December 4, 1996 Federal Reserve Districts First District - Boston

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The New England economy continues to expand at a moderate pace. Most First District manufacturers are posting solid gains, retailers report scattered pick-ups in activity, and personnel supply firms continue to grow, but at a less hectic pace than in the recent past. The region's residential real estate markets are steady and growth continues at money management firms. Prices remain generally stable, contacts say, while wages are rising 2 to 6 percent and some employers note selective hiring difficulties. Retail Most retail contacts in the First District report a pick-up in sales activity for some period during October and the first half of November. They attribute these improvements, in some cases temporary, to colder weather, early holiday shopping, or increased promotions. Overall results for the six weeks vary, however, ranging from 10 percent sales declines to gains of 13 percent compared with a year earlier. Most respondents detect a rise in consumer confidence and view the economy as "OK but not exciting." They predict 2 to 6 percent sales growth in December; growth will be restrained because four fewer shopping days between Thanksgiving and Christmas could cut gains by as much as 3 to 5 percentage points. Vendor and customer prices remain stable, although one respondent cites continued declines in apparel prices. Lumber prices have stabilized, following a significant rise and fall earlier this year. Retailers have intentionally trimmed inventories compared with a year ago to avoid last January's overstock. Most contacts are posting increased profits and gross margins, which they attribute to better inventory management. Only one retail chain noted major increases in capital spending and employment. Merchants plan to increase wages 2 to 5 percent in 1997. Manufacturing Most First District manufacturing contacts report continued 5 to 15 percent growth in revenues and/or orders from year-ago levels, and they are at least cautiously optimistic about future business. Demand for furniture, appliances, other consumer durables, and medical and computer equipment is said to be strong. Contacts are experiencing moderate to rapid growth in automotive-related business, but some express concern about a possible slowdown late next year or thereafter. Aircraft-related orders are picking up significantly, mostly as a result of improved profitability of commercial airlines. The semiconductor industry remains in a slump. One maker of consumer durables expects to raise production in order to replenish depleted inventories. Some of the remaining contacts express a desire to reduce inventories as part of an overall cost containment strategy. Materials costs and selling prices remain fairly stable. A recent drop in component costs has led to a larger-than-normal drop in computer prices. Contacts report slight increases in the cost of selected metals, furniture-grade lumber, and chemical products, but falling costs for paper and packaging. Just over half the respondents report fairly stable U.S. employment levels; most others have increased employment. A couple of manufacturers indicate difficulties finding production workers, but an equal number indicate ample applicants. Companywide pay increases range from 2.5 to 6 percent. In the Boston area, compensation packages to attract key technical employees are said to be escalating rapidly. Temporary Employment Firms Personnel supply contacts in the First District report solid growth into the fourth quarter of 1996. The outstanding growth that earlier characterized the industry leveled off for most firms in the third quarter: revenues are now expanding 10 to 20 percent annually, down from 20 to 30 percent in 1995 and the first half of 1996. Industrywide consolidation has increased contacts� reliance on partnerships and subcontracts with other personnel supply firms. Vendor-on-premises operations dominate, hurting smaller local temp firms and favoring national companies large enough to meet the full range of employment demands of clients. Demand for highly skilled temporary workers continues to outpace supply, especially in technical and clerical fields. Wages have risen 8 to 10 percent over the past year, but this reflects primarily an influx of workers from higher-paying sectors rather than expanding wages of individual workers. Tightness in the labor market has forced temp agencies to adopt more aggressive recruiting techniques, including automated resume retrieval, personal networks, and the Internet, as well as enhanced pay and benefit packages. Residential Real Estate The residential real estate market in most of New England was stable in the third quarter. Sales volumes have been constant in most states, and contacts report no significant changes in prices. Contacts in Rhode Island, Vermont, and Maine report that buyers have a large selection of houses to choose from in all price ranges. However, no price reductions have been observed so far. Low-end houses have been selling better than higher-priced ones. The market in Massachusetts is doing better. Sales have gone up throughout the state, especially in the condominium and new construction markets. Massachusetts had the highest increase in existing home sales in the country in both the second and third quarters. Despite the increase in activity, inventory grew slightly during the third quarter. While median sales prices rose moderately in most of the state, the increases largely reflect a shift in mix as people trade up to more expensive homes. Overall, most contacts predict that the market will remain steady over the next few months. While low interest rates and a generally positive economic outlook should stimulate sales, activity usually slows in the winter. Nonbank Financial Services Investment management firms report substantial increases in assets under management since the beginning of the third quarter of 1996. Inflows into stock funds were high in September and slowed somewhat in October. Bond funds experienced inflows in September but were in net liquidation in October. Most respondents increased employment in the third quarter. Salary increases are reported to be about 5 percent, the same as last year. Return to top Summary New York