January 20, 1999 Federal Reserve Districts First District - Boston

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The First District economy shows somewhat mixed results at the end of 1998. Only half of the contacted manufacturers report increases in business from a year earlier, with the balance flat to down. Slightly more than half the retail respondents cite sales above expectations, while the others report disappointing sales because of warm weather. Firms are doing little net hiring; wage increases continue in a 3 to 6 percent range with the exception of information technology workers, in very short supply. Prices are generally falling or stable, although selected product markets are sustaining modest price increases. Residential real estate markets and the investment management industry are strong. Retail Retail results were mixed during the holiday season (November and December). Sellers of hardware, office supplies, office technology products, and home appliances report moderate to strong sales growth, slightly better than expectations. By contrast, apparel merchants and the tourism sector report results below expectations, which they attribute primarily to warmer than usual weather in November and most of December. Employment is said to be increasing with store expansions. Wage growth is reported to be in the same 3 to 6 percent range that prevailed for most of last year. With the holiday season over, retailers do not seem worried about labor shortages, except in the extremely tight information technology area. Respondents reporting strong growth say that competitive pressures are holding retail prices steady; with supplier prices declining somewhat, they have seen some improvement in gross margins. However, in the weaker sectors, price discounting is rampant and margins have fallen. Looking forward, most retail contacts express optimism about the first half of 1999, but some uncertainty concerning the outlook for the second half of the year and beyond. A majority of respondents are planning significant capital expansions in 1999. Manufacturing About one-half of the First District manufacturers contacted report that their recent business is up from a year ago, mostly at single-digit rates. They indicate strong trends for aircraft, medical, and biotech equipment, and consumer items. The remaining respondents report that business is flat or down, for a variety of reasons. Some manufacturers are seeing reduced orders as large retail chains continue to introduce improved inventory management techniques. Weak demand from U.S. industry and heightened competition from foreign producers have caused machine tool orders to slip. Sales to the semiconductor industry reportedly are down considerably from a year earlier, although incoming orders suggest stable or even improving patterns ahead. Exporters mention that the economic environment in Asia no longer is deteriorating. Most manufacturers indicate that materials prices continue to edge downward, with the exception of small increases for furniture-grade lumber and cotton fibers. About one-half report being able to get higher prices for at least some of their products, although, for the most part, these increases are not more than 2 or 3 percent. By contrast, manufacturers of machinery and equipment cite continued downward pressures on selling prices as a result of ample worldwide capacity, strong competition, and cost-control efforts on the part of business customers. The majority of manufacturers contacted currently are holding their work forces steady or raising head counts slightly. One-third report recent layoffs or furloughs, while one-quarter anticipate sizable layoffs this year. Respondents continue to report tight labor markets for information technology, engineering, and financial personnel. For the most part, they indicate that the shortages are resulting in hiring delays rather than intensified upward pressure on pay. Salaries reportedly are rising 4 to 5 percent on average (with greater increases in IT and engineering), while hourly workers are receiving increases of 3-1/2 percent or less. However, several contacts based in low-unemployment regions of New Hampshire and Vermont report that they are beginning to compensate valued employees much more generously in order to retain them. About one-half of contacts plan to increase capital expenditures this year. At most companies, the focus is on modernizing equipment, adding to capacity for new products, and upgrading computer systems. The sharpest declines in capital spending are reported in machine tools and textiles. Manufacturers generally expect their revenues to increase in 1999, although some believe their business will be constrained by weaker growth in the economy or by competition. Several mention that customer reactions to Y2K could result in volatile patterns over the course of the year. Residential Real Estate The residential real estate market in New England is doing well. Most contacts report that the last quarter of 1998 was active and busy. Greater Boston and adjacent areas (southern New Hampshire and northern Rhode Island) are especially strong. Massachusetts tallied a record number of sales, with the total number of homes sold through November 1998 already above the full-year total for 1997; condominium sales were particularly strong. Contacts say the average year-end sale price was 9 percent higher than the year-end average in 1997, although some of the increase reflects a shift toward bigger homes. Housing markets in the rest of New England are less consistently strong, although all contacts report an increased level of activity in the last quarter. The number of sales did not increase much outside Massachusetts, in part because of shortages of inventory in many regions, especially Rhode Island and Vermont. Most contacts expect residential markets to remain strong as long as interest rates stay at their current levels. Investment Management The latest data report that stock mutual funds experienced a 6.7 percent increase in total assets in November 1998 compared to the previous month. Inflows in November were more than five times higher than in October, largely because of a substantial decline in redemptions and exchanges by investors. Anecdotal information indicates that the strength in stock mutual funds continued through December and early January. Mutual fund respondents in the First District increased employment in the fourth quarter of 1998 and plan to add further in 1999; most of the increase is for customer service representatives. Respondents note some easing of previously reported labor shortages, except for technology personnel. Return to top Summary New York