October 30, 1996 Federal Reserve Districts First District - Boston

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Economic expansion remains solid in New England. Reports from contacts in retailing, manufacturing, and commercial real estate all have a positive tone. Insurance companies indicate mixed results. Input and materials prices are generally little changed; some manufacturers are raising prices. A recent forecast of the New England economy predicts current trends will continue, with employment growing more slowly than in the nation and unemployment remaining low. Retail First District retailers report varied results in September and the first half of October. Non-apparel contacts, such as furniture and hardware chains, cite steady double-digit sales growth in the past six weeks. By contrast, several off-price discounters and one shoe chain note soft September sales, ranging from level to 15 percent declines compared with year-earlier levels, followed by modest gains in early October. Respondents' expectations for the upcoming holiday season range from 1 to 15 percent sales growth over last year. Retail contacts believe the economy is strong in most areas of New England and that consumers are more confident and optimistic than a year ago. Vendor and customer prices generally remain flat; one contact, however, noted a temporary price hike for European shoe leather. Gross margins and profits vary, and most inventories are high in anticipation of the holiday season. Several contacts plan new store openings in 1997 and expect small gains in employment as a result. Wage increases of 2 to 5 percent are anticipated. Manufacturing A slight majority of the First District manufacturers contacted indicate that sales are little changed from a year ago. Some of these firms, however, report improved profits through cost reductions. The remaining contacts indicate solid sales gains from a year ago. Manufacturers generally say that they are successfully managing their inventories. A couple of contacts note medical supply markets as a source of rapid growth. A textile manufacturer detects a small improvement in apparel retailing, after several slow years. Several respondents mention adverse effects of foreign imports. For example, a maker of high-quality furniture notes that while his own business is thriving, the U.S. furniture parts industry is shrinking because of competition, especially from China. Automotive suppliers indicate a need to develop other products because carmakers increasingly are turning to low-cost offshore suppliers. Exporters tend to be experiencing slow business in Europe, but rapid growth in Asian markets. Most manufacturers report that overall materials prices are similar to or lower than a year ago. Chemicals prices are rising, but contacts indicate that the increases are selective or smaller than a year earlier. About one-half of the contacts report that their selling prices remain unchanged. However, a maker of consumer durables recently raised prices by 7 percent, and several nondurables manufacturers, including firms in the paper products industry, report price increases in the 3 to 4 percent range. In contrast, a machinery manufacturer whose business has recently slowed has instituted a temporary price reduction for one product line. About one-half of the manufacturing contacts report stable employment over the past year; most of the remainder have reduced their head counts. Currently, more respondents are adding than are cutting employment, but contemplated changes generally are modest. Although a couple of contacts report wage freezes, most have raised pay 2 to 4 percent this year. Most respondents state that labor availability is not a problem. Commercial Real Estate The New England commercial real estate market is doing well. The economy in most states has improved, resulting in increased demand. In Massachusetts, Connecticut, and Rhode Island, vacancy rates have declined and rental rates increased. The Greater Boston area continues to enjoy a modest boom, with vacancy rates around 5 to 6 percent in all sectors, both downtown and in the suburbs. Connecticut is said to have experienced significant improvements in its economy, leading to lower vacancy rates even in downtown Hartford. Maine and Vermont are not doing as well, with more variation across sub-regions and sectors. Despite strong markets, most contacts report little new construction. The low rate of construction constitutes the main difference between the current boom and the 1980s, and it reflects banks' reluctance to extend credit for speculative construction as well as more caution by everyone. Most contacts predict, however, that continued favorable economic conditions may soon lead to more construction. Nonbank Financial Services Respondents at insurance companies report mixed sales for the third quarter of 1996 compared to the third quarter of 1995. The biggest increases in sales are for variable annuities and mutual funds. Sales are also strong in international subsidiaries, particularly in Latin America and Asia. Sales of traditional life insurance are weak. Only two respondents report increases in employment in the third quarter. The rest cite a downward trend in employment which they expect to continue for the rest of the year. The Outlook The New England Economic Project (NEEP), a nonprofit forecasting group, released its semiannual regional forecast in mid October. NEEP expects regional employment to continue expanding 1.2 to 1.4 percent per year, with modest declines in manufacturing and most of the net job additions in services and trade. New England's unemployment rate is forecast to remain below 5.0 percent over the next several years, although the size of the labor force should begin to expand. Return to top Summary New York