March 17, 1999 Federal Reserve Districts First District - Boston

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Economic activity continues to expand in the First District. Retailers see ongoing strong consumer demand, while manufacturing results are mixed. For the most part, prices are said to be steady and wages growing moderately. Retail Contacts in the retail sector report continued expansion during the first two months of 1999 and news reports in early March cite unexpectedly strong sales growth for regional retailers. Sectors of strength include apparel, home furnishings, appliances, and discount retailers. Employment is said to be holding steady on a same-store basis, increasing only with store expansions. Wage growth is reported to be in the same 4 to 6 percent range that characterized most of 1998. Most respondents say that prices continue to hold steady, primarily because of competitive pressures. Supplier prices are reported to be level, except for imported goods, for which prices are falling on account of the Asian slump, and lumber prices, which are said to have increased dramatically because of very strong U.S. residential construction activity. Gross margins are unchanged. Contacts say that moderate increases in operations are planned for 1999, with heavy investments being made in information technology. Looking forward, respondents express optimism about the economic outlook for the rest of 1999, but do not expect consumer spending to continue growing at its current pace. Manufacturing First District manufacturing contacts are about equally split as to whether recent business is up, down, or flat relative to a year ago. Companies selling to the automotive, furniture, and health care industries report positive trends, and demand for office supplies continues to rise. Sales of commercial aircraft parts are said to be increasing, although incoming orders suggest a sluggish period ahead. Sales of electronics, industrial machinery, and sports equipment are reported to be down. New England's paper and textile industries are being hurt by import competition, although some niches are now showing positive trends. Overall, exports to Asia continue to fall, with a couple of large manufacturers noting recent sales declines in China. Manufacturers indicate that materials costs continue to be flat or down. The majority report steady selling prices. One-quarter report some small increases, partly reflecting a pass-through of higher labor costs. Apparel textile makers indicate somewhat lower selling prices, and some equipment manufacturers say customers are pressuring them for reductions. Most contacts report little change in the size of their domestic workforce compared to either a year ago or a few months ago. However, several companies have laid off some production workers. Most new hiring is concentrated on sales, marketing, and service positions. Manufacturers mostly report that overall pay is increasing 3 to 5 percent, which some contacts note provides workers comfortable increases in real compensation. In general, wage pressures do not seem to be on the rise, although information technology personnel continue to command large increases. Over half the contacts plan higher capital spending this year. The increases are primarily to introduce new technologies for production, product design, distribution, or information processing. Several firms also intend to expand overall capacity. Most manufacturers have positive expectations for 1999. However, some mention the need to remain cautious or flexible in light of economic uncertainties. Temporary Services First District temporary employment firms report that 1999 is off to a reasonably good start as their business continues to expand. Demand continues to be strong, with firms reporting significant increases in their number of workers on assignment despite extremely tight labor markets across all industries. Wage inflation seems stable for most industries. For high tech workers, however, who are in extremely short supply (especially in the Boston area), robust wage growth continues. Prices that temp agencies charge firms for high tech workers are not rising as quickly as their wages because of increased competition; as a result, profit margins are being slightly squeezed. Revenues continue to rise due to increased business volume. Outside of high tech, clients have become more willing to accept higher prices. Most contacts foresee strong future growth for the staffing industry though some warn that "gravity has to work sometime." Commercial Real Estate After a long period of declining vacancy rates and increasing rental rates, the Boston office market seems to be leveling off a bit. While demand is still high, new construction of office buildings is increasing the supply of office space. So far there has been no decrease in rental rates, but contacts worry about overbuilding, especially since some of the new construction projects are speculative. Hartford is said to be undergoing a "renaissance," caused in part by the upcoming construction of the Patriots' football stadium. Office and industrial vacancy rates have declined in Hartford, and several new construction projects are planned. Rhode Island, Maine, and Vermont contacts describe their commercial markets as "flat" and "steady." Outside a few pockets of increased rental activity, the markets in those states have been stable. Most contacts anticipate market conditions to remain unchanged during the next few months. Nonbank Financial Services - Insurance The majority of respondents at insurance companies experienced reductions in employment in the fourth quarter of 1998 and the first two months of 1999. The decline is attributed mostly to mergers and acquisitions. Respondents expect the downward trend in employment to continue for the rest of this year. Revenues were flat or down for the majority of respondents in the fourth quarter of 1998 compared to the fourth quarter of 1997. However, one property-casualty insurer reports dramatic increases in revenue, due to acquisitions. Return to top Summary New York