May 6, 1998 Federal Reserve Districts First District - Boston

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The First District economy remains strong. Retail and manufacturing revenues generally are rising except for Asia-related business. Commercial real estate markets are improving throughout the region. Goods prices remain largely stable, but some import prices are down, office rents are rising, and some technical workers are commanding near double-digit pay raises. Retail Most First District retail contacts report that sales in recent months grew at a strong pace of about 5 to 10 percent from a year earlier. These results either matched or exceeded expectations. Sectors of strength were upscale and mail-order apparel, office supplies and office technology products, and hardware. General weakness was reported only in men's casual wear. However, two apparel retailers also note a drop-off in sales to Asian customers. In all sectors, inventories are at desired levels. Looking forward, retailers expect sales growth in the 4 to 7 percent range. Retailers report that, other than computer help, tight labor markets are not constraining their operations. Most hiring is related to store expansions. Wage growth for most workers has picked up a notch, to a 4 to 6 percent pace. Wages for computer-related occupations are said to be increasing at an 8 to 10 percent rate. Most respondents report that both sales prices and gross margins are holding steady. However, the cost of some merchandise has declined as a result of import price reductions. Other non-labor costs are stable. Retailers report that capital spending increases are primarily technology-related. In contrast with 1997, they are not planning major store expansions, except in the very fast-growing office supply sector. Manufacturing About one-half of the First District manufacturers contacted indicate that recent business is up at a single-digit rate from a year ago. Of the remainder, about the same number report faster growth as report declines. Contacts indicate brisk activity and some capacity constraints for telecommunications equipment, automotive and aircraft components, furniture and home appliances, cable, and packaging. Demand by small businesses for office equipment and supplies is said to be growing strongly. Manufacturers in these various product lines remain upbeat about future trends. By contrast, a maker of industrial machinery, a paper manufacturer, and several companies selling to the computer and electronics industries express disappointment with recent results or see signs of slower activity ahead. Exporters indicate that Asian business has slowed, mostly in line with expectations. One reports rising liquidity problems for Asian customers, particularly smaller firms. A couple of contacts point to continuing risks due to structural problems in the Chinese and Japanese economies, although another firm indicated that its sales to China remain strong. European sales have picked up smartly for most contacts, although less so for consumer products than for capital goods. Most manufacturers indicate that their materials costs and selling prices remain generally stable. However, computer memory prices are falling dramatically and paper prices are slipping. One contact indicates that some materials prices are so low as to provide stockpiling opportunities. On the other hand, other manufacturers mention cost increases related to tighter commercial real estate markets and rising prices for furniture-grade lumber. About one-third of the contacts have been able to raise their prices in the range of 2 to 4 percent for products in strong demand or products with new features. Most contacts have been holding U.S. employment steady or hiring only selectively and they generally expect to continue in this mode. While a few respondents in high tech have tended to be more aggressive in hiring, even they currently expect to implement small reductions or at least reassess the pace of hiring in the near future. Recent company-wide pay increases are said to be in the range of 2 to 6 percent, and only about one-sixth of the manufacturers contacted say that general pay raises have accelerated. However, on the whole respondents appear more concerned than in the past about the scarcity and high cost of information technology personnel. Various contacts also mention challenges in recruiting and retaining engineers and R&D specialists. Pay for such high-demand occupations is rising at rates of about 8 to 10 percent. Manufacturers with around-the-clock production schedules are having trouble finding adequate help for off-hour shifts, but base wage increases for factory workers remain rather modest. Commercial Real Estate The commercial real estate market reportedly has improved throughout New England. The downtown Boston office market is said to be extremely tight. Vacancy rates are 3 to 4 percent and rental rates for prime space have reached $50 per square foot. Overall first quarter rental rates were 10 to 12 percent higher than last year. There is virtually no new construction downtown and no available space for larger firms. Several companies are reportedly moving to the suburbs and beyond. The suburban Boston office market is also very strong, with vacancy rates at 5 to 6 percent and considerable speculative construction; some contacts are becoming concerned that new building is outpacing demand. Apartment buildings are in demand, but the retail market in the Boston suburbs has slowed and rental rates have stopped rising in that sector. The rest of New England is active as well. Connecticut reportedly is doing very well throughout; even Greater Hartford's office market vacancy rates have dropped to 17 or 18 percent. Increases in rental rates are reported in Connecticut and Rhode Island. While the downtown Providence office market remains flat, its suburban office and industrial markets have improved substantially. Nonetheless, outside of the Boston suburbs no significant new development is currently reported anywhere in the region. All the contacts are optimistic and expect the strength in commercial real estate markets to continue at least through the end of the year. Return to top Summary New York