December 6, 2000 Federal Reserve Districts First District - Boston

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The New England economy continues to grow, but contacts are expressing more widespread caution now than they did earlier. Several First District retailers say sales slowed in recent weeks; some manufacturers cite signs of emerging weakness. Labor markets remain very tight, although almost all contacts say they are slightly looser than earlier in the year. Prices are said to be largely stable. Retail Most retail contacts in the First District, including discount retailers, upscale retailers, and stores selling consumer electronics, office supplies, computers, and building materials, report robust sales growth from August through September, but flat or declining sales in the October through mid-November period. Indeed, a few contacts said that sales "fell off a cliff" recently and that they don't know why. The tourist sector, by exception, continues to exhibit robust growth. Employment patterns are more varied across sectors than in past reports. Discount retailers and the building materials sector are consolidating operations, with the former reporting layoffs. Employment is said to be holding steady at contacts in the consumer electronics and upscale retail sectors. Office supply stores and the tourism sector are continuing to add employees. Labor shortages appear to be abating except in the tourism sector. Wage rates continue to rise at a 3 to 6 percent pace. Most retail contacts report that selling prices are not rising and vendor price increases are only sporadic. One exception is ongoing increases in hotel room rates. Except for the office supply sector, profit margins are reported to be either holding steady or rising. Rising profit margins are said to result from productivity-enhancing new technologies. Looking forward, most retail contacts express uncertainty regarding the economic outlook. Most expect slower growth in the future, but are unsure as to the magnitude of the slowdown. In the near term, they are cautiously optimistic concerning holiday sales, but they expect sales growth to be slower than the exceptional holiday results of the last few years. Manufacturing and Related Services A slight majority of First District manufacturing contacts indicate that recent sales or orders are up relative to a year earlier. Business at the remaining firms is approximately even with year-ago levels. Regardless of overall trends to date, most respondents cite emerging weakness in selected product lines or a more defensive stance on the part of customers or competitors. Manufacturers selling to retail chains are at best cautiously optimistic about the holiday season; at worst, they cite evidence that their retail customers are wary of getting caught with excess inventories. Sellers of information systems and related products continue to experience growth but they indicate that their customers are becoming more hesitant in placing orders, particularly for pricey items. Contacts in the semiconductor industry say their orders continue to look strong; however, they are watching to see if the recent declines in high tech stock prices or sluggishness in some customer industries portend a downturn for them. A manufacturer of complex machinery reports a much improved order backlog, but is concerned about the ability of customers to continue to make timely payments. By contrast with these notes of caution, suppliers to the biopharmaceutical and transportation industries report that business remains strong and is accelerating in some cases. Manufacturers in the paper and textile industries express concern about recent increases in energy costs. Other respondents indicate that energy forms a relatively small fraction of costs and they cite few instances of other nonlabor input costs going up to any noteworthy degree. While makers of semiconductors and information systems report higher selling prices, most contacts are holding their selling prices steady. Office equipment manufacturers say competition has intensified downward pressure on prices. Reports concerning labor markets vary. Some respondents comment that salary pressures have eased or that labor availability has improved somewhat, and several are laying off employees. Three-fourths of contacts are giving average base pay raises of 2 to 5 percent. However, in some cases these contacts are absorbing much higher increases in health insurance costs or are paying out additional compensation to selected groups of employees. The remaining one-fourth are offering higher raises. For example, a couple of companies report that their growth is being impeded by more aggressive recruitment of their technical workers by competitor firms. They are responding with significant adjustments in salary structures as well as investments in automation tools or the establishment of remote sites. Software and Information Technology Services Software and IT respondents give mixed reports on the strength of demand. About one-third have continuing strong demand for their products or services; a second third report the beginnings of recovery after a significant period of lower demand; the final third report flat to slightly slowing demand. Almost all these contacts expect to enjoy high demand next year. One contact with currently flat demand expects next year to be the best in company history. Most contacts in the Boston area and New Hampshire report continuing tight labor markets, but one sees a slight easing of pressure due to the failure of some competitors. One Boston area company listed the labor market as the biggest obstacle to the company's growth. Temporary Employment All temporary employment contacts in New England report strong growth. Among those contacted, overall revenues grew an average of 10 percent from a year ago for firms specializing in administrative support staff and 20 percent for IT. Profit margins are unchanged for most contacts. Demand is strong for administrative support and accounting as well as IT workers. Most contacts are managing to maintain their fill rate despite a tight labor market. Contacts supplying IT workers indicate that dot-com failures are contributing to a slight easing in the tightness of the labor market by supplying laid-off workers and by discouraging workers at client companies from leaving for start-ups. Commercial Real Estate Despite a few signs of softening, commercial real estate markets in New England are still strong. In the Boston area, office vacancy rates remain extremely low, especially downtown and in Cambridge. Demand for office space remains very strong. As a result, rental rates are "going through the roof." The Boston suburbs are a little softer, but demand is strong here as well. High-tech companies reportedly still consider Boston a bargain compared to Silicon Valley. Contacts complain about "extreme shortages" of office space and apartments. High rental rates and lack of space in Boston have caused some companies to move their operations to southern New Hampshire, southern Vermont, and Rhode Island, putting upward pressure on office rents in those areas. Rhode Island contacts report that office and industrial vacancy rates in downtown Providence have dropped slightly, although they increased in the suburbs. A Maine contact notes a marked increase in retail vacancies in downtown Portland. Although Hartford has its lowest vacancy rate in a decade, it is still one of the weakest markets in the country. Contacts across the region expect to see small increases in vacancy rates in the coming year. Return to top Summary New York