March 18, 1998 Federal Reserve Districts First District - Boston

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The First District economy continues to expand. Retail activity has picked up recently in many sectors. Manufacturers' results are mixed, with some contacts experiencing accelerating revenue growth and about half seeing no increase in sales or orders from a year ago. Many respondents report hiring difficulties, and contacts in the temporary employment industry say their revenues are expanding at double-digit rates. Prices are said to be generally steady. Residential real estate markets are doing well. Retail and Tourism Most retail contacts report that sales are growing at a healthy pace, with the growth rate higher now than in the second half of 1997. This unexpected strength in sales is not causing upward revisions of 1998 growth projections, already strong at 4 to 7 percent. Faster-growing sectors are office and graphics supplies, tourism, consumer electronics, home furnishings, building materials, and health and beauty aids. Areas of weakness are hardware, automotive parts, and apparel. Employment is said to be either increasing moderately or holding steady. Half the contacts report tightness in labor markets and corresponding difficulty finding, attracting, and retaining employees. Shortages are reportedly concentrated in high-skill areas; low-skill retail help is ample except in selected small geographic pockets. In most sectors, wage growth has picked up somewhat and is now running at a 4 to 6 percent annual rate. By contrast, in sectors growing only moderately, wages are said to be increasing only 2 to 3 percent. With one exception, respondents say that prices are holding steady. The exception is tourism, where a continuing shortage of hotel rooms in the Boston area is causing room rates to rise. Vendor prices are also holding steady or, in some cases (lumber and fuel), declining dramatically. Profit margins are increasing slightly. Except for "aggressive expansion" in the tourism sector, contacts indicate they plan to expand capital budgets modestly in 1998. Manufacturing About one-half of First District manufacturing contacts report that recent business is up from a year ago, with strong and/or accelerating growth for aircraft and heavy truck parts, furniture, and equipment servicing. The remaining firms mostly report that overall sales or orders are steady from a year ago. Some exporters report sharp declines in Asian revenues, while others expect that a slowdown will become noticeable by mid-year. Several respondents express concern that the strong dollar is impeding export growth generally, even beyond Asia. Manufacturers indicate that most materials costs are flat to down compared to a year ago. They cite reduced prices for copper and oil in particular, as well as greater bargains on components from Asia. Contacts mention that furniture materials costs are rising, however, along with travel costs. Selling prices are largely stable because of flat to declining supply prices, improved production efficiencies, competitive pressures, and retailer resistance. One maker of machine tools recently implemented a price increase, although another lamented that industry prices are far below normal levels because of intense global competition. Computer prices are falling sharply. Employment trends vary widely among the manufacturers contacted, with roughly one-third implementing layoffs, one-third hiring at double-digit annual rates, and the remaining one-third somewhere in between. Almost all respondents report some hiring difficulties, usually for selected high-skill jobs. Most contacts indicate that average pay is rising 3 to 5 percent. Firms differ in the degree to which they are adjusting compensation packages to deal with labor shortages. In addition, one-half of those facing labor shortages are outsourcing more work and one-quarter report passing up some business opportunities. Temporary Employment Firms Temporary employment firms in the First District continue to expand at a brisk pace. Labor markets are said to be extremely tight across all client industries and First District locations; wage growth for temps has reportedly risen to 15 percent annually. Demand continues to far outpace supply for more highly skilled workers, from computer programmers to clerical workers with knowledge of multiple software packages. Contacts foresee continued double-digit growth in revenues over the next year. Residential Real Estate The residential real estate market in New England is strong. Most contacts report active markets and more sales than last year. Activity has risen most markedly in Massachusetts and New Hampshire. The number of sales increased also in Connecticut and Rhode Island, while the number of sales in Maine was stable until February, when it rose markedly. Increased activity has not generated price increases except in New Hampshire and Massachusetts, where high demand and extremely low inventory levels have caused prices to rise 4 to 9 percent from a year ago. Mild winter weather has allowed Massachusetts builders to work at full capacity during the past few months, and some spec construction is being undertaken. Contacts in other states report that it is still a "buyers' market," although the level of inventory is shrinking and price increases are expected later this year. Contacts are optimistic, however, and stated that unless interest rates go up, the market will remain strong for the next few months. Nonbank Financial Institutions Nationwide cash flows into stock and bond mutual funds were 23 percent higher in January 1998 than in December of 1997. Stock funds experienced moderate outflows which were more than offset by the doubling of inflows into bond funds. The largest inflows were into high yield bond funds, while international stock funds experienced their fourth consecutive month of outflows. Respondents at investment management firms indicate that they have increased employment in recent months and plan to increase employment further, although these increases have been hampered by labor shortages. All respondents report significant difficulty hiring and retaining information technology personnel. Most contacts are implementing targeted wage increases and hiring bonuses for workers in short supply; many are also broadening their recruitment techniques. Return to top Summary New York