September 16, 1998 Federal Reserve Districts First District - Boston

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Business contacts in the First District continue to report growth. Retailers and temporary employment firms are the most upbeat, although most respondents in manufacturing and the insurance industry also say their revenues are expanding. Prices are generally level or declining. Labor markets in New England remain very tight, and base wage increases range from 2 to 6 percent. Respondents across industries express increased uncertainty about the outlook for 1999. Retail Most retail contacts report strong sales growth in recent months compared to a year earlier, generally above expectations. Sectors of strength were general retail, consumer electronics, home furnishings, and building materials. Men's casual wear is said to be weak, but the discount retail sector has rebounded somewhat. Looking forward, retailers expect strong sales growth to continue for the remainder of the year but they express some concern about the outlook for 1999 and beyond. Their uncertainty centers on possible fallout from turmoil in international financial markets and on domestic consumer response to recent stock market declines. Employment is reported to be holding steady on a same-store basis. Retailers say that labor markets are very tight: Those hiring for replacement are seeing a decline in worker quality; those that are expanding find worker shortages impinging on their expansion plans; general retailers expect this winter's seasonal hiring to be very difficult. Wages are reported to be increasing at a 3 to 6 percent rate. Most respondents report that competitive pressures are continuing to keep price inflation in check. Consumer prices are said to be either holding steady or declining slightly, while some purchase prices -- for lumber, apparel, and consumer appliances -- are reported to be declining significantly. Most contacts say profit margins are holding steady. Manufacturing Three-quarters of the First District manufacturers contacted indicate that recent business is up from a year ago. Most of these respondents cite percentage gains in the single digits, although orders for medical equipment are said to be rising strongly. Contacts report that business with General Motors has increased since the end of the strike but not as much as expected. Some equipment manufacturers cite other areas of recent softness, including computer circuitry and appliances. Contacts indicate that overall exports have been "okay" at best. Sales to Asia continue to fall off, and one manufacturer reports that its Russian business has "come to a stop." Overall, one-half of the manufacturers contacted expect some slippage in economic growth. Most respondents holding this view cite either foreign developments or the possibility of deteriorating consumer confidence stemming from declines in stock prices. Almost all manufacturers indicate that both their materials costs and their selling prices are stable or falling. The few increases in selling prices are in the range of 2 to 4 percent. Most contacts are making only modest changes in employment levels, but over half indicate difficulties filling some positions. These occupations include information technology, engineering, finance, equipment servicing, sales, and toolmaking. Overall pay is said to be rising 2 to 5 percent, but some contacts mention double-digit increases for certain categories. One-third of the manufacturers indicate that overall pay raises are now higher than before or will be higher in 1999 in order to stem turnover. Almost one-half of the respondents intend to reduce inventories. However, most plan sizable investments in fixed capital, primarily to increase operating efficiency or to develop capacity for new products. Temporary Employment Firms First District temporary employment firms continue to expand. Contacts report revenue growth between 10 and 20 percent over a year earlier. Markets for temporary and contract workers remain extremely tight across all industries and locations in the First District. Wages also continue to increase but the increases are said to be slowing down for less skilled occupations. Respondents are no longer feeling squeezed by their clients' resistance to price increases; one contact even reported that "pricing is the best it's been in a year." Outlooks for the next twelve months are mixed. Some respondents are optimistic, predicting continued solid performance. Others are more cautious, anticipating a softening of the regional economy toward the beginning of next year. Nonbank Financial Services Respondents at insurance companies report revenues in the second quarter of 1998 ranging from flat to 25 percent increases. Mutual funds and variable annuities were responsible for much of the growth in sales. Employment changes range from down 5 percent to up 4 percent. Most respondents note continued shortages of information systems personnel. In response, they are relying more on outside contractors, raising base salaries, and increasing the amounts and types of bonuses. A number of respondents also note a scarcity of accounting and investment management professionals. Return to top Summary New York