January 21, 1998 Federal Reserve Districts First District - Boston

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The First District economy is strong. For manufacturers and retailers, sales are generally up, employment is level or rising, and prices are largely stable. Commercial real estate markets are more robust in Greater Boston than elsewhere in New England. Retail Most retail contacts report that sales grew at a moderate to strong pace in the fourth quarter, matching expectations for the period. Sectors of strength are office supplies, tourism, appliances, and mail-order apparel. Weakness is reported in only one sector: men's leisure wear. In all sectors, inventories are at desired levels. Looking forward, retail contacts expect sales growth in the 4 to 7 percent range for 1998, about on par with recent trends. Employment is said to be either increasing moderately or holding steady. Most contacts report that labor markets were tight during the holiday hiring period, with employers encountering difficulty in finding, attracting, and retaining employees. Permanent staff levels appear to be holding steady, with highly skilled computer programmers being the primary occupation with shortages. Among retailers reporting tight labor markets, half are offering wage premiums as one device to hire and retain help, although one contact said such premiums were ineffective. In general, wages are said to be increasing at a 3 to 5 percent annual rate, with selective premiums adding another 5 to 10 percent for specific individual employees. Most respondents report that prices are holding steady. The exception is tourism, where excess demand for hotel rooms in Greater Boston has led to significant price increases. Materials costs are also said to be holding steady, except for paper products, for which prices are rising. Half the contacts say profit margins are either level or increasing slightly. The other half report slight declines in margins, suggesting that rising wage costs may be more than offsetting productivity improvements. Most contacts have modest capital expansions planned for 1998. New England retailers are quite optimistic, expecting growth to continue at a healthy pace during the next six months. None of the contacts express concern that sales will slow as a result of the Asian financial crisis. Manufacturing Almost all First District manufacturing contacts report that recent business is up from a year ago, with about half reporting double-digit gains in sales or orders. The trends are particularly strong for aircraft parts, biotech products, telecommunications and computer-related equipment, sporting goods, and small tools. The majority of automotive parts suppliers contacted indicate that business is very robust, with some citing rising backlogs. For others in this industry, however, sales are declining . In addition, equipment makers serving overseas markets indicate that currency translation has resulted in weaker revenues. Contacts generally believe the U.S. economy remains in good shape, with several citing accelerating domestic demand for their products. Most exporters indicate that they have not yet felt a decline in sales volume as a result of the Asian crisis. However, they have downgraded their projections for sales to Asia and they expect to face stiffer competition from Asian firms in other markets. Manufacturers indicate that most materials costs are flat to down. Costs rose a little at the beginning of 1998 for some grades of paper but held steady for others. Travel costs are said to be increasing. Selling prices are largely stable. Manufacturers have implemented small increases for selected paper products and for fabricated metal products that are in short supply. Employment is holding steady at about three-quarters of the manufacturers contacted while increasing substantially at the remainder. Average pay is said to be rising at a rate of 3 to 6 percent. Manufacturers indicate that markets continue to be very tight for specialized technical and professional personnel, with double-digit pay increases in some categories such as engineering. A few report rising turnover or greater challenges in recruiting blue-collar workers, although most remain satisfied with availability. Many manufacturers expect to make heavy capital investments this year, in order to expand capacity or improve efficiency. Most of the remaining companies indicate a moderate need for plant and equipment. By exception, a large exporting firm is now scrutinizing capital expenditures more closely in anticipation of margin pressures. Commercial Real Estate Boston continues to lead the commercial real estate market in New England. All sectors of the Greater Boston market are strong. Vacancy rates are around 5 to 6 percent for office space and below 3 percent for retail space. During the past year, rental rates have reportedly increased 12.5 percent on average and about 30 percent for prime downtown and suburban office spaces. Small high-tech firms continue pushing up demand for suburban office space. For the first time since the 1980s, some speculative construction is being undertaken, although banks are still very cautious about lending money for this purpose. Commercial real estate markets in the rest of New England are mixed. The areas adjacent to Greater Boston--southern New Hampshire and Rhode Island--are also strong, with inventory levels shrinking and prices increasing slightly. However, the market in downtown Providence has not changed, and the Greater Hartford area showed no improvement during the last quarter of 1997. Moreover, several major retailers around Hartford closed their doors, leading to an increase in retail vacancy rates and a drop in retail rental rates in the area. Nonbank Financial Institutions Respondents at insurance companies report increases in revenue in the range of 5 to 10 percent in the fourth quarter of 1997 compared to the fourth quarter of 1996. New sales at life insurance companies continue to be driven by variable products linked to the stock market. A few contacts mention increased downward pressure on premiums relative to claims for group health and commercial property/casualty insurance. Several insurers reduced their employment in 1997 while others intend to do so in 1998. Respondents note continued difficulties in finding information technology specialists but some indicate that wage pressures in this field were lower than could be expected. Return to top Summary New York