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Federal Reserve Districts

First District - Boston

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The First District economy continues to expand at a moderate pace, with contacts in manufacturing, retailing, and insurance reporting revenue growth. Respondents say labor market tightness is confined to selected submarkets and is not translating into general wage acceleration; they cite wage and salary increases of 3 to 5 percent. Prices of inputs and finished goods reportedly remain stable, with only a few exceptions. A local forecasting group expects the region's rate of job growth to slow over the next couple of years, in line with the nation's.

Most retail contacts report that sales continue to grow reasonably well in the current quarter. Areas of strength are women's apparel, tourism, and office and graphic reproduction supplies. These sectors report growth in the 5 to 10 percent range, a deceleration from the 10 to 15 percent growth reported earlier this year. Areas of weakness continue to be men's and specialty apparel. Appliance contacts report high single-digit sales growth, reversing reports of declines earlier in the year, but they say this recovery may be attributable to significant consolidation of appliance retailers in New England rather than rebounding demand.

Employment is said to be either increasing modestly or holding steady, with headcounts rising where sales are strongest. Some respondents report pockets of tightness in labor markets, most notably in stores selling high-end apparel or office supplies and in low-skill areas related to tourism. Other contacts holding employment steady cite no difficulty in hiring for turnover. Even where labor markets are tight, wage inflation is not picking up; wage increases are in the 3 to 5 percent range.

Respondents report that prices are generally holding steady, although one seller of men's specialty apparel is reducing prices to move inventory. Most contacts say that profit margins are unchanged or increasing slightly, with the increases attributed to efficiency improvements such as better inventory control, automation, and purchasing efficiencies. With the exception of building materials, for which vendor prices are up about 3 percent, most contacts say that materials costs are also holding steady. Looking forward, retailers expect steady growth at a modest pace continuing through the first quarter of 1998.

Most of the First District manufacturers contacted report that recent revenues are up from a year ago, typically at a single-digit rate. Makers of aircraft parts and computer networking equipment are experiencing the most rapid growth. The semiconductor industry is reportedly ramping up production after its recent slump. Firms supplying automotive components are doing well, but one contact notes that U.S. automakers are sharply reducing new orders for capital goods from domestic suppliers. Some producers of consumer items indicate that sales are being limited by conservative stocking at retail. Many manufacturers are selling a rising share of their products overseas, although some say the strong dollar is holding down reported international revenues.

Most respondents report that, overall, both materials costs and selling prices continue to be essentially flat. Paper prices are firming somewhat, and paper product manufacturers have increased selling prices a little. A few contacts report small price increases associated with product improvements or strong demand in certain niches.

Employment trends vary widely. However, companies that have expanded or contracted noticeably over the past year now tend to report that their head counts are stabilizing. Manufacturers generally cite average wage and salary increases in the range of 3 to 5 percent, with strong upward pressure in computer-related occupations. On balance, contacts report that it is taking longer to fill openings in information systems, engineering, and accounting positions, especially in out-of-the-way locations.

Manufacturers mostly appear optimistic or at least hopeful that the coming year will see a continuation of current trends. Respondents selling innovative products and those tapping into growth markets are especially upbeat.

Commercial Real Estate
The commercial real estate market in New England is doing well. Contacts report high levels of activity in most areas, with generally lower vacancy rates and only small price increases. An exception is the Greater Boston area, where rental rates have increased significantly. Several contacts express surprise at the lack of new construction, given the high activity levels.

Conditions vary across the region, with a vacancy rate of 5 percent in the downtown Boston office market, and 25 percent in the Greater New Haven office market. After six months of little activity, Maine has reportedly picked up in the third quarter. Rhode Island is also doing well, particularly the industrial and suburban office markets. Conditions in Connecticut are mixed, although vacancy rates have declined slightly. Respondents are optimistic about the rest of the year, with most predicting some new construction "soon."

Nonbank Financial Services
Respondents at insurance companies report increases in revenue in the range of 10 to 20 percent in the third quarter of 1997 compared to the third quarter of 1996. New sales were due mostly to mutual funds, variable annuities and variable life insurance. Employment is increasing at the majority of respondents. Contacts note continued shortages of technology personnel. While most wages and salaries at insurance companies are rising at a 4 percent pace, compensation for computer programmers is up 8 to 10 percent.

The New England Economic Project (NEEP), a nonprofit forecasting group, released its semiannual five-year regional forecast in mid October. NEEP expects employment growth to slow from its current 2 percent annual pace, averaging 1.5 percent over the 1997-2001 forecast period. Services and wholesale and retail trade will continue to account for most of the region's job growth; manufacturing job losses will be very gradual. The regional unemployment rate is expected to deviate very little over the forecast horizon from its recent 4.0 to 4.5 percent range.

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Last update: October 29, 1997