hiring for sales, engineering, information technology, and/or other technical positions. Almost half are cutting jobs or hours for factory and lower-level service workers. Most companies report average pay increases in the range of 3 to 5 percent. Despite tight labor markets, only a few respondents indicate that hiring expenses are increasing faster than average pay; a couple of these firms report changing work assignments internally or contracting work out in order to avoid what they view as excessive costs for new hires. About one-half of manufacturing contacts plan to increase capital spending this year. The most commonly cited reasons are Y2K, computer upgrades, and modernization of facilities. Most firms do not plan to build up inventories later this year in anticipation of Y2K, but a few indicate they will accelerate orders from critical suppliers. Most manufacturers are upbeat about their business over the coming year. To the extent they have concerns, these tend to relate to their own company's sales challenges rather than to conditions in the economy at large. Temporary Employment Firms First District temporary employment firms continue to expand, although the pace of growth has slowed largely because of supply constraints. Demand is strong, with firms reporting substantial increases in demand for information technology (IT) workers, especially for software and Internet development. Contacts say they cannot find enough people to fill all the IT jobs. The summer influx of student workers may temporarily alleviate some of the supply shortage for general office work, but this will not help firms searching for highly skilled, experienced workers or workers for longer term projects. Wages are increasing 10 percent annually for IT workers and 5 percent outside that sector; temp firms are passing these increases on to their customers, so profit margins remain steady. Commercial Real Estate The commercial real estate market in New England is doing well and most contacts are optimistic. While some Massachusetts respondents say that the market is becoming less active, others see no signs of slowdown. Demand for prime office space downtown is very strong, and supply will not increase until new construction projects are completed during the next one to two years. Office rental rates continue increasing in downtown Boston but have been steady in the suburbs. The rest of New England is mixed. Providence is doing very well, with strong demand and rising rental rates for industrial and suburban office space. The market in Hartford is unchanged, although several new projects are planned. Southern Maine and southern New Hampshire are experiencing high levels of activity, but report no change in vacancy or rental rates. Nonbank Financial Services - Insurance All but one respondent at insurance companies reports an increase in sales during the first quarter of 1999. The increases were mostly traditional individual life insurance products. Despite sales growth, most respondents indicate that they have either reduced employment since the beginning of the year or expect to do so in the second part of the year. One respondent has a hiring freeze in effect and two are implementing early retirement programs later this year. Return to top Summary New York