September 22, 1999 Federal Reserve Districts First District - Boston

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Business activity continues to expand moderately in the First District, although some contacts express more caution as they look forward than has been the case in recent reports. New England retailers indicate their sales grew solidly during the summer months and most manufacturers report single-digit increases in business. Wages are said to be rising in the 2.5 to 5 percent range. Prices may be rising slightly faster, on average, than at the last report, although many prices are said to be flat or down. Retail Most retail contacts report solid growth that met expectations during the summer (June through August). Discount retailers indicate their back-to-school period was stronger than expected, while consumer appliance retailers cite growth that was slower than expected. Employment is said to be holding steady. Every sector reports very tight labor markets, but for the most part, they are not constraining retailers' operations. One exception is the tourist industry, which was unable to find the usual seasonal help for the summer season. Retailers mostly say that base wages are increasing at a 3 to 5 percent rate, but overall compensation is increasing faster because performance-based incentives raise payroll in line with sales. Only in the tourist industry are wage premiums being offered to attract labor. Respondents say that consumer prices are holding steady, with two exceptions. Hotel room rates are reported to be rising at a 5 percent rate and discount retailers engaged in less price discounting than usual during the back-to-school season. Supplier prices are also said to be holding steady. Contacts report that modest capital expansions are planned over the next six months. Looking forward, respondents are more cautious in their outlook than they have been in recent reports, though still quite positive. Most expect continued strong growth through the remainder of the year, with a growth slowdown arriving in the first quarter of 2000. Manufacturing and Related Services Most First District manufacturing contacts report that recent business is up relative to a year ago, typically at a single-digit rate. Demand in the semiconductor, furniture, and home renovation industries is rising much more sharply than the norm. Producers of industrial machinery and parts indicate that sales remained sluggish in the second quarter but now seem to be improving. Sales of apparel textiles and supplies used by steel foundries continue to decline as a result of import competition, as do sales to the oil and gas drilling industry. Makers of selected consumer items report negative impacts as some of their retail chain customers lose market share. Manufacturers indicate mostly small changes in input costs. In contrast with previous reports, more contacts report increases than decreases. Selling prices are mostly flat or up a little from a year ago. However, some industrial machinery and office equipment prices are still falling. A seafood processor and a furniture maker, who raised their prices early in the year, have kept them stable in recent months. Most contacts report fairly steady headcounts. Average pay increases remain in the range of 2.5 to 5 percent, but respondents frequently mention accelerating costs for health insurance. Several companies say that they experienced unusual difficulties hiring and/or retaining production workers; one of these contacts indicates that the resulting wage pressures are problematic and another foresees higher pay increases after the current union contract expires. Otherwise, complaints about labor shortages are largely unchanged. To some degree, this is attributed to manufacturers' continuing efforts to introduce capital improvements that reduce either labor requirements or non-labor costs. Most manufacturers are fairly upbeat about future trends, citing continued positive momentum in the U.S. economy or their own success in controlling costs. Less than one-quarter of respondents expect to increase inventories appreciably as a hedge against Y2K-related delivery problems, although some others plan very selective increases. Mostly the ramp-up will entail foreign items, especially from Asian suppliers. Temporary Employment Temporary employment firms continue to expand in the First District; they are seeing increased business and opening new locations. All contacts report growth in overall revenue from a year earlier, ranging from "slightly up" to 20 percent. Tight labor markets are nonetheless constraining growth, with unfilled requisitions thought to represent substantial amounts of unattained revenue. Supply shortages persist for workers of all skill levels and firms have been forced to concentrate more effort on recruiting. Wages are rising modestly, on average, though firms cite double-digit increases for workers in more technical areas. For the most part, contacts relate that prices are rising in line with wages, yielding steady profit margins. Outlooks are extremely positive. Contacts have high expectations for the future performance of New England's staffing industry and most predict that demand will grow unabated. Commercial Real Estate The commercial real estate market in New England remains strong. Most contacts report rising prices and rental rates, and steady or declining vacancy rates. As in the past, the Boston office market is particularly strong, with downtown vacancy rates at 5 to 6 percent and rental rates rising steadily. Boston suburbs have higher vacancy rates and lower rental rates than downtown, but demand from high-tech companies remains strong. Vacancies are expected to remain low in Boston even after some planned office buildings are completed, because most of the new space is pre-leased. The rest of New England is also doing well. Although Hartford still reports the highest vacancy rates in the region, contacts say office vacancy rates have declined to around 15 percent and rental rates are up 3 to 4 percent from a year earlier. Contacts in New Hampshire and Providence report strong demand and rising rental rates for industrial and office space. Maine respondents report no change in vacancy or rental rates. Most contacts anticipate market conditions to remain strong. Nonbank Financial Services-Insurance All but one respondent at insurance companies reports ongoing or planned reductions in employment. These cutbacks are mostly associated with mergers and restructurings; some of them are being achieved through use of early retirement programs. Contacts note continued tightness of the labor market in the information technology and investments areas. Return to top Summary New York