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Federal Reserve Districts

First District - Boston

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Solid economic growth continues in the First District. Retail contacts report sales in line with expectations, with the majority citing strong growth. Most respondents in the manufacturing sector are also seeing revenues rise well. While retailers say they are raising prices somewhat, supplier prices are flat to down with only a few exceptions. Wages are rising slowly, except for selected high tech occupations. Office rents are increasing, notably in the Boston area, as demand for commercial real estate outstrips fairly level supplies. Insurance company revenues rose in the first quarter, led by annuities and mutual funds.

Most contacts in the retail sector recorded fairly strong sales growth during the first quarter. The sales increases are said to be in line with expectations. Inventories are in line with sales. On the high end, both the building materials and tourism sectors report very strong growth. Building materials contacts cite 30 to 40 percent sales increases over the year; growth is expected to moderate over the next two quarters but still continue at a rapid pace. Office-related products and both discount and upper-end apparel report strong sales growth. In contrast, appliances and computers are seeing weak sales, but this too is said to be in line with expectations. Appliance retailers expect their sales to decline in the rest of the year, citing ongoing industry consolidation. A discount retail contact, which has been down in the last six months, is improving, with current sales growth slightly positive.

Unlike earlier in the year, many retailers now say increased demand is allowing them to raise prices, with corresponding improvements in profit margins. Most supplier prices are reported to be either holding steady or declining. The exception is lumber, for which prices are moving up.

Employment seems to be picking up in all sectors and employee turnover is increasing. With the exception of building materials stores, wages are reported to be holding steady. The building materials sector, with rapidly growing head counts, sees wage growth of 4 percent. Capital expansions also appear to be picking up, with only the discount retail sector lacking significant expansion plans. In summary, retailers see a strong economy and expect solid growth to continue during the next six months.

Two-thirds of First District manufacturing contacts report that recent business is solidly above year-earlier levels. Most of the remaining respondents indicate that sales are flat or up a little. One-quarter of the manufacturing contacts are facing capacity constraints. Strong gains are reported for biotech instruments, telecommunications and computer networking equipment, and some categories of electric utility equipment. Aircraft equipment sales are reported to be recovering, while home appliance, automotive equipment, and machine markets are softening after several strong years.

Most contacts report that materials costs are flat or down somewhat. Some contacts have avoided metals price increases by entering into long-term contracts. Selling prices also remain largely flat, although higher costs for hardwoods are putting upward pressure on furniture prices. Automakers reportedly are forcing lower prices and profitability onto equipment and parts manufacturers. Price trends for computer products vary considerably, depending on shifting demand for different technologies.

Most respondents report very little net change in their head counts over the past year. For firms seeking to hire workers, labor availability is generally viewed as adequate, except for skilled technical positions. Company-wide wage and salary growth is mostly in the range of 2� to 5 percent, but engineers and software specialists are receiving increases that are considerably higher. A Connecticut-based manufacturer notes that market conditions no longer allow the company to freeze pay.

Manufacturers generally anticipate reasonably good macroeconomic growth with little inflationary pressure for the remainder of 1997. Some express concerns about exchange rates or specific product lines.

Commercial Real Estate
The commercial real estate market in New England continues to improve. The Greater Boston area is doing especially well, with vacancy rates declining and rents increasing in all sectors. While demand from new and expanding firms continues growing, the supply remains constant. In particular, the office market is said to be very tight right now, with no large office space and very little developable land available, both downtown and in the suburbs. Even with increases in office rents, excess demand for space is forcing some firms to move farther out of the city. The retail and apartment markets are very strong as well. According to one contact, Boston has fully recovered from the downturn of the early 1990s.

Conditions in the rest of New England are mixed. Rhode Island is doing well and seems to be on its way to recovery. New Hampshire, Vermont, and Maine have seen minor changes. Parts of Connecticut are very strong, mainly southwestern Connecticut (as a result of New York's strong economy). However, the Hartford, New Bedford (MA), and Worcester (MA) areas are still doing poorly, with high vacancy rates in most sectors.

Nonbank Financial Services
Respondents at insurance companies report revenue increases ranging from 3 to 20 percent in the first quarter of 1997. Revenues are increasing the most in annuities and mutual funds and the least in traditional life insurance business. Employment at responding insurance companies was flat or down in the first quarter and is expected to continue on a downward trend because of downsizing and consolidations.

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Last update: May 7, 1997