August 11, 1999 Federal Reserve Districts First District - Boston

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Economic activity in the First District continues its expansion. Area manufacturers report positive results more consistently than they did earlier in the year and retailers say sales growth is still strong. Most employers indicate labor markets are tight, but general wage increases remain in the 3 to 5 percent range. With limited exceptions, prices are generally level or down. Retail Most retail contacts report sales growth in the middle single-digit range in June and July, in line with projections for the period; they characterize these results as "strong." Inventories are considered to be at desired levels. In the tourism sector, revenues continue to grow, but at a slower pace than earlier in the year. Retail contacts generally report that employment is holding steady and wages continue to rise at a 3 to 5 percent pace; total compensation costs are increasing somewhat faster than wages. All respondents say that the labor market is very tight, but that the tightness is not causing generalized wage growth because of a shift in compensation packages toward performance-based incentives. Competition for employees is taking place via more liberal incentive packages rather than higher base pay. Contacts also state that the tight labor market is not constraining their operations. Consumer price inflation is reported to be almost nonexistent as competitive pressures continue to restrain prices. Two notable exceptions are lumber prices and hotel room rates, both of which are rising. Weakness in international markets continues to drive down vendor prices, so merchandise purchasing costs are either holding steady or declining. As a result, gross margins are said to be either increasing slightly or holding steady. The slower growth in tourism is attributed to two shifts: smaller increases in bookings from international tourists (primarily from Asia and Canada) and a drop in domestic leisure tourists. The explanation offered in both cases is the high cost of hotels in the Boston regional market. Retailers indicate that capital expansion plans have not changed since early this year. All contacts report significant expansion in the e-commerce area. Looking forward, most contacts say that economic fundamentals are strong and that they expect steady economic growth to continue for the next six months, barring major policy changes. Manufacturing and Related Services Most First District manufacturing contacts report that recent business is up relative to a year ago. At the high end, companies cite double-digit growth in demand for medical equipment and related services, pharmaceuticals, telecommunications equipment, integrated circuits, and automotive equipment. A paper company has returned to more normal operations after being severely hurt by the Asian crisis. A manufacturer of consumer items reports that industry-wide sales had slowed earlier as major retailers installed new inventory-management systems; sales at his company have now resumed growing although he believes retail inventories have permanently shrunk. A manufacturer of residential construction components reports that business was disrupted this spring because of temporary shortages of basic materials such as concrete, drywall, and insulation. On the other hand, the demand for machine tools continues to slump and makers of non-automotive transportation equipment indicate sharply deteriorating orders. Some capital goods suppliers have yet to see a turnaround in Asia. Manufacturers indicate that input costs remain mostly flat or down, in part because of pressures buyers are exerting on suppliers. However, some contacts mention they are paying more for construction-grade lumber, oil-based products, copper, and steel. Selling prices also are mostly flat or down, with the exception of increases for construction products and modest upturns from cyclical lows for paper and integrated circuits. Most contacts continue to report average pay increases in the range of 3 to 5 percent and steady or declining headcounts. However, at an expanding biotech firm, pay raises are said to be twice this norm and recruitment has become more challenging. A couple of other contacts report a shortage of manual labor, but they differ on whether wage pressures are increasing. By contrast, another employer, experiencing significant layoffs, reports that most continuing workers will get no raise at all while new hires receive very attractive compensation packages. Manufacturers report very mixed capital spending plans. At one extreme, some companies in troubled industries indicate they will spend almost nothing this year; at the other extreme, companies are doubling capital expenditures in order to become more efficient or expand capacity. Various manufacturers point to recovery in Asia as a positive factor in their outlook. However, half of the contacts cite idiosyncratic factors that will limit their revenue growth, and some now see a need for greater emphasis on controlling costs. Residential Real Estate The residential real estate market in New England remains active. Low inventory levels continue to be the major problem in most areas. Higher interest rates and a lack of inventory are blamed for a reported decline in home sales in Massachusetts in the first half of 1999 compared to the same period last year. Contacts view the drop as "leveling off" after a year of record sales, and predict that 1999 is going to be another strong year. Several respondents report price increases, driven in part by high demand for expensive second homes in Massachusetts, New Hampshire, and Vermont; they anticipate much slower price appreciation in the next few months. Hartford is said to be seeing slight, selective price appreciation in both the city and the suburbs. In New Hampshire, the average selling price in the second quarter exceeded its 1980s peak. Investment management First District investment management companies indicate they are continuing to add employees as their assets expand. Because of tightness in the labor market, they report raising entry-level salaries and continuing to pay referral bonuses to current workers. Return to top Summary New York