Beige Book Report: Boston
August 2, 1988
Retail sales in the First District ranged from fair to "OK" in recent weeks with early July somewhat weaker than June for most stores. Retailers have kept inventories in line without extensive markdowns and margins have not eroded significantly. Manufacturers report a good first half, with profits rising more than sales. Prices of both inputs and finished goods are generally rising faster than a year ago, with selected commodities and imports leading the way. The outlook for the rest of 1988 and the first half of 1989 remains positive, but recent signs of weakness have generated some concern.
Retail
Sales are running at or below planned levels in many First District
chains. Planned levels varied widely, however, from 5 percent to
more than 20 percent ahead of last year. All but one of the
merchants contacted reported slower growth in early Judy than in
June; the exception experienced some pickup after several months in
the doldrums. Respondents carrying ladies' apparel described this
area as weak; several attributed their problems to the failure of
short skirts to catch on. Hot weather makes it difficult to assess
consumer interest in the "more traditional" transition and fall
apparel mow available, but merchants expect a good response.
Most contacts reported that careful monitoring had kept inventories from getting too high. While some markdowns have been taken, the careful control of inventories has enabled contacts to avoid extensive price-cutting and hence to maintain margins.
Price increases are averaging about 5 percent overall. All contacts noted that price increases are greater this year than last. Rising import prices have caused merchants to seek out alternate foreign and domestic suppliers. Wage costs are also rising in the region, as retail employers attempt to deal with high turnover and the tight labor market.
Sales in the remainder of 1988 are expected to increase 5 to 20 percent compared to 1987. This range is similar to actual results to date, but merchants seem cautious. One mentioned a lack of exciting new products; others lamented female customers' reluctance to buy. Store openings and remodeling proceed on schedule, however, and several contacts said they could scale up quickly if sales are more buoyant than expected.
Manufacturing
For most First District manufacturers the first half of 1988 proved
"very good," even "a boomer to date." Sales in the first half were
up 5 to 15 percent from year-ago levels while profits rose even
more. New orders increased 3 to 20 percent. Respondents experienced
strong demand from a broad range of customers, including makers of
commercial aircraft, autos, machinery and sports equipment. The only
weak markets were construction and military aircraft. Despite these
strong results, half the respondents noted very recent (May or June)
slowdowns in sales, orders or responses to marketing efforts. While
all the declines could be explained away, these signs of possible
weakness introduced a note of caution.
Reports on inventories were mixed. Half of the respondents said inventories were comfortable while half found them a little high. Two mentioned that the longer lead times required in ordering paper had contributed to larger inventories.
Three-fourths of the manufacturers noted big price increases for basic materials such as steel, copper, aluminum and paper. A few thought that metals prices had stabilized, but most foresaw continuing upward pressures on commodity prices and cited increases already announced for August and September. Most manufacturers could pass on at least part of these rising costs. While price increases have become "more acceptable," in some markets competition still makes them difficult; thus, manufacturers' price increases ranged from "very little" to "10 to 15 percent and sticking."
Many contacts described labor markets as tight, with technical workers and minimum-wage teenagers said to be in particularly short supply. However, most respondents do not sense that wage pressures are picking up in the manufacturing sector. Workers continue to give priority to job security and preserving work rules rather than to wage gains. In general, contacts report that employment levels are stable or up slightly, but according to press accounts, two major regional employers have recently announced layoffs.
Most First District manufacturers characterize their capital spending programs as "strong." Expenditures for 1988 range from slightly less than last year's level to increases of 20 percent. Capital programs continue to emphasize cost reduction, productivity gains and replacement needs, but three firms are expanding their U.S. capacity.
Expectations for 1988 as a whole fell between "OK" and "good." Sales and profits are generally forecast to end above last year's levels. Nevertheless, half the respondents noted recent signs of weakness, and two expect a slowdown in the second half. Several contacts forecast a recession for late 1989, and half expect inflation to accelerate.