June 14, 2000
Federal Reserve Districts
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Economic activity in the First District continues at a high level. Almost all of the New England businesses contacted this time have seen increases in revenues or sales from a year earlier, although some cite signs of slower growth. Price inflation remains limited. Contacts are unanimous in saying that labor markets are tight; while increases in base wages for most employees remain in the 2 to 5 percent range, technical personnel and others in short supply are seeing bigger raises.
Most respondents report steady employment levels, although a lumber yard and contacts in the tourist industry are seeing employment levels erode because job leavers are running ahead of new hires. All contacts say that hiring is increasingly difficult because of very tight labor market conditions. Most merchants continue to report wage increases in the 3 to 5 percent range. However, in the tourist industry, wage offers to seasonal help are said to be running 20 to 30 percent above normal levels.
Most respondents say retail prices are generally holding steady. By exception, one sector is raising prices less than 4 percent and hotel room rates are increasing at a 5 to 7 percent pace. Profit margins are said to be holding steady, with non-labor cost efficiencies offsetting wage inflation.
Merchants contacted this time plan only modest expansions of operations over the next few months. Respondents expect relatively strong economic growth to continue through the remainder of 2000. Construction material suppliers, for example, report that building contractors do not expect interest rate hikes to affect their businesses until late in the year.
Manufacturing and Related Services
Materials costs are largely flat, although some manufacturers mention increases for fuel and other oil-based products, pulp and paper, wood, and metals. Selling prices are mostly flat, although there are scattered reports of modestly higher prices. Respondents from the paper, printing, and some non-consumer goods industries indicate that their margins are under pressure as a result of intense competition and their customers' price-sensitivity or Internet-based purchasing.
About three-quarters of the contacted manufacturers report that employment levels are flat or down slightly; the remainder report single-digit increases. Most contacts are not increasing their capital expenditures this year, in part reflecting heavy past investments. Two-thirds of the firms report average pay increases in the range of 2 to 4 percent. Those reporting greater average pay increases (of up to 10 percent) tend to make intensive use of technical personnel or be located in areas of extremely low unemployment. Some companies with modest wage and salary growth report paying sharply higher rates for health coverage. Most contacts categorize labor markets as very tight and indicate they are having difficulties filling vacancies. Sales, engineering and science, information technology, and entry-level manufacturing positions are reported to be particularly challenging to fill.
Most manufacturers are at least cautiously optimistic about their business prospects, especially those developing new products. About half of the respondents believe their revenue growth may be constrained this year because of shortages of labor or plant capacity. In addition, many mention that rising interest rates pose downside business risks or added costs.
Software and Information Technology Services
Most respondents are increasing employment, although some report small decreases. Many contacts indicate that high turnover is a problem, especially among younger employees. However, turnover rates generally seem to be stable. Respondents at established software companies report difficulties in competing with the compensation packages offered by "dot coms." Average salary increases at most companies are in the 6 to 10 percent range. Salary increases tend to be higher for technical employees than for non-technical employees, and higher at firms located close to Boston.
Commercial Real Estate
Hartford contacts report high levels of activity and a gradual decline in office vacancy rates, which are now around 14 percent. In Rhode Island, new construction is planned in suburban Providence, where office vacancy rates are low. Rental rates have increased somewhat in downtown Providence, while holding steady in the suburbs. Maine contacts report unchanged vacancy and rental rates in the office market and a weak retail market, with several empty stores in downtown Portland.