June 18, 1997 Federal Reserve Districts First District - Boston

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Most First District contacts in the retail and manufacturing sectors continue to report growing sales, and many are increasing employment as well. Temporary employment firms, residential real estate, and the mutual fund industry are all growing strongly, although somewhat less so than earlier. Contacts cite generally stable prices; one exception is house prices in the Boston metropolitan area which are up noticeably. Wage increases are concentrated in the 3 to 5 percent range, with larger increases and shortages confined to a few markets, notably high technology and asset management occupations. Retail Most retail contacts report that sales growth has maintained its steady pace in recent months, and inventories are in line with sales. Areas of strength include apparel, home furnishings, building materials, and office and graphic reproduction supplies, all of which report sales gains of 10 to 15 percent from a year earlier. Firms doing less well are selling appliances, which have been weak throughout the year, or seasonal merchandise restrained by New England's cold spring. Wage rate growth is reported to be moderate as employment increases support rising sales. Contacts say that although employee turnover is rising, they are having little trouble finding replacements, except in a few areas. All the retailers contacted are holding their selling prices steady, constrained by competitive pressures. Most respondents say that profit margins are increasing modestly as a result of efficiency improvements (better inventory control, automation, and purchasing efficiencies). Materials costs are also holding steady. Expecting continued growth, respondents have capital expansions underway. Manufacturing Most First District manufacturing contacts report that recent business is flat or up at a single-digit rate compared to a year ago. Sales of computer equipment and home furnishings continue to show above-average gains. Two instruments manufacturers and a medical equipment producer report pickups in orders following a period of sluggish performance, and a paper mill indicates slight improvement relative to the very weak conditions prevailing at the beginning of the year. By contrast, a machine tool maker and a consumer items manufacturer report slowdowns. Most manufacturers indicate little if any pressure from materials costs. A notable exception is the price of wool, up sharply in recent months. Selling prices are also largely stable. Some contacts report that retail stores are pressing for concessions. Respondents generally report that employment levels are a little higher than a year ago. Except for some delays in filling vacancies in software, engineering, and international marketing, labor availability is said to be adequate. Wages and salaries are reported to be rising in the range of 2 to 5 percent, with substantially higher increases and added perks offered in occupations that are in heavy demand. Most respondents indicate little change in the level of capital spending from a year earlier. Those making aggressive investments cite a need to develop new products or install more sophisticated equipment. Manufacturers generally expect a continuation of positive business trends, although some are now expressing a little caution. Commodity-type producers tend to have a more conservative outlook than others. Temporary Employment Firms Business is better than ever for most personnel supply contacts in the First District. Most agencies report revenues to be growing 8 to 20 percent from year-earlier levels. Despite very tight labor markets across all industries, wage growth has leveled off at an annual rate of roughly 10 percent. Clients' resistance to higher labor costs is squeezing profit margins, but the resistance has weakened from six months ago since tight labor markets are widely acknowledged. High technology and financial services are the fastest growing client sectors, while contacts report profit gains from shedding their light industrial divisions. Residential Real Estate The residential real estate market in Massachusetts continued its strong course during April and May, although growth was slower than during the first quarter. Because inventories are very low in most of the state, sales have increased only modestly. Since demand has risen faster than supply in some areas around Boston, prices now exceed their 1988-89 levels and are still rising. In other parts of the state, price growth has been only moderate. In a couple of pockets, notably Springfield, contacts say prices have declined and inventory levels increased. Other parts of New England are mixed. Southern New Hampshire is similar to the Greater Boston area, but central New Hampshire, Maine, and Vermont have experienced only moderate increases in prices and sales. Rhode Island has seen minor changes. Some parts of Connecticut are very strong (influenced by the strong New York market), while others have not yet recovered from the downturn of the early 1990s. Nonbank Financial Services Investment management firms report substantial increases in assets under management in the first four months of 1997. Nonetheless, these inflows ran at a lower rate than during early 1996. All the investment management respondents report they have increased employment since the beginning of the year, and they plan further increases. Firms report difficulty filling vacancies because of tight labor markets; shortages were noted in several segments, including customer service personnel, fund accountants, sales/marketing and investment analysts, portfolio managers, and most acutely, technology professionals. Contacts note that wage movements exceed inflation and report having to pay higher bonuses and other incentive compensation to a wider range of employees throughout their organizations. The Outlook The New England Economic Project (NEEP), a nonprofit forecasting group, released its semiannual five-year regional forecast in late May. NEEP expects regional employment to expand 2.0 percent in 1997, followed by increases of 1.2 to 1.4 percent in subsequent years. The most rapid job growth is projected for services, construction, and trade; modest declines are expected in manufacturing. New England's unemployment rate is forecast to be in the range of 4.3 to 4.5 percent for the next several years. 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