Beige Book Report: Boston
January 28, 1987
Retailers in the First District enjoyed strong year-over-year holiday sales. Manufacturing activity, on the other hand, remains flat. Export sales have increased, but the improvement is small. Orders of capital equipment from the auto industry have fallen sharply. Although some retailers report that vendor prices are rising faster than a year ago, others see no acceleration. The prices of manufacturing inputs are stable. Commercial construction activity is said to be down from the level of the past two years, but still high by the standards of earlier years.
Retail
Christmas selling results in the First District were mixed; but
among those contacted, the weakest year-over-year sales increase
still exceeded 5 percent on a comparable stores basis. Some
retailers enjoyed increases ranging as high as 25 percent. Several
respondents noted that the season started slowly but became almost
frenzied in the last week or so; margins suffered at stores that
responded to the early weakness with price reductions. Electronics,
VCRs, TVs, and microwave ovens continued to sell well. Selected
apparel categories picked up. Pre-holiday toy sales showed
significant growth.
Inventories are said to be in good shape. A number of stores have made significant efforts in the last year to reduce inventory levels. Several of those contacted reported that post-holiday inventories are no greater than last year even though they are supporting significantly higher sales.
Some merchants report domestic and foreign vendor prices rising somewhat faster than a year earlier, others note very little change. One of those facing rising import prices plans to shift from Japanese suppliers to Korean. Another said that even after sizable price increases six months ago (which have since leveled off), foreign hard-goods suppliers offer better quality relative to price than domestic competitors. One firm expects its import prices to increase more in 1987 than in 1986; this firm orders up to a year in advance and by buying foreign currency when the orders are placed, it locks in exchange rates.
Retailers continue to report difficulties in finding high-quality employees in the tight New England labor market, even as they reduce staff after the holiday season. This situation gives them confidence that the region's consumer sector will remain robust in 1987.
Manufacturing
Most manufacturing respondents in the First District report that
business remains flat. However, in the metalworking and machinery
industries there has been a substantial falling-off in orders from
auto makers. Various manufacturers of capital goods report that the
chemical industry is increasing orders, defense demand remains
strong, but orders from the oil and gas industry remain depressed.
Several contacts in the computer industry have experienced moderate
increases in demand.
Exports have picked up, but the improvement is modest. Europe accounts for most of the gains. In addition, several manufacturers of large-scale capital goods are experiencing increased success competing against Japanese and German suppliers in third country markets, particularly in the Far East. Most manufacturing respondents do not see any lessening in import competition, but a representative of the textile industry reports that the prices of European products have increased and U.S. mills have regained a little market share. None of the firms contacted is shifting production to the United States to take advantage of the lower dollar. On the contrary, several are expanding overseas operations, in some cases with the intention of exporting to the United States.
Manufacturers in the First District do not expect 1987 to be much different from 1986. Seeing little growth potential, they are focusing attention on cost containment. Many have reduced employment levels in the past year; several are continuing to do so. Administrative staffs are being reorganized and reduced. Manufacturers are also continuing to cut inventories through the use of more computerized controls and just-in-time procedures. Respondents are reasonably satisfied with their progress in reducing inventory levels, but they are trying to bring them lower still. With respect to capital spending, most contacts plan to spend about the same in 1987 as in 1986. Two themes were heard, often from the same individuals: 1) approval standards are very stringent and 2) if the project will yield substantial productivity gains, it will be approved.
Prices of inputs, whether imported or domestic, are not rising to any significant degree. One exception is the price of raw wool from Europe. Manufacturers also report a continued inability to raise their own prices.
Commercial Real Estate and Construction
The commercial real-estate market is healthy for the most part,
according to local agents. Boston, despite the addition of a
significant amount of new commercial space, still enjoys one of the
highest occupancy rates of any city in the country. Agents in most
areas in the region are reporting a strong market for office space.
Construction in this sector continues but at a level somewhat below
that of the past two years. Where over-building has teen reported,
absorption rates are said to be catching up with vacancy rates.
Retail space is tight in many suburban and prime downtown locations.
Other than the current expansion of some rural shopping malls,
little retail construction is underway. Reports were mixed for
industrial real estate. While some agents report high vacancy rates,
others suggest an even match between supply and demand. Industrial
space in some locations has priced itself out of high occupancy by
charging retail rents for industrial footage. Other industrial sites
are being converted to research and development and other uses that
generate higher revenues.