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Economic activity in the First District is generally expanding, but at a slower pace than in the first half of the year. Prices are reportedly stable or falling. Labor markets remain tight and firms in the region mostly report they are not adding to their work forces, except seasonally.
Retail
Most retail contacts report positive, but clearly slowing, sales growth in the September to early November period. Sectors said to be strong are middle to low-end department stores and building materials; sales growth is moderating in tourism and home furnishings, while men's casual wear and footwear continue to be weak. Retail sales the day after Thanksgiving were up modestly from year-earlier. Permanent employment is reported to be holding steady on a same-store basis. Hiring for the holiday season is currently in progress. Some retailers say that labor markets are very tight, especially for information technology workers. The tourism sector reports that labor raiding is occurring and large wage premiums are being offered. Otherwise, wage rates are said to be either flat or increasing only slightly.
With the exception of tourism, respondents report that consumer prices and vendor prices are holding steady. The fast pace of inflation in hotel room rates is expected to end in 1999, as new hotel construction will ease current room shortages. Lumber prices are reported to be declining. Most contacts say profit margins are holding steady. Respondents report that recent capital expansions have been completed and they do not plan any additional expansions over the next six months.
Looking forward, retail contacts are cautiously optimistic for the holiday period, but report a great degree of uncertainty concerning the outlook for 1999. Most expect the current expansion to continue in 1999 but at a markedly slower pace.
Manufacturing
Half of the First District manufacturers contacted indicate that recent business is up from a year ago; the remaining firms report declines. Segments with growing revenues include automotive and aircraft parts, furniture, and building equipment. Weakness is reported in apparel textiles, machinery, and components for electrical, electronic, and sports equipment. Competition from Asian suppliers or a reduction in sales in Asian markets were the most commonly cited reasons for declining revenues.
Most manufacturers indicate that both their materials costs and their selling prices are either stable or falling. The most notable downward price pressures are in textiles (because of competition) and automotive and aircraft parts (because of pressures from major customers). However, about one-quarter of the respondents plan to raise prices modestly because of rising costs for components or labor.
Contacts mostly report that their U.S. employment is flat or down (in about equal numbers) relative to a year ago. Hiring is concentrated on engineering, information systems, purchasing management, technical sales and service, and other professional and technical fields. Average wage and salary increases are mostly in the range of 2 to 6 percent.
About one-quarter of the respondents have reined in capital spending because of concerns about business trends. Others are maintaining their investment programs and typically cite factors such as a need to improve efficiency, become Y2K-compliant, or introduce new production or information technologies. Most manufacturers express a somewhat cautious view of their business prospects for 1999, but they cite examples of "silver linings" as well as "clouds." Some firms that expect revenue gains predict flat earnings because of escalating labor costs, while others express confidence that they have taken actions that will enable earnings to continue to grow.
Temporary Employment Firms
Expansion continues at First District temporary employment firms, although growth has slowed from earlier this year at some firms. Contacts report a sharp drop in activity early in the third quarter, but most recovered relatively quickly. Overall revenues are 10 to 33 percent higher than year-earlier levels. Fall is typically a busy time for contract employment and October 1998 marked one firm's best month ever. Labor markets remain tight, with the supply of workers still scarce; one contact, however, mentioned some softening on the demand side. The rate of increase in wages reportedly has begun to moderate. Contacts are cautiously optimistic about the industry's future. All expect the usual slowdown around the holidays and some anticipate additional softening of the regional economy.
Commercial Real Estate
Commercial real estate in New England is doing well. Capital market problems in August created shortages of financing in September and October. As a result, sales prices of commercial properties in Boston have declined by 10 to 15 percent since August. By contrast, rental rates for prime downtown Boston office space have been rising and are about $50 to $60 per square foot. Suburban rental rates have been flat for the past few months, having reached $40 per square foot. Contacts report very low vacancy rates for office and retail space. Vacancy rates for apartments are second lowest in the country, with particularly severe shortages of low- and medium-priced apartments. Some retail construction is occurring, but contacts report no speculative construction anywhere in the Boston area.
The rest of New England is mixed. Office vacancy rates in Greater Hartford are the lowest since 1989, but still the highest in the Northeast; rental rates for retail space have risen slightly, but the industrial sector has high vacancies and unchanged rental rates. New Haven and Stamford are doing very well, with low office vacancy rates and office rental rates up 12 percent in 1998; apartment vacancy rates are very low as well. Maine has seen a rise in office and retail vacancy rates during the past quarter. Rhode Island has a very strong industrial market, but little activity in its office market.
Contacts anticipate the Boston market will remain strong; the Greater Boston economy is sufficiently diversified to absorb any space that might be vacated by declining sectors of the economy. Vacancy rates in Hartford, however, may rise because of consolidation in the financial sector.
Nonbank Financial Services
Respondents at insurance companies report revenues in the second quarter of 1998 ranging from flat to up 25 percent. Mutual funds and variable annuities are responsible for much of the growth in sales. Employment changes range from 5 percent decreases to 4 percent increases. Most respondents note continued shortages of information systems personnel; as a result, they are relying more on outside contractors and raising base salaries and the amounts and types of bonuses. A number of respondents also note scarcity of accounting and investment management professionals.
The Outlook
The New England Economic Project (NEEP), a nonprofit forecasting group, released its semiannual five-year regional forecast in October. NEEP expects regional employment growth to slow to a range of 1.0 to 1.3 percent annually in the period 1999 to 2002, after exceeding 2 percent in 1998. Among industries, average annual job growth is projected to range from a low of zero in manufacturing to a high of 2.4 percent in services.
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Summary