June 15, 1988
Manufacturers in the First District report that business is strong, in part because of a pickup in exports. Retailers experienced a slowdown in May but attribute the pause to poor weather rather than to any slackening in underlying consumer demand. Rising costs are a concern: Rapid increases in selected materials prices have pinched manufacturers and rising payroll costs may force some retail price increases. Capital spending plans are more modest than in recent years, but both retailers and manufacturers are optimistic about the second half of the year.
Retail
The First District retailers surveyed reported slower sales in May.
However, they universally blamed the softness on raw weather during
the first three weeks. Materials for outdoor projects and seasonal
merchandise moved especially slowly. Bright sunshine on the Memorial
Day weekend, however, brought spirited shopping. Most retailers are
thus confident that they will recoup their lost sales.
Supplier prices are basically flat, although imported goods and plastics show some increases. Far more troublesome are labor costs. While New England's tight labor market is driving up wages, insurance expenses (such as Social Security, workmen's compensation, and medical coverage) which reflect national trends, are reportedly rising even faster.
Profits are showing signs of slippage as a result of softer sales and rising expenses. Nonetheless, expansion plans are proceeding, though at a slower pace than in 1987.
Manufacturing
Most First District manufacturers report that business is strong,
with shipments generally up 8 to 25 percent and orders up 8 to 15
percent compared to a year ago. (As exceptions, one machine tool
maker's sales have doubled while business is flat at two fabricated
metals firms.) Sales of packaging materials and sales to customers
in computers and electronics were described as particularly buoyant.
Moreover, for the first time in months, a majority of contacts
mentioned increased exports. Exports of specialty textiles, hobby
equipment, electronics and instruments rose significantly. By
contrast, firms serving the auto industry and the Department of
Defense have mixed views about the strength of these markets. In
addition, several respondents mentioned signs of caution among their
customers: one firm is being asked to hold inventories for its
customers; another said customers are taking a "just-in-time
approach" to adding capacity; and a third is experiencing
"continuing deferrals" of big ticket items.
Almost without exception, First District manufacturers indicate that certain materials prices are rising rapidly, even "alarmingly." They mentioned paper, petro-chemicals, steel, copper and nickel. Nickel prices have doubled since February. No one expressed any concern about the availability of these materials, however. Only a minority of respondents have been able to pass these price increases on to their customers. Most report that their own prices are up 1 to 2.5 percent.
Inventory and employment levels are broadly satisfactory at First District firms. Only a few contacts indicate that inventories are uncomfortably high. Employment is generally stable or declining slightly, reflecting productivity increases. While most respondents report "normal" wage increases, a small number think wage pressures may be developing.
Most manufacturers contacted are not engaged in expansive capital spending programs. The majority had made major capital expenditures over the last several years and have adequate capacity.
The outlook for 1988 remains very positive. Most First District firms expect a strong, even a "banner" year, although a manufacturer of discretionary consumer goods expects a "rough retail year." Two respondents expect a recession in 1989, but most are reserving judgment until after the election.
Residential Real Estate
First District residential real estate sales were unusually slow
this spring. Some realtors report that activity rose significantly
at the end of May but others have seen no change. No contacts are
experiencing more activity now than last year at this time. The
prospect of rising interest rates, however, may encourage some
acceleration of sales. Preferences for small versus large homes is
mixed, but buyers appear to be far more interested in houses than in
condominiums.
Outlook
The New England Economic Project (NEEP), a nonprofit organization
comprising businesses, government agencies and educational
institutions, held its semi-annual outlook conference early in June.
The NEEP forecasts for the six New England states call for
nonagricultural employment in the region to increase somewhat more
slowly in 1988, 1989, and 1990 that the 2.6 percent growth rate
experienced in 1987. Growth will be more balanced than in the recent
past; manufacturing will contribute positively to projected
employment gains through the beginning of 1990 but nonmanufacturing
industries will still account for most of the additional jobs.
Unemployment rates may rise slightly, but will remain almost 2
percentage points below the national average, according to the
forecasts.