September 17, 1997 Federal Reserve Districts First District - Boston

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The First District economy continues to expand steadily. Sales are rising at most retail, manufacturing, and temporary employment firms contacted. Meanwhile, investment management firms continue to see increases in assets under management, and residential real estate markets are doing well. Manufacturers and retailers say wages are rising 3 to 5 percent and prices are generally level. Retail Most retail contacts report that sales have been growing steadily in the current quarter, with inventories at desired levels. Areas of strength are apparel, toys, home furnishings, building materials, and office and graphic reproduction supplies, where respondents report sales growth rates of 10 to 15 percent, bettering expectations. Areas of weakness include appliances, discount retailing, and footwear. Employment is said to be either increasing or holding steady. Contacts that are increasing employment are staffing expanded operations. Most contacts report difficulty attracting help and a corresponding decline in available labor quality. Labor market tightness, however, is not translating into higher wages. Wages are said to be increasing at a 3 to 5 percent annual pace. Contacts say that they are not offering wage premiums to attract labor, with the exception of computer systems professionals. Respondents report that competitive pressures continue to constrain their ability to raise prices. As a result, prices are either level or, in a few cases (discount retailing, appliances, and footwear), declining. Materials costs are holding steady. Most contacts say that profit margins are unchanged or increasing slightly. Increases in profit margins are attributed to efficiency improvements such as better inventory control, automation, and purchasing efficiencies. All respondents say that capital expansions are currently under way and will continue for many months. Looking forward, retailers expect steady, sustainable growth with low inflation through the first quarter of 1998. Manufacturing Three-quarters of the First District manufacturers contacted report that recent revenues are up from a year ago. Aircraft parts, computers and other business equipment, and furniture are showing the most rapid growth. Only a few contacts say that inventories are excessive (or insufficient) relative to the volume of business. However, some have adopted inventory management practices or production technologies that result in ongoing reductions in stocks. Most respondents report that, overall, both materials costs and selling prices are essentially flat. Plastic resin prices have risen dramatically, however, and minor increases are reported for chemicals, metals, and cotton. Paper and furniture-grade lumber prices are said to have been more stable in recent months following double-digit decreases and increases, respectively. Domestic employment has increased in the range of 4 to 7 percent from a year ago at one-third of the manufacturers contacted. Most others report little change in headcount. Manufacturers generally cite average wage and salary increases in the range of 3 to 5 percent. Pay increases are greater for specialized technical and marketing occupations and are being augmented by bonuses and stock options at some companies. About one-quarter of the manufacturing contacts report capacity constraints and about one-half are making heavy capital investments this year. Investment projects are related to product introductions and productivity enhancements in addition to capacity expansions. Most of the remaining respondents describe capital spending as flat or normal. Manufacturers generally appear sanguine about future trends. No contacts detect signs of a noteworthy deterioration in business over the next six months, and many are upbeat about opportunities to market their products or to control costs. Temporary Employment Firms Temporary employment firms in the First District continue to expand. Most contacts report revenues growing smartly, from the upper single digits to 50 percent annually. Respondents that specialize in technical areas are expanding more quickly than clerical and administrative placement firms. Skilled temporary labor continues to be in short supply; wages are up 5 to 20 percent from year-earlier levels. While a shortage of talent exists across all industries, the gap between supply and demand is greatest for computer programmers, software engineers, and information systems developers. Personnel supply contacts no longer report squeezed profit margins, as the tight labor markets have forced their customers to accept higher prices. Residential Real Estate The residential real estate market in New England is strong, although conditions vary among the states and even among regions within each state. The number of sales in New Hampshire and Rhode Island has increased over the last year, although contacts say some areas in New Hampshire are still doing poorly. Sales in Maine have not changed significantly, but Maine is the only state reporting price increases. Massachusetts and parts of Connecticut are doing very well. Even within Massachusetts and Connecticut, however, desirable suburbs are doing significantly better than other communities. While sales of single-family homes in more expensive suburbs are quite strong, condominium sales are generally unchanged, and every state has "pockets" with stagnant sales. Prices have increased slightly in some markets, although price increases are not mentioned as a major concern. Most contacts anticipate home sales will remain steady with mild price increases in the near future. Nonbank Financial Services Investment management firms report that assets under management continued to increase this summer. Total industry assets increased 3 percent in June, reaching $4 trillion, and 6 percent in July. In both months, the bulk of new sales went to stock funds. All the First District firms contacted are increasing employment. The labor market in Boston is said to be tight, particularly for customer service and technology personnel, as well as for analysts and portfolio managers. As compensation rises, most of the increases are reportedly taking the form of bonuses and other incentive pay, not base salaries. Return to top Summary New York