August 9, 2000 Federal Reserve Districts First District - Boston

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Economic growth continues in the First District although, as noted in the June report, the pace of expansion appears to be slowing somewhat from earlier in the year. A majority of the New England retailers contacted in July report sales growth at or above expectations in recent months. Most manufacturers say business is strong; some are seeing rapid growth, while others report demand is holding at a high level. Labor markets remain tight. While both manufacturers and retailers say selected input costs are rising, they are passing very little on to customers, largely because of offsetting cost savings. Retail Retail contacts in the First District say that sales continue to grow, although they are seeing some evidence of a slowdown. Sales growth was at or above expectations in the building materials, household furniture, and office supply sectors, but below expectations for contacts selling hardware and apparel. Respondents say that inventories are at desired levels and head counts are mostly holding steady. Labor shortages have reportedly become somewhat more severe, with contacts increasingly resorting to wage increases in order to retain critical help. Wages are reported to be growing at a 4 to 5 percent rate, up from the 3 to 5 percent range reported over the past couple of years. Most retail contacts say that they are not raising selling prices and that increases in vendor prices are only sporadic. Exceptions to generally stable prices include ongoing declines in prices of technology products and a reported 30 to 40 percent drop in lumber prices from year-earlier. All contacts say that higher fuel prices are adding to costs in the distribution chain, but that profit margins are either holding steady or rising slightly because of productivity improvements. A majority of retail respondents plan some modest expansion of their operations over the next six months. Most contacts expect a slowdown in the rate of economic growth during the second half of calendar year 2000; one is concerned about a recession in 2001. Manufacturing and Related Services Most First District manufacturing contacts report that recent business is up relative to a year earlier. Some capital goods producers report very rapid growth in sales or orders as a result of rising demand for semiconductors, computer systems, transportation equipment, and medical equipment. Several note that they or their suppliers face capacity constraints for certain products. Manufacturers of automotive parts and construction-related products indicate that business remains strong, although in some cases production levels are holding steady or dipping slightly. A furniture manufacturer continues to expect double-digit revenue growth, albeit at a slightly slower rate than in the recent past. Respondents from nondurables sectors such as food and paper products mostly report that demand is steady compared to a year ago. A variety of exporters note particularly robust sales growth in Asian markets. Most manufacturers cite examples of higher input costs--especially for energy, metals, and furniture-grade lumber--but these are said to be resulting in only selective increases in selling prices. Some companies have offset inflationary pressures by negotiating volume discounts with their suppliers, making expanded use of electronic purchasing, or shifting production to foreign locations. Others say that competitive pressures limit their ability to pass through cost increases. Contacted manufacturers report limited hiring, except those with very rapid sales growth, new product introductions, or high turnover. Average pay increases are typically 3 to 4 percent, but higher at some companies making intensive use of high-end technical workers. In addition, some employers of lower-skilled factory workers mention that greater hiring expenses, out-of-cycle raises, and expanded shift differentials have boosted "true" wage costs 6 to 10 percent from a year ago. In discussing future prospects, many manufacturers cite reasons that their industry or the U.S. economy will grow more slowly in the coming twelve months. Nevertheless, most are quite upbeat about their own companies' prospects, at least through the end of this year. Insurance Restructuring of the insurance industry continues, as acquisitions, sales of divisions, and demutualization transform many companies. As a result, underlying trends in employment and revenue are hard to discern. Some contacts report employment reductions as operations are rationalized. Several spoke of competitive pressures on pricing. Some contacts note difficulty filling information technology and other specialized positions, but few complain of labor market pressures. Salaries generally are increasing at an annual rate of 4 to 5 percent. Although most companies do not think demand for their services would be strongly affected by a possible slowing of economic growth, two contacts express concern regarding increased default risk on corporate bonds they hold. Residential Real Estate Residential real estate markets in New England remain strong. Respondents continue to complain about lack of inventory throughout the region. Most contacts report that brokers have more prospective buyers than listings to show to them. However, a prolonged period of price increases combined with high interest rates has discouraged some potential buyers. Multiple offers and bids above the list price, relatively frequent last year, have almost disappeared, indicating that demand has "cooled off somewhat" and the market has "lost its momentum." In Massachusetts this year, the number of sales has been lower every month than in the same month in 1999. The changes have not been uniform, however: According to one contact, the number of "high-end" sales (priced over $500,000) in the first quarter was 25 percent higher than in first quarter 1999, while the number of "low-end" sales (below $300,000) was 12 percent lower. Partly because of the change in mix, the average price of homes sold in Massachusetts increased 18 percent from first quarter 1999 to first quarter 2000. Prices rose more modestly in Rhode Island, Maine, and Vermont, with greater appreciation at the low end of the market than at the high end. New construction is very active in Rhode Island and Connecticut, although land is in short supply in desirable communities. Return to top Summary New York