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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. Sales and revenue gains are reported to be healthy, but manufacturers and retailers express concern about whether the current pace of activity is sustainable. Prices are said to be generally flat, although wage pressures are increasing in some submarkets. Contacts say the residential real estate market is performing well.

Most retail contacts report that sales continue to grow at a moderate pace in the current quarter. Areas of strength are building supplies, tourism, office and graphic reproduction supplies, and home furnishings, all of which are said to be growing at a 10 to 20 percent pace. Areas of weakness are apparel sales and discount retailing. Across the board, sales growth is said to be at or slightly above expectations, with inventories at desired levels.

Employment is reported to be either increasing moderately or holding steady. Contacts mention pockets of tightness in labor markets, most notably the faster-growing sectors. In these submarkets, significant wage premiums are being offered to attract labor from competitors. In contrast, contacts that are mainly hiring for normal turnover report little difficulty in attracting help. Wages are generally said to be increasing at a 3 to 5 percent annual rate.

Respondents indicate that most prices are holding steady because of an extremely competitive retail environment. The exception is tourism, where rates are rising to ration the short supply of hotel rooms. Materials costs are said to be unchanged. Contacts say that profit margins are either level or increasing slightly because of efficiency improvements that outweigh wage increases. The two exceptions are office/graphics supplies and tourism; hotels are realizing increases in profits as prices rise, while office supply stores report wage-driven declines in profitability.

Most contacts plan modest capital expansions for 1998. Looking forward, retailers expect moderate growth continuing through the first quarter of 1998. However, a significant minority of retailers mention the possibility of the stock market and international events negatively affecting growth prospects for next year.

Three-quarters of First District manufacturers contacted report that recent business is unchanged or up at a single-digit rate compared to a year ago. Most of the remaining firms cite revenue or order gains in the range of 10 to 20 percent. Although manufacturers are continuing to experience strong trends for furnishings, some computer products, and aircraft parts, a number of contacts are disappointed by recent demand for electrical, electronic, consumer, and medical goods. Contacts report a slowdown in Asian sales; demand generally continues to grow in other export markets, but revenues are down in dollar terms. Holiday sales in the U.S. are expected to be solid but not outstanding.

Manufacturers indicate that most materials costs are flat to down. However, high-grade lumber prices are considerably higher than a year ago and expected to increase further as a result of strong demand. Contacts are also paying higher prices for packaging, upholstery materials, and natural gas. Only one contact (a manufacturer of upscale furnishings) has implemented a meaningful increase in selling prices. The remainder report that selling prices are flat to down as a result of competition, resistance on the part of retail chains, or productivity gains. A sizeable minority express concern that competition will exert further downward pressure on prices.

With some exceptions, employment at respondent firms is holding steady. Manufacturers are experiencing very tight labor markets for information technology and engineering positions, as well as some shortages of production workers in rural areas. Average pay is said to be rising at a rate of 3 to 6 percent, with greater increases for some technically-oriented and senior professional categories.

On the whole, projections for 1998 are somewhat guarded. Some manufacturers foresee revenue growth in the low single digits. Others expect better results but most hasten to add that rates of growth are unlikely to match this year's performance.

Temporary Employment Firms
Expansion in the temporary employment industry continues. Most contacts report revenues to be growing 14 to 40 percent annually. Temp labor markets are said to be extremely tight across all industries and occupations, with the exception of low-skilled entry-level workers. However, respondents cite little or no effect on wage growth, which continues to range between 3 and 10 percent annually. Some contacts note their profit margins are being squeezed, primarily because of increasing price competition; others say prices are rising in line with wages. Many mid-size firms are merging or being acquired. Smaller agencies reportedly avoid competition with large "one-stop shopping" firms by specializing or operating as secondary vendors.

Residential Real Estate
The residential real estate market in New England is doing well. Contacts report active markets with moderate increases in sales and little, if any, price pressure. Relative to a year ago, third quarter sales were slightly lower in Vermont, but up in Connecticut and Massachusetts. Rhode Island and Maine experienced minor changes in sales. Only Massachusetts contacts report price increases for existing homes. Several respondents say existing homes are in short supply, but some also note excess supply of new homes. There has been little speculative new construction, even though high-priced new homes are selling well.

Nonbank Financial Services
In September and October of 1997, cash flows into mutual funds continued at a robust pace. Because of recent market volatility, October cash inflows were 19 percent below September's, but still 50 percent greater than in August. Latin America and Asia/Pacific funds report net cash outflows in the past two months. This cash is said to be flowing into domestic stock funds. Assets in Asia/Pacific funds have dropped by half since August because of cash outflows and the drop in their market value. Respondents at local investment management firms indicate that they are increasing employment because of the growing volume of business and plan to increase employment further during the rest of the year.

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Last update: December 3, 1997