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Federal Reserve Districts

First District - Boston

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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 retail contacts say that sales growth continues to exceed expectations. By exception, however, respondents in the discount retail sector report sales below last year, while a graphic supply firm indicates sales growth slowed in the last month.

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
First District manufacturing contacts report that recent business is up relative to a year earlier. About one-half of this month's respondents are experiencing low single-digit revenue growth, with the remaining half experiencing faster growth. The strongest areas are integrated circuits, furniture, construction-related products, small aircraft, publishing, biotech, and medical equipment. Companies reporting sluggish sales include makers of machinery, paper, defense hardware, and products for use by the oil and gas industry.

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
This is the first report incorporating material from conversations with firms producing software and information technology services. Most contacts say revenue growth is strong this year to date. However, some cite decreased demand for their products due to factors associated with the particular markets they serve, and some cite a temporary drop in demand earlier this year due to heavy spending on Y2K-related activities late last year. Both groups report that they continue to spend heavily on new product development, and often cite the need to keep up with changing technology.

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.

Temporary Employment
Expansion at First District contract employment firms continues, with overall revenues about 20 percent higher than year-earlier values. Most contacts are increasing their focus on the Internet for "e-cruiting." Contacts also report increased use of their services to transition temporary hires into permanent employees; client companies are able to "test drive" these workers and then recruit them for long-term positions. Recent college graduates are providing a temporary inflow of new help into a very tight labor market, but according to one source, "most students were hired even before they left their schools." Wages are up 5 to 10 percent from year-earlier, and Internet workers are receiving even greater increases. Prices are rising in line with wages, with no resistance from clients. "They have no choice. As long as you can provide quality, companies will pay anything." Staffing firms retain a very upbeat outlook.

Commercial Real Estate
Commercial real estate markets in New England are doing well. The Boston area continues to be exceptional. Vacancy rates in the downtown office market are extremely low and suburban demand has been spurred by companies leaving the more expensive downtown area. High demand coupled with lack of new construction has created "tremendous" pressure on downtown rental rates. Rental rates in the suburbs have also increased somewhat. Contacts anticipate a slight increase in vacancy rates in the next two years, after some new office construction is completed.

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.

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Last update: June 14, 2000