Beige Book Report: Boston
January 27, 1988
First District merchants and manufacturers ended the year with satisfactory growth in sales and earnings. In the aftermath of the stock market decline, retailers achieved relatively robust sales increases without shaving margins. Most manufacturers also felt little or no impact from the stock market decline. The few who sensed some weakening in demand late in the year report a recent rise in orders. Both groups view 1988 with cautious optimism and are proceeding with spending plans unchanged. Although the residential real estate market his been unseasonably weak, many realtors also note a recent pick-up in sales activity.
Retail
Despite fears that the stock market decline would seriously cut
consumption expenditures, a sample of First District retailers
report Christmas sales up a satisfactory 8 to 10 percent above year-ago levels. Some major chains stepped up promotions, but most
retailers did not. Thus margins generally held steady, and price
increases paralleled the 1 to 3 percent rise in the cost of goods
sold.
Most respondents are optimistic about the new year, and all intend to build up their inventories and expand their operations. One major discount chain is, however, reassessing its building program in light of the stock market decline.
The respondents do not anticipate that the fall in the dollar will cause them to increase orders from domestic sources significantly. Where import costs have risen substantially firms expect to switch to foreign suppliers whose currencies have appreciated relatively little. Some retailers also report that they can no longer find domestic manufacturers capable of supplying their needs.
The District's tight labor market remains a major concern. The situation is causing rising wages and understaffed operations.
Manufacturing
Most First District manufacturers enjoyed a good fourth quarter with
real gains in sales and orders of 3 to 12 percent from year-ago
levels. Increases in earnings ranged from 15 to 45 percent. Makers
of producer goods and consumer essentials report no impact from the
stock market decline. Those serving the auto industry or producing
discretionary consumer goods saw some weakening in November or
December but almost universally report a recent pick-up in orders.
Respondents were divided on the importance of exports. Half serve
foreign markets from foreign affiliates; thus, exports played little
role in their sales gains. The other half cited significant
increases in exports or export orders.
Contacts continue to stress efforts "to run lean." Inventories are being monitored carefully and are generally termed "satisfactory." Employment levels are stable or increasing slightly. Several firms mentioned that 1987 productivity gains of 5 to 6 percent allowed them to meet increased demand with only modest growth in employment.
Capital spending will generally continue at or above the 1987 pace. Several firms plan increases of 10 to 25 percent, while only one anticipates a significant decline. These plans reflect the introduction of new products, maintenance needs and continued efforts to increase productivity. Little expansion of capacity is likely. In no case has the stock market caused any change in respondents' plans.
Increases in the cost of materials are widespread—with steel, copper, precious metals, glass, pulp and paper, plastic resins, DRAMs from Japan and various imports from Europe all cited. Contacts expect materials prices to rise considerably faster in 1988 than in the last 18 months. In particular, spot steel prices are reported to be up 10 to 15 percent, and availability is a potential problem. In contrast to the situation a year ago, contacts are now able to pass some of these increases on to their customers. Most expect their own prices to rise an average 3 to 4 percent.
First District manufacturers view 1988 with cautious optimism. No respondent foresees a recession this year, although one-third expect sales growth to be slightly less than in 1987 or than they forecast in early October. Another third, however, expect a very good year with sales increases of 15 to 25 percent. Many are keeping a wary eye on consumer spending, and a few expressed concern about self-fulfilling prophecies.
Residential Real Estate
Throughout most of the First District, the residential real estate
market is making a moderate comeback after an unusually slow pre-holiday and holiday season. Although sales have generally increased
since the turn of the new year, they are weaker than they "were last
year at this time. In most of the region, reports suggest little
variance in sales activity among small homes, large homes, and
condominiums. Many realtors expect the recent increase in activity
to continue through the spring.