November 4, 1998 Federal Reserve Districts First District - Boston

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Economic conditions in the First District are increasingly mixed. Retail contacts generally report moderate to strong sales growth, but some sectors began to soften in September or October. Manufacturers are less upbeat; about half are still seeing increases in business, but a growing range of industries are weakening. Prices continue to be steady. Selected labor markets are still said to be tight, but both manufacturers and mutual fund firms are reducing hiring. Retailers are cutting back on capital spending. Firms say they are planning for 1999 with increasing caution. Retail Most retail contacts report moderate to strong sales growth in the period from July through early October, about in line with expectations. Sectors of strength are mail-order apparel, office supplies and office technology products, building materials and supplies, hardware, and tourism. One retailer selling apparel in Asia reports weak, but no longer declining, demand. By contrast, upscale retailers and sellers of graphic products report a slowdown in growth in September or early October. An upscale retailer blamed stock market uncertainty, in part, for the decrease in sales. Inventories are generally at desired levels. Base employment is said to be holding steady and increasing only with store expansion. Most retailers hope to hire the normal range of workers for the holiday season, but expect to experience difficulty in recruiting. Many contacts report wage growth in the 5 to 8 percent range, an increase from earlier in the year, as they attempt to retain valued help in a tight labor market. Most respondents say prices and gross margins are holding steady. One exception is hotel room rates, which continue to rise; these contacts say they don't expect rates to continue rising in 1999. Only a few retail respondents plan to expand operations. Of these, two-thirds are expanding only to complete projects well under way, while re-evaluating projects planned for a year or more out. Looking forward, most retail contacts express optimism about the final quarter of 1998, but they are more pessimistic regarding 1999 and beyond. Half of the contacts say they expect a recession within the next 12 to 18 months, while the other half expect a slowdown in growth. Manufacturing About one-half of the First District manufacturers contacted indicate that recent business is up from a year ago. Segments with sales growth include biotech products, printed matter and paper goods, and office equipment. However, weakness is emerging or continuing in a substantial range of industries. Demand from the semiconductor industry reportedly is down almost 50 percent from a year ago. Furniture orders, which had been growing strongly, now appear to be trailing off. A paper mill reports a flurry of order cancellations in the past month. Manufacturers of automotive components and consumer items also report falling sales. Sales to Asia continue to be considerably lower than a year ago; exporters typically expect further weakness, although one firm is encouraged by a considerable decline in retail inventories in Asia. Some firms also mention steep declines in business in Russia and Brazil. Almost all manufacturers indicate that both their materials costs and their selling prices are either stable or falling. The few increases in selling prices are in the range of 1 to 3 percent. Paper prices are said to be falling at a double-digit rate and companies are getting bargains on items from Asia. Because of a reduced crop this year, cotton prices are expected to increase in coming months. Most respondents' capital spending plans are unchanged, although a few are either cutting or scrutinizing expenditures. About two-thirds of contacts have either cut employment recently or made downward adjustments in hours. Although layoffs have become more common in general, companies report continued difficulties hiring for telemarketing, information technology, and engineering positions (but some easing in the case of hardware engineers). A few companies located in areas with very low unemployment are having trouble filling production jobs. Average pay increases are running 3 to 6 percent. Most respondents express some degree of caution about sales or profits in 1999, especially in light of lingering problems in foreign nations and stock market volatility. A couple of representatives remarked that financing has become more costly or less available, although the majority do not cite the availability of bank credit as an additional impediment. Residential Real Estate Contacts in real estate report that recent changes in the stock market are making lenders and potential home buyers somewhat more cautious. Banks are said to have become more conservative about lending money for new construction, virtually eliminating any speculative building. Nonetheless, conditions in the market for existing homes have not changed much. The residential market continues to be strong in most of New England, with year-to-date sales increasing moderately relative to last year. Massachusetts is still robust, with considerable sales growth in the summer for single-family homes, especially in desirable communities, as well as a very active market for condominiums. In contrast, the inner-city Hartford market is still depressed, with large inventories of condominiums and multi-family houses. Markets in Vermont, Rhode Island, and New Hampshire have been very active during the past few months, but with no or very small price increases. Contacts expect their markets to remain active through the end of the year if interest rates stay low. Investment Management Total assets in stock mutual funds declined 16 percent between July and August of 1998. The declines represented mostly falling share prices, as net cash outflows amounted to only 0.4 percent of assets. Furthermore, contacts indicate that the net cash outflows were caused mostly by significant declines in new sales rather than by redemptions. Respondents report cash flow into stock funds was again positive in September. The assets of bond funds were mostly unchanged in August. Respondents at investment management firms in the First District report some easing of previously reported labor shortages, partly because of hiring cutbacks in response to uncertain market conditions. Return to top Summary New York