January 22, 1997 Federal Reserve Districts First District - Boston

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The First District economy continues to expand at a moderate pace. Retailers say sales in the holiday period were modestly higher than a year earlier and mostly in line with their expectations. Over half the manufacturing contacts report rising or unchanged revenues. Commercial real estate markets are fairly stable, with activity more robust in Massachusetts than elsewhere in New England. Insurance company results vary among products. Prices of manufactured goods are said to be generally level, although manufacturers report paper prices are down sharply, while prices of selected other materials have risen modestly; some manufacturers' selling prices, largely for certain business services and consumer products, are also up modestly. Retailers also say most prices are stable, but they cite price increases for high-end apparel and tourism, and significant discounting for low- to mid-range apparel and appliances. Retail Most contacts in the retail sector saw a modest increase in sales for the fourth quarter that was in line with expectations. As a result, their inventories are right on track, with no over- or under-stocking reported. Some sectors were stronger than expected (building materials, apparel, food, and tourism). Strong apparel sales, however, are attributed in part to significant price discounting in the low to middle ranges. Sales of appliances, personal computers, and consumer electronics declined in the quarter, but in line with expectations. Respondents expect a continuation of modest sales growth through the first half of 1997. Employment is said to be increasing in line with consumer spending and this steady growth is expected through 1997. Wages are reported to have risen slightly in the last quarter and this trend is also expected to continue. All respondents indicate that competitive pressures are constraining their ability to raise prices, even with increased demand. Costs are stable, so profit margins are generally holding. However, some sectors (low- to middle-range apparel and appliances) report significant price discounting and lower profit margins. Only two sectors (high-end apparel and tourism) are reporting price increases on account of higher demand, and these increases are characterized as a recovery of ground lost to discounting earlier in the year; they expect competition to constrain further price increases. No contacts except those in tourism plan to expand capital significantly in 1997. Overall, retail respondents see modest and sustainable growth continuing through 1997. Manufacturing Half of the First District manufacturers contacted have experienced revenue gains from a year ago. Substantial increases are reported for innovative technology products, furniture, selected consumer items, and some business services provided by manufacturers. Revenues have been flat or declining for the remaining half of the sample. Paper prices are down sharply as a result of excess capacity in the industry. Intense competition has resulted in declining business for some automotive suppliers. Most contacts report that materials prices have been flat or declining. In some cases, this is due to more aggressive dealings with suppliers or the appreciation of the dollar relative to the yen. Manufacturers mention small to moderate increases in the cost of plastic resins, gelatin, abrasives, and furniture-grade maple. Selling prices are reported to be stable or rising up to 3 percent. The increases are largely for business services and consumer products. Manufacturers do not anticipate much change in overall employment levels in 1997. Demand is rising for professional, sales, and services employees, while productivity gains are limiting the need for production workers. Most contacts indicate pay increases of 2 to 4 percent in 1996, with similar raises projected for 1997. Compensation packages are escalating more for high tech workers and some managers. Companies report aggressive competition to hire hardware and software engineers. Health care and other benefits do not appear to be creating much, if any, cost pressure, especially with the continued adoption of managed-care health plans. Most manufacturers expect a positive macroeconomic environment in 1997, although some mention a stock market correction or consumer indebtedness as possible sources of weakness. One-half of the respondents have aggressive capital spending plans. Commercial Real Estate The commercial real estate market in New England has not changed much during the last quarter. Massachusetts continues doing extremely well, Maine is still relatively weak, and activity levels in the other states in the region remain between those two. Massachusetts has experienced a significant increase in demand for commercial space, especially in the Greater Boston area. Since there has been little new construction, vacancy rates are down and prices are rising. High prices for downtown office space have induced many new companies to locate in the suburbs. While prices have almost reached their 1980s levels, banks' reluctance to lend for real estate is said to have limited speculative construction. Outside Massachusetts, market conditions are mixed. Some sectors are seeing declining vacancy rates and increasing prices, but others still have high levels of inventory. Retail real estate markets have been strong in most places, mainly due to the mild winter and a successful holiday season. Contacts report no major new construction projects in their states. Most respondents are optimistic about the outlook, anticipating steady prices and decreasing vacancy rates during the coming quarter. Nonbank Financial Services Respondents at insurance companies report continued weak sales of life insurance in the fourth quarter and strong sales of mutual funds and variable annuities. Employment moved down slightly in the fourth quarter. Consolidations in the insurance industry are expected to continue in 1997, contributing to further reductions in employment. Return to top Summary New York