August 5, 1998 Federal Reserve Districts First District - Boston

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Economic conditions are mixed in the First District although growth continues overall. While most retailers report strong sales increases, some manufacturers are seeing a slowdown in business. Price increases remain minimal but wage growth is said to be picking up a bit. Commercial real estate markets are robust in the Boston area and varied elsewhere. Investment management firms saw assets rise in June after a dip in May. Retail and Tourism Most retail contacts report that sales continued to show strong growth in the April through June quarter, either matching or bettering expectations for the period. Sectors of strength were upscale and mail-order apparel and office supplies and office technology products. The tourism industry is also robust. More recently (since mid-June), upscale apparel and hardware report some weakening. In all sectors, inventories are at desired levels. Two contacts note ongoing effects of the Asian crisis: Catalog apparel sales to Asia are weak and tourist business from Asia is said to be down much more than anticipated. However, these contacts say their Asian mail order business may be bottoming out and the loss of Asian tourists is being offset by increased business from Europe. Retailers indicate that employment is generally level, increasing only with store expansions. Wage growth has picked up a notch from the earlier 3 to 5 percent range to a 4 to 7 percent annual pace. Respondents say prices and gross margins are holding steady. The exception is hotel room rates, which continue to show sizable increases. A majority of retail contacts say significant capital expansions are either planned or in progress. Looking forward, most retailers express cautious optimism. Manufacturing Half of the First District manufacturers contacted indicate that recent business is up from a year ago, as compared with three-quarters of those responding seven weeks ago. Of the remaining respondents, about equal numbers report flat trends and declines. Close to half of the manufacturing sample say that inventories are too high and/or that employment levels are being reduced through layoffs. Telecommunications, furniture, and some appliance sales continue to increase at a rapid rate. The demand for selected aeronautics products is growing robustly, although respondents also indicate that some customers are canceling or delaying orders. Contacts manufacturing computer hardware, semiconductor equipment, industrial machinery, and automotive parts report declining sales or orders. Sluggish trends also are noted by makers of electrical components, power equipment, paper, and apparel textiles. Manufacturers of consumer items report slow growth or declines in revenues, in part because of aggressive inventory control measures by retailers. Exporters typically indicate that sales to Asia are down substantially from a year ago, with some reporting that their business in countries such as Korea and Indonesia has virtually disappeared. Most expect that weakness in Asian economies will continue to depress their revenues in 1999. Almost all manufacturers indicate that their materials costs are flat or down, although some mention rising costs for services. Petroleum-based products, copper, steel, some grades of lumber, as well as Asian items in general, are all reported to cost less than a year ago. Reports of higher selling prices are rare. Paper prices are said to be depressed because of increased domestic capacity and higher imports. Makers of various types of equipment express concern about their customers' ongoing demands for lower prices, given their already low margins. Wage and salary increases are reported to be mostly in the range of 3 to 5 percent, but are 6 to 10 percent in the case of some firms heavily oriented toward research and development. Respondents indicate somewhat greater delays and upward pay pressures than previously when hiring professional, technical, and sales workers, with substantial difficulties and/or costs associated with filling engineering, information technology, and finance positions. Commercial Real Estate Commercial real estate markets are doing well in most of New England. The downtown Boston office market is still very tight. Vacancy rates are around 3 percent in prime buildings and around 5 percent overall. Downtown rental rates are at record high levels. Although some new development is planned, there is currently little new construction downtown and larger firms have been forced to locate in the suburbs or beyond. The suburban Boston office market is also very strong, with vacancy rates only slightly higher than downtown. Apartment buildings are in demand, but the retail sector is weak, with higher vacancy rates and lower rental rates than last year. Contacts report various market conditions elsewhere in New England. The Connecticut office market has improved compared to the last two years, but it still has "a long way to go" relative to where it was in the late 1980s. Office vacancy rates in the Greater Hartford area are around 18 percent while the Stamford office market is strong. The Maine commercial market, however, has not recovered so far this year. Demand for commercial space is low and banks have little confidence in the market, leading to a tight credit market and lack of new construction. The Rhode Island market is very strong, with low inventories and plans for new industrial and office construction. Moderate increases in rental rates are reported in Connecticut and Rhode Island. Contacts predict steady markets for the rest of the calendar year. Investment Management Assets of long-term (non-money-market) mutual funds rose in June after declining slightly in May. Stock funds saw an increase in net cash flows between May and June while bond funds had a decrease in cash inflows. All contacts at investment management firms report that they have increased employment in recent months. Respondents indicate that they rely on hiring bonuses to attract workers and that these bonuses usually exceed 10 percent of base salary. While bonus programs are of long standing in investment management firms, some have recently expanded them into lower levels of the organization. Return to top Summary New York