Beige Book Report: Boston
October 27, 1987
Economic activity appears to be picking up in the First District. Retailers are quite upbeat about their recent sales results. Most of those contacted show double-digit percentage increases in September compared to a year earlier. However, the tight labor market in New England is creating cost pressures for retailers as wages rise and hiring difficulties cause delays. In manufacturing, most respondents have also experienced recent gains in orders and sales. Despite rising costs for some raw materials and imported inputs, most manufacturers are holding the line on their own sales prices. Manufacturers and retailers are both moderately optimistic about the remainder of the year and 1988. Many foresee continuing cost pressures but no real upsurge in inflation.
Retail
Sales in comparable stores posted increases over the year ranging
from 0 to 22 percent, with all but one contact reporting increases
of 10 percent or more. Sales growth was quite widespread across
product lines, with seasonal items and heavily promoted products
showing better than average gains. The one chain showing no growth,
a building materials supplier, had budgeted accordingly since new
construction has leveled off in the limited geographic area it
serves, after booming for four years.
Inventories are generally in line with plans, mostly higher than last year to support increased sales. One chain reported selected inventories below plan because of difficulties obtaining consumer electronics merchandise from "over-cautious" manufacturers who were stung by slow sales in the spring.
Hiring difficulties are an important source of concern among First District retailers. High-quality applicants to fill all job categories are in short supply despite wage increases. Some convenience stores have intermittently curtailed hours for lack of help, and some chains have had to postpone opening new stores because of hiring delays.
Sales for the remainder of 1987 are expected to continue as they have during the year to date, including a "good but not outstanding" Christmas selling season. Next year's sales are expected to be 5 to 10 percent ahead of 1987.
Manufacturing
Most First District manufacturers report a recent pick-up in orders.
Respondents representing the machinery, fabricated metals and
instruments industries cite gains ranging from 10 to 25 percent or
more above their 1986 levels; however, some of these increases
reflect defense and other large contracts that have been under
negotiation for a long time. At many firms sales are also up 10 to
15 percent above 1986 figures. Medical and electronic testing
instruments and fabricated metal products and plastics for the auto
industry are especially buoyant, while textiles and other consumer
and housing-related goods show little strength. Exports have played
only a minor role in these increases. Respondents say that their
major exports are too specialized to be very price-sensitive and
that foreign producers have too much excess capacity to buy many
U.S. capital goods right now.
Manufacturers' sales prices generally remain stable in the First District. Contacts mention that foreign competitors have raised prices far less than exchange rate changes would suggest; thus, despite rising costs for raw materials (such as pulp, paper, copper and chemical feedstocks for plastics) and for imports from their off-shore affiliates, most respondents are holding their own prices steady. Textile prices have even eroded slightly. Respondents also cite price resistance from the U.S. auto industry and the U.S. Department of Defense.
The employment report is mixed although the situation is muddled by some major restructurings and the first reported strike in many months. Declining employment—at about one-third of the firms—generally reflects restructuring efforts. Hiring is occurring at another third of the companies, primarily those producing tools, parts and other materials for the aerospace and auto industries.
Capital spending is generally running at or above last year's levels. By contrast with the recent past, when almost all capital spending was devoted to raising productivity, four firms indicate that some expenditures reflect expansions, including five new plants (two in New England).
First District manufacturers anticipate ending the year with good increases in sales and profits. In 1988 they expect sales to "chug along" at or slightly above the pace of GNP. Only one was concerned about a resurgence of inflation. Several believe raw materials prices will continue to rise faster than their own, however.