March 12, 1997 Federal Reserve Districts First District - Boston

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Business contacts in the First District are fairly upbeat at the beginning of 1997. Most retailers report solid, sustainable sales growth, although a few sectors are weak. Manufacturers are seeing revenue gains as well, with over half the contacts reporting sales 8 to 20 percent ahead of a year earlier. Input prices and selling prices are mostly flat. Residential real estate continues to do well in New England and assets under management continue to rise at investment management firms. Most contacts in all sectors say they face tight labor markets for some occupations, but they cite only moderate increases in general wage levels. Retail A plurality of retail contacts report sales growth of 3 to 5 percent, a few percentage points greater than expected. The building materials and home furnishings sectors are doing even better, with growth in the 10 to 20 percent range. On the downside, apparel, discount, and appliance retailers report sales 3 to 8 percent below year-earlier levels. Inventories are generally in line with sales. With the exception of stores selling building materials and home furnishings, which expect sales to grow 15 percent, and discount and appliance retailers, who see ongoing consolidation contributing to continued losses, First District retail contacts expect moderate, sustainable growth to continue through 1997. Retail employment is reported to be fairly level, and most retailers are expanding capital moderately. The exception is building materials and furnishings stores, which are expanding their work forces and making major capital investments. All contacts report rising employee turnover and increased difficulty replacing workers. Wages are said to be rising about 4 percent. Respondents report that they are holding their prices steady, largely because competitive pressures constrain their ability to raise them. Only the discount retail sector engaged in significant price cutting during the last quarter (primarily to move product in the Christmas season). Profit margins are holding; retailers say they are operating more efficiently in order to offset rising wage costs. Manufacturing Most First District manufacturing contacts report that recent sales are above the levels of a year earlier, with just over one-half indicating growth as high as 8 to 20 percent. Strong gains are reported by makers of automotive, general industrial, and computer equipment, as well as furniture. A couple of these contacts expect to ramp up production in coming months to replenish stocks; another may have to turn down work because of capacity constraints. Manufacturers note some signs of turnaround in commercial aircraft and semiconductor markets. Medical sales are reportedly mixed, while markets for textiles and paper remain quite flat. Most contacts report that, overall, materials costs are flat or down somewhat. Costs for some metals and furniture-grade lumber are rising, however. Selling prices also remain largely flat, except for small to moderate increases for fabricated metals, industrial equipment, and paper products. Only one-quarter of the respondents have made substantial net new hires over the past year; the remainder report very little change in head counts. Most contacts anticipate only moderate increases in their work forces in coming months, while describing capital expenditures as heavy or rising. About one-half report delays in filling positions in information systems, engineering, technical sales, or finance. Wages and salaries are mostly rising in the range of 2 to 4 percent but considerably faster for some computer-related specialists; manufacturers generally do not view these increases as inflationary. Manufacturers expect current business trends to continue for the remainder of 1997, although several express concern that the strong dollar could damp exports, and a couple mention upcoming labor negotiations as a potential challenge. Temporary Employment Firms Personnel supply contacts in the First District report 8 to 10 percent growth in revenues over the year ending in December 1996, with each quarter�s growth rate falling short of the previous quarter's. The slowdown stems from worker shortages, as demand for qualified temporary labor continues to outpace supply across all industries and occupations. Nonetheless, respondents estimate their New England revenue growth to be several percentage points higher than nationwide averages. Most contacts have seen improved overall performance in February 1997, and they expect revenues to expand at double-digit rates for the rest of the year. These 1997 growth forecasts are higher than 1996 actuals, but lower than both 1995 actuals and advance projections for 1996. Respondents are feeling both wage and price pressures. Wages are rising at an 8 to 10 percent annual rate. Yet, as temporary services firms attempt to pass these increases on to their client firms, they face more aggressive price negotiations. Residential Real Estate The residential real estate market in New England continues to do well. While sales have increased in some areas and remained unchanged in others, most contacts report more inquiries and other signs of increased future activity. Mild winter conditions have contributed to the gains. Massachusetts is doing particularly well, with 1996 showing the highest-ever annual increase in residential sales. Despite this record increase in sales volume, house prices continue to increase at a slower pace than during the 1987-88 real estate boom. Within Massachusetts, areas inside Route 495 are doing best, while the Springfield area is weakest. Other states are also doing well. Southern Connecticut and southern New Hampshire are reported to be very strong, and Maine and Vermont are both starting to pick up. Nonbank Financial Services Investment management firms report that in the fourth quarter of 1996, assets under management increased substantially over the previous quarter. However, assets were lower in December of 1996 than in November of 1996. Sales were reported to be highest in stock funds, particularly growth funds and growth and income funds. Most respondents increased employment in the fourth quarter and plan further employment increases in 1997. Contacts report hiring difficulties and wage pressures in the markets for computer programmers and equity analysts. Return to top Summary New York