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The First District economy continues to expand. Most contacts in manufacturing, retailing, personnel supply, and even insurance report ongoing growth in revenues. Selling prices are mostly level, with some input price declines attributed to Asian markets. Respondents say tight labor markets are still not leading to sizable wage hikes. Residential real estate markets are doing well throughout New England.
Retailing and Tourism
Most retail contacts report that sales grew at a healthy pace in the March to May period, up 5 to 8 percent from a year earlier and at or above expectations; tourist-related business is growing even faster. Sectors of strength are consumer electronics, home furnishings, building materials, and general retail; footwear is weak.
Employment is generally reported to be holding steady on a same-store basis. Hiring is up, however, because tight labor markets have led to increased turnover and retailers that are expanding operations are raising head counts. Nonetheless, shortages are reported only for information technology professionals. Base wage growth is said to be in the 3 to 5 percent range; contacts indicate they are switching to incentive pay systems to keep labor costs down.
Most respondents report that their selling prices are steady. The exception is tourism in the Boston area, where excess demand for hotel rooms is bidding up room rates; hotel rates in the rest of the region are rising more modestly. Troubles in Asia are said to have led to declines in some vendor prices, notably for lumber and fuel. Most contacts say that profit margins are holding steady, with input price declines being offset by wage growth in excess of productivity improvements. With the exception of tourism, respondents are planning modest capital expansions this year. Many contacts are investing heavily in computerization, including inventory control systems to improve efficiency.
Looking forward, contacts expect strong sales growth to continue. Nonetheless, all express some uneasiness about how long the economic expansion can continue.
Manufacturing
About three-quarters of the First District manufacturers contacted indicate that recent business is up from a year ago, with considerable variation across products. Respondents report double-digit sales gains for aircraft components, power equipment, and medical and pharmaceutical equipment. Industrial machinery orders are said to be growing nicely or recovering. Sellers of automotive components indicate mixed results. The demand for microelectronics products, electrical equipment, and apparel textiles is reported to have softened. Several companies cite double-digit reductions in sales to Asian markets. Looking forward, manufacturers are fairly upbeat, although the downturns in the microelectronics industry and in the Asian economies are expected to limit revenue growth for some firms.
Almost all manufacturers indicate that materials costs are flat or down. They report that costs for oil-based products, metals, and wool are lower than a year ago, although two now expect metals prices to recover somewhat. Manufacturers are paying sharply higher prices for travel and outside programmers, but they say that competition and their own efforts to seek alternative suppliers are keeping a lid on the costs of other services.
With few exceptions, manufacturing output prices are said to be stable. About one-half of the companies mention downward pressure on prices coming from cost-reduction efforts of customers in the automotive, health care, and office supply industries, declining currency values in Asia, and competition.
Overall employment levels have been fairly stable over the past year for about two-thirds of the manufacturers contacted. The remaining one-third is split equally between large increases and large decreases. Some contacts report limited availability and escalating pay scales for selected categories of professional and technical workers. However, manufacturers do not report widespread difficulties in hiring and they mostly cite overall wage and salary increases in the range of 2 to 4 percent. A few mention expanded use of incentive-based pay for blue-collar workers.
Temporary Employment Firms
Expansion at First District temporary employment firms continues. Most contacts report double-digit revenue growth. Labor markets are described as extremely tight; respondents say the gap between supply and demand has remained unchanged over the past six to nine months. Wage growth is said to be averaging 10 percent annually, ranging from 5 percent for less-skilled occupations to as much as 20 percent for highly skilled technical workers. Contacts are feeling squeezed as their clients resist price increases. Any growth in profits is attributed to efficiency gains or increased sales volume. Outlooks for the next twelve months are positive, but most respondents expect some softening in the economy.
Residential Real Estate
Residential real estate in New England continues doing well. Markets have been very active throughout the region, and the number of sales has increased in most areas. Massachusetts and New Hampshire contacts report the largest rise in sales, but Connecticut, Vermont, and Maine have also experienced some increase. Almost every area is experiencing inventory shortages. However, the increased activity and low inventory levels have not yet led to substantial price hikes; average prices have remained stable or increased modestly. The market for new construction is very active and spec construction is noted in some areas. All contacts indicate that potential buyers are confident and optimistic about the economy; they expect markets to remain active at least through the third quarter.
Nonbank Financial Services
Respondents at insurance companies report first-quarter 1998 revenues ranging from flat to up 17 percent. Purchases of traditional life insurance are said to be flat or down; any increases are due to continued growth of mutual funds and annuities. Contacts report significant increases in sales of group disability insurance, largely due to demand from smaller employers who appear to be responding to the tight labor market with improved benefits. Respondents among property casualty insurers report continued downward pricing pressure in commercial lines. Employment is generally level. Most respondents note continued shortages of computer programmers, especially those to work on the Y2K problem. Some also report difficulty filling high-level professional positions in underwriting, accounting, legal, and finance.
The Outlook
The New England Economic Project (NEEP), a nonprofit forecasting group, released its semiannual five-year regional forecast in May. NEEP expects regional employment to expand 2.3 percent in 1998, followed by increases of 1.1 to 1.4 percent in subsequent years. Among industries, average annual job growth is projected to range from a low of 0.2 percent in manufacturing to a high of 2.5 percent in services.
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Summary