March 8, 2000 Federal Reserve Districts First District - Boston

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Economic activity continues to expand in the First District. Retailers report strong sales growth and little price inflation. Most manufacturers are also seeing their business grow and indicate they are not raising prices. Labor markets remain tight. Most companies say base wages are rising at a 3 to 5 percent pace, although increasing numbers say they are raising wages more than this. In addition, temp firms report wages are up 5 to 10 percent from a year earlier. Firms continue to implement technologies or strategies that economize on labor and other inputs. Retail Most retail contacts report sales growth from year-earlier in the upper single-digit range for the December through mid-February period, at or slightly above expectations. Respondents in all sectors characterize their results as strong. Permanent employment is said to be holding steady. Most retailers indicate that base wages are increasing at a 3 to 5 percent rate, although overall compensation is increasing faster because of performance-based incentives. However, contacts in faster-growing sectors are raising wages at a 5 to 10 percent pace in order to attract scarce labor. Retailers continue to report little evidence of inflation except in the fast-growing tourist sector. Contacts say that profit margins are increasing slightly as technological improvements yield cost efficiencies. Retailers plan some modest capital expansions over the next six months; these expansion plans have changed little over the past year. Most contacts say that the economy is currently very strong and they are optimistic concerning sales growth prospects for the first half of 2000. However, looking toward the second half of the year, they expect to see a moderation in the rate of growth in consumer spending, reflecting the braking action of interest rate hikes and oil price increases. Manufacturing and Related Services Most First District manufacturing contacts report that recent business is up relative to a year earlier, although typically the gains are modest. Makers of building equipment and furnishings report solid activity. Aerospace manufacturers continue to experience weakness but are beginning to see some positive signs for future business. Consumer goods manufacturers are experiencing good post-Christmas orders, although in some cases they say that ongoing inventory reduction efforts on the part of retailers are holding down new business. Manufacturers cite rising costs for oil and gasoline, paper, copper, and furniture-grade lumber but reductions for electronic components. Most selling prices remain flat, and many contacts cite increased operating efficiencies or improved cost management techniques as being helpful in avoiding the need to raise prices. However, prices reportedly are rising somewhat for paper goods, consumer products, and industrial machinery. Prices of aircraft equipment are falling. One-third of the respondents are reducing their head counts substantially as part of restructuring efforts. Employment changes at most other companies are fairly small. The majority of respondents indicate that average pay raises remain in the range of 3 to 5 percent, but a growing fraction report higher increases. Contacts indicate that tight labor markets have raised workloads for existing employees and increased the need to reward key personnel. Finance, accounting, information technology, research and development, and sales and service openings reportedly are the hardest to fill. All contacts expect business either to be good or to show improvement this year. However, many point to at least some degree of uncertainty arising from their own restructuring efforts or those of competitors or customers. Temporary Employment Temporary employment firms in the First District continue to expand, with overall revenues growing an average of 25 percent from a year earlier. As before, contacts report strong demand for information technology workers, especially those associated with the Internet. Wages are generally 5 to 10 percent higher than a year earlier, and these increases are in line with billing rates. E-business professionals and web developers are witnessing even greater wage growth because of high demand for their skill sets. In response to tight labor markets, many clients are increasingly using staffing firms to fill their permanent hire needs. Outlooks are positive, although contacts say most of their clients are slightly concerned about future stock market performance. Commercial Real Estate The commercial real estate market in New England has not changed much during the past quarter. The Boston office market continues its strong course, and contacts describe it as the "hottest" market in the country. Rents continue to rise. Vacancy rates for prime downtown office space are extremely low. Lack of space downtown has induced some firms to move to the suburbs, raising demand for office space in the 128/495 corridor. Rental rates in the suburban office market have increased as a result. Retail and multifamily markets are also very robust, with vacancy rates below 4 percent in both. Contacts do not expect any major changes in the Boston market. The rest of New England is mixed. Hartford has seen some recovery, but its office vacancy rate is still one of the highest in the country, at around 20 percent. The retail and industrial sectors in Hartford have vacancy rates of 7.5 and 14 percent, respectively, also worse than the national averages. Rhode Island has experienced some restructuring in manufacturing and contacts anticipate an increase in industrial vacancy rates there. The office market in Rhode Island is doing well, however. Insurance Continued restructuring in the insurance industry is resulting in employment reductions at some companies as redundant positions are eliminated following mergers or acquisitions. Sales trends are mixed, with underlying trends somewhat hard to discern because of restructuring of the industry. Most insurance companies do not seem to be experiencing general labor market pressures. The market for some specialties, particularly information technology (IT) workers, remains tight. However, contacts suggest that the degree of tightness in the IT labor market varies considerably by geographic area within New England. Return to top Summary New York