Beige Book Report: Boston
June 24, 1986
Summary
The economic imbalance that has characterized the First District
economy for over a year continues, with manufacturers experiencing
little or no growth while other sectors expand. Once again
manufacturing respondents report that business is flat. The decline
in the dollar has not yet had a clearly discernible effect on the
firms contacted. Inventories and employment levels are viewed as a
little high given current order rates. Retailers report mixed
results for April and May, but more respondents were above plan than
below. Retail inventories are up but contacts do not view this as a
serious concern. Prices remain stable; few respondents have seen
much increase in import prices. Retailers, even those with less than
satisfactory sales growth in recent months, expect the second half
of the year to be good.
Retail
Retail results for April and May were mixed. Several department
stores, both upscale and discount, were disappointed in their late
spring sales, with sales in some stores and chains below those of a
year earlier. (The year-earlier results, contacts noted, were
unusually robust.) In one case, the month of May appears stronger
than the preceding three months; in another, no pickup is yet
evident. In contrast, other department stores, notably one targeted
to low income consumers, reported sales "nicely" ahead of last year.
Sales in hardware and home buildings supply outlets were uniformly
buoyant.
Among product lines, results were similarly mixed. Hard lines, such as electronics and paint, are generally strong. Other items experiencing strong demand include outdoor footwear and expensive housewares, such as crystal. Apparel has performed poorly.
Inventories are higher than last year, but are not, at present, a source of concern for the retailers contacted. In some stores, inventories have been intentionally increased to improve customer service or alter product mix. Although inventories are also high in stores with disappointing sales, most do not plan major price cuts or order slowdowns to reduce them.
Prices are rising very moderately, in the 1-2 percent range. Merchants expect retail prices to remain well-behaved, with the effects of oil price reductions offsetting the declining value of the dollar; however, few have yet seen either oil-related cost reductions or rising import prices.
Stores doing well expect the strength to continue through the balance of the year. Those with weak growth are not making major adjustments, confident that consumer demand will soon be back on track.
Manufacturing
Manufacturing respondents report that while orders are weakening in
some areas and strengthening in others, the overall level of
activity remains flat. General industrial demand for traditional
machinery and fabricated metal products is slow and getting slower.
Sales of a variety of automotive products, which had been strong,
are also softening. One contact reports a slowing in sales to the
industrial and commercial construction market. On the other hand,
sales of appliances and home building supplies are doing well. The
defense business remains very strong, with a couple of respondents
experiencing increases. The commercial aerospace market is said to
be strengthening.
Several respondents noted that sales are stronger in Europe than in the United States. These reports referred to sales of subsidiary operations rather than exports. None of the firms contacted has experienced an improvement in business that he would attribute to the decline in the value of the dollar. Respondents in the traditional machinery and metals industries said that Japanese competitors had increased prices 5 - 6 percent; however, they did not think this was enough to change the competitive situation.
One contact noted that prices for imported parts had increased. However, all respondents, including the one experiencing the increase in import prices, said that materials prices are not changing to any significant degree. Several commented on their inability to raise their own prices; one reported that an attempt to raise prices 2 percent on a commodity-type metal product was greeted with derision from customers. Respondents expect wage increases of 0 to 4 1/2 percent.
Respondents consider employment and inventory levels to be a little high and will be taking modest corrective action. Plans call for capital spending to be higher in 1986 than in 1985, but a couple of larger respondents have got off to unexpectedly slow starts on their capital projects.
While manufacturing respondents do not expect a downturn in the near future, they are concerned about a lack of vigor in the economy and they are puzzled by widespread forecasts of a strong second half of 1986 when they see no evidence of any change.
New England Economic Project Outlook
The New England Economic Project (NEEP), a non-profit corporation
comprised of New England business firms, government agencies and
educational institutions has just released its semi-annual forecast
for the New England economy. The forecast is based on state models
developed by a local-area consulting firm and managed by NEEP
members from each state.
The NEEP forecast calls for employment growth in New England of just under 3 percent in 1986—about the same as in 1985—and 2 1/2 percent in 1987. Growth should be sufficient to maintain an average unemployment rate in the region of close to 4 percent.
New England's growth in 1986 will depend, as it did in 1985, on the non-manufacturing sector, especially trade, services and the finance insurance and real estate group. Manufacturing employment, which declined throughout 1985, will stabilize in 1986.
The NEEP expects growth in 1987 to be more balanced. Non- manufacturing employment will grow more slowly. Construction employment is projected to slip a little from very high levels. Manufacturing employment, on the other hand, is expected to increase moderately—in large part because of an improved trade situation. This pickup in manufacturing employment will be concentrated in high tech and in traditional metalworking and machinery.