June 25, 1985
Economic activity in the First District remains sluggish. This sluggishness is particularly apparent in the manufacturing sector, where high technology companies continue to announce layoffs and furloughs. Firms in more traditional manufacturing industries report that employment is trending downward in response to fairly flat order rates; but, for most, layoffs are not required. Inventory-to-sales ratios are said to be higher than desired but coming down. The experience of the retail sector is more mixed, with some contacts enjoying strong sales increases and others seeing a slowing in growth. Retailers remain optimistic about the rest of the year and are currently ordering winter merchandise based on this optimism. Increases in both industrial and retail prices remain very moderate. In contrast to the sluggishness of the manufacturing sector and the confusing signals from retailing, the real estate market is booming.
Retail
Retail results continue to be mixed in the First District. Several
retailers enjoyed a strong performance in May; others reported some
softening in sales growth. On both sides of the performance scale,
however, retailers with national affiliations felt First District
results were at least as strong as those of their affiliates
elsewhere.
Merchants with "upscale" customers appear to be faring somewhat better than discount stores, although the difference is not great. Several contacts mentioned especially strong sales of video-related merchandise, computers, and VCRs. Toys and women's apparel are also performing well.
Inventories are higher than last year in several cases, but are not a source of concern among the merchants contacted. In one case, inventories are high because sales did not meet expectations; another supplier, however, has intentionally increased inventories faster than sales so as to improve customer service.
Firms are currently ordering merchandise for next winter's holiday season and are building into those orders expectations for a good sales season—as good or better than year-over-year growth to date. A contributing factor, according to one contact, is that interest rate declines have reduced the costs of carrying this merchandise. Prices are steady. Fall prices for one merchant, for example, will be only 2 1/2 percent higher than last fall.
Manufacturing
A number of First District high technology companies have announced
layoffs and furloughs in the past two months. Layoffs have been
especially prevalent among manufacturers of semiconductor test and
production equipment; most of these layoffs have been fairly small,
affecting a couple of hundred people each. The largest individual
layoffs have been at computer companies; in one case, 1,000 workers
in the First District have been dismissed. However, the employment
situation in the computer industry appears to be more varied than
for firms selling to the semiconductor industry: some computer
companies have avoided layoffs but are shrinking staff through
attrition; others are still hiring, A slaving in domestic orders is
said to be the primary reason for the high tech companies'
difficulties. The effect of the slowdown has been magnified by the
rapid expansion that preceded it; during this expansion firms added
to capacity and built up staff in anticipation of continued rapid
growth. Despite current difficulties, however, the high tech firms
contacted are not curtailing their capital spending plans; these
expenditures are seen as necessary to bring out new products and
remain cost competitive.
Firms in more traditional manufacturing industries report only small changes in aggregate order rates. Although one contact reported that overall business was down and would require layoffs, most manufacturing respondents have seen order decreases in some divisions offset by gains in others. Sales to the auto industry are good. Sales of housing related products are mixed. Sales of capital goods depend very much on the condition of the customer's industry, but appear to be holding steady overall. As in the case of high tech companies, traditional manufacturers have not changed their capital spending plans. For the firms contacted, planned expenditures are about the same as or less than expenditures in 1984; however, spending in 1984 is said to have been unusually high. The emphasis in capital spending is on increasing productivity rather than adding to capacity. In particular, there seems to be little need for additional floor space; according to one respondent, today's machinery is much more compact for the same power and value.
Inventory-to-sales ratios are a little higher than desired but coming down. Industrial prices remain very well behaved. All respondents report that price increases for materials and supplies continue to be very modest; several commented that they are encountering greater resistance to increases in their own prices.
Real Estate
The real estate market is booming, especially in the Boston area.
Realtors report a low number of listings while demand, said to be
fueled by declining mortgage interest rates, is running very high.
Many realtors report that it is a "sellers" market. They expect this
situation to continue in the near future and intensify if mortgage
interest rates decline further.
New residential construction centers on condominium developments and higher-priced homes. Realtors report that very few moderately priced housing units are being constructed. Also, condominium conversions are continuing at a rapid pace.