August 11, 1999
Federal Reserve Districts
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Economic activity in the First District continues its expansion. Area manufacturers report positive results more consistently than they did earlier in the year and retailers say sales growth is still strong. Most employers indicate labor markets are tight, but general wage increases remain in the 3 to 5 percent range. With limited exceptions, prices are generally level or down.
Retail contacts generally report that employment is holding steady and wages continue to rise at a 3 to 5 percent pace; total compensation costs are increasing somewhat faster than wages. All respondents say that the labor market is very tight, but that the tightness is not causing generalized wage growth because of a shift in compensation packages toward performance-based incentives. Competition for employees is taking place via more liberal incentive packages rather than higher base pay. Contacts also state that the tight labor market is not constraining their operations.
Consumer price inflation is reported to be almost nonexistent as competitive pressures continue to restrain prices. Two notable exceptions are lumber prices and hotel room rates, both of which are rising. Weakness in international markets continues to drive down vendor prices, so merchandise purchasing costs are either holding steady or declining. As a result, gross margins are said to be either increasing slightly or holding steady.
The slower growth in tourism is attributed to two shifts: smaller increases in bookings from international tourists (primarily from Asia and Canada) and a drop in domestic leisure tourists. The explanation offered in both cases is the high cost of hotels in the Boston regional market.
Retailers indicate that capital expansion plans have not changed since early this year. All contacts report significant expansion in the e-commerce area. Looking forward, most contacts say that economic fundamentals are strong and that they expect steady economic growth to continue for the next six months, barring major policy changes.
Manufacturing and Related Services
Manufacturers indicate that input costs remain mostly flat or down, in part because of pressures buyers are exerting on suppliers. However, some contacts mention they are paying more for construction-grade lumber, oil-based products, copper, and steel. Selling prices also are mostly flat or down, with the exception of increases for construction products and modest upturns from cyclical lows for paper and integrated circuits.
Most contacts continue to report average pay increases in the range of 3 to 5 percent and steady or declining headcounts. However, at an expanding biotech firm, pay raises are said to be twice this norm and recruitment has become more challenging. A couple of other contacts report a shortage of manual labor, but they differ on whether wage pressures are increasing. By contrast, another employer, experiencing significant layoffs, reports that most continuing workers will get no raise at all while new hires receive very attractive compensation packages.
Manufacturers report very mixed capital spending plans. At one extreme, some companies in troubled industries indicate they will spend almost nothing this year; at the other extreme, companies are doubling capital expenditures in order to become more efficient or expand capacity.
Various manufacturers point to recovery in Asia as a positive factor in their outlook. However, half of the contacts cite idiosyncratic factors that will limit their revenue growth, and some now see a need for greater emphasis on controlling costs.
Residential Real Estate