December 8, 1999 Federal Reserve Districts First District - Boston

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The First District economy continues to expand at a moderate pace. Most contacts in the retail and manufacturing sectors report rising revenues and steady headcounts. While materials costs and vendor prices are generally holding steady, wages are rising and some retailers, manufacturers, and temporary employment firms are obtaining higher selling prices. Retail Most retail contacts report strong growth in the mid to upper single-digit range--meeting expectations for the fall period (August through early November). While sellers of furniture, consumer electronics, and general retail (both upscale and discount) cite solid growth, a major exception is construction supply retailers who say sales have been flat on a month-to-month basis over the past four months. Permanent employment is said to be holding steady. Seasonal hiring has been difficult because of tight labor markets, but for the most part these difficulties are not impinging on retailers' operations. Retailers report that base wages are increasing at a 4 to 7 percent rate, but performance-based incentive plans are not generally being altered in response to the tight labor market. Both upscale and discount general retailers report some increases in selling prices; while list prices are holding steady, they are undertaking less discounting than in the recent past. As a result, profit margins are up in these sectors. Contacts selling furniture, by contrast, say that prices, costs, and margins are holding steady. Respondents report modest plans for capital expansion over the next six months. Most contacts say that the economy is currently very strong and they expect a continuation of strong sales growth through the Christmas holiday season. Looking beyond the holiday season, retailers are cautiously optimistic, with some expecting consumer spending to moderate 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. Revenue increases typically are in the single digits, although makers of furniture, pharmaceuticals, and specialty instruments report strong gains. Manufacturers of industrial equipment, machine tools, and basic electrical products are being hurt by sluggish demand and severe competition. A firm that produces automotive parts and another that produces paper products report an upward blip in business attributable to Y2K. However, a provider of information systems says that customers in industries such as finance and accounting are requesting deferral of major installations until early 2000. A majority of the manufacturers contacted indicate that materials costs are flat; a few mention having long-term contracts. Some others have experienced selective increases but express little concern because they can pass them on or offset them. By exception, a couple of firms making heavy use of paper indicate negative impacts from continuing cost increases. Many manufacturers indicate that their selling prices remain unchanged. Some firms in the paper and publishing industries note price increases, mostly modest. Makers of machinery and equipment tend to report continuing downward pressures, prompting some to give further consideration to shifting production to foreign locations. Most respondents report steady headcounts. Many indicate that labor markets remain tight, with some contacts noting increased pay pressures or production constraints. For example, a couple of contacts indicate that turnover has increased and salary pressures are rising as a result of competition for employees on the part of Internet-related and other start-up firms. Another expects to set up a foreign operation for technical projects because of labor shortages domestically. Reported health insurance cost increases for 2000 are mostly in the double digits, higher than in recent years. About one-third of the manufacturers contacted express optimism about revenue growth prospects in 2000. The remaining firms are more cautious and generally expect to face increasing challenges in controlling costs. Several respondents indicate that consolidation on the part of customers is likely to constrain prices and demand for their products. Temporary Employment First District temporary employment firms continue to expand at a brisk pace. Overall revenues have increased between 10 and 20 percent from a year ago, and one firm cites over 50 percent growth for the year. High tech workers, including e-business professionals and Internet programmers, remain in high demand with many companies looking to staffing firms to fulfill all their permanent hire needs. On a year-over-year basis, wages have grown 5 to 10 percent on average and slightly more for technical workers. Contacts report that bill rates are rising in line with wages, yielding steady profit margins. Recognizing how difficult it is to find workers in the tight labor market, clients are no longer resisting price increases. Looking forward, staffing firms in New England are optimistic; they expect a rise in computer-related projects at the beginning of next year. Commercial Real Estate Commercial real estate markets in New England are largely unchanged from last quarter. Boston is still very strong, with office vacancy rates around 5 to 6 percent downtown and twice as high in the suburbs. Retail and hotel markets in Boston are robust as well. The Hartford market continues to lag. Hartford office vacancy rates are three times as high as those in downtown Boston, but contacts say they are dropping slightly and rental rates are gradually rising. Other parts of New England are doing very well. As in the past, southern New Hampshire and southern Maine are closely linked to the Boston market. Burlington, Vermont, and southern Connecticut are booming. Contacts do not anticipate major changes before next spring. Nonbank Financial Services-Insurance Continued restructuring in the insurance industry is resulting in employment reductions at many companies. Some firms have lost jobs by selling a line of business while others report staffing reductions associated with the elimination of redundant positions following the acquisition of a unit from another company. Sales trends are mixed, with some companies reporting rising revenue and others reporting revenue declines. Some contacts say that competition has left little room for increases in premiums. Respondents generally report upcoming annual merit salary increases in the 3 to 4 percent range. Information technology (IT) professionals remain in high demand, and are generally expected to receive larger than average merit increases or to benefit from special compensation programs. However, insurers report some indications that pressures in the IT labor market may be lessening. One contact notes that turnover rates among IT workers have dropped, another reports no compensation pressures for IT staff, and two others say they have no trouble hiring IT workers. Return to top Summary New York