September 20, 2000 Federal Reserve Districts First District - Boston

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The First District economy remains strong, notwithstanding scattered signs that growth is slowing. Recent growth rates vary widely among both retailers and manufacturers. Most contacts are holding employment steady, although head counts at temp firms are up. A few respondents say their local labor markets are somewhat less tight than earlier in the year, but others see no loosening. Aside from hotel room rates and oil-related products, vendor and selling prices are generally little changed. Retail Retail contacts give mixed reports on sales growth at the end of the summer. Shoe stores, lumber and hardware stores, and a discount retailer say that same-store sales are flat or declining from year earlier. By contrast, specialty retailers, consumer electronics, and the hospitality industry report double-digit sales increases. Most respondents are holding their employment levels steady. Unlike in June, none mention tight labor markets as a constraint on hiring. Wages are generally growing at an annual rate of 3 to 5 percent. Most contacts report steady prices. By exception, a discount retail chain is cutting prices in order to move inventory, while rates for Boston-area hotel rooms are rising at an annual rate of 7 percent. Profit margins are generally steady or rising; this is attributed in large part to constant or declining purchasing costs and, in the case of the hospitality industry, technology-based enhancements to productivity. Contacted merchants generally believe the economy will continue to exhibit strong growth over the next 6 to 12 months; as a result, they are optimistic about their own sales prospects. The respondent in discount retailing expects weaker conditions. Lumber and hardware stores cite interest rate hikes as an ongoing brake on the economy. Manufacturing and Related Services Most First District manufacturing contacts indicate that recent business is up relative to a year earlier. However, their reports vary in tone, falling largely into two groups. Makers of semiconductors, pharmaceuticals, aircraft components, medical equipment, and furniture report that revenues are up 15 percent or more from a year ago. Almost all of these companies believe that demand will continue to be strong, and some cite labor or capital equipment constraints that already prevent them from keeping up with demand. Manufacturers of other products generally report that recent business is up less than 5 percent from a year ago. Most characterize these results as disappointing or below prior trends. They cite factors such as weak industrial demand or slower growth in retail sales or demand for office equipment. Respondents in a variety of industries--both fast- and slow-growing--indicate that the weak euro has eroded their export revenues. Manufacturers indicate that they are paying more for paper, cotton fibers, petrochemicals, and energy. Other materials costs are mostly flat. Increases in selling prices remain selective and are largely confined to products in very high demand or for which input costs have risen. Employment is largely flat, except at companies with rapidly expanding sales, but many employers complain that vacancies are hard to fill. Capital spending also is mostly flat except for companies adding capacity or involved in new Internet-related initiatives. Average pay increases most commonly are in the 3 to 5 percent range, but higher at most expanding companies. For example, one firm in a "hot" industry plans to raise pay 10 percent in order to stem turnover and help recruitment among production workers. Another with a professional and technical orientation is giving 5 to 7 percent raises this year and expects to grant 6 to 10 percent increases next year. Another company with unfilled engineering needs plans to give key personnel raises in the teens plus bonuses. By contrast with these reports, a company trying to recruit for a new production facility does not plan extraordinary pay inducements but is instead exploring new ways to economize on labor. Software and Information Technology Services Most software and IT contacts report strong demand for their products or services. Some companies indicate that their revenues are now growing following a temporary decrease after the cessation of Y2K-related activity. By contrast, a firm that produces custom applications under contract reports that demand for its services has decreased sharply across a broad range of industries and geographic locations. Contacts in the Boston area and New Hampshire report that labor markets remain extremely tight. However, a company in Rhode Island says that its labor market has loosened somewhat recently. And a respondent in central Connecticut indicates that although the labor market is tight, recruitment and retention are not major problems. Temporary Employment Contract employment firms in New England continue to grow. Overall revenues are up about 25 percent from a year earlier, as a result of increases in both the number of projects and bill rates. Wages are also up, with one contact reporting a 20 percent hike from a year ago. In addition, contacts indicate they are increasing spending on benefits in order to retain workers. Demand for IT workers remains very strong. Other specialties such as office support, engineering, and medical are expanding as well. Contacts also report increases in permanent placement services. Although temporary firms say the labor market is still very tight, they suggest that conditions have eased recently. Contacts indicate that layoffs at dot-coms and other start-ups are contributing to a lessening of labor market pressures, although demand from some larger and more established clients has picked up. Commercial Real Estate Contacts in commercial real estate report low levels of inventory in New England due to strong demand and lack of new construction. They anticipate no significant changes this fall. The Greater Boston area is tight, with very low vacancy rates both downtown and in the suburbs. Although office vacancy rates increased slightly over the past quarter, rental rates continue to edge up, as demand for office space is still very high. Top office space rents for over $70/sq.ft. downtown and $40/sq.ft. in the suburbs. Hartford continues to be the weakest market in New England, although its office vacancy rates have declined and rental rates increased slightly over the last two years. Hartford's retail vacancy rates remain high and may rise further as construction is completed on new retail space. Maine contacts report their lowest vacancy rates in a decade, for both office and retail space. With pent-up demand, both office and retail rental rates in Portland have increased sharply from a year ago. Return to top Summary New York