Beige Book Report: Boston
August 9, 1989
While most First District manufacturers report good year-to-year gains in sales and orders, half say that the pace of incoming business has slowed. Retail sales are generally weak and below expectation. Auto sales continue to decline and are significantly below year-ago levels. By contrast, demand for residential real estate has improved slightly since last month in response to falling interest rates and prices. Respondents agree that materials prices have peaked and that selling prices are rising modestly at most. They expect slow growth to continue and view themselves and their customers as very cautious.
Retail
A sample of First District retailers reports that recent sales are
weak and below expectation. Reflecting a regional downturn in home
sales, building supplies and appliances are moving especially
slowly. But apparel is also soft, and consumers seem broadly
cautious, spending less money per trip to the store.
Reported price changes range from no increases in building materials and electronic equipment to a 6 percent rise in hardware. One discounter lamented a lack of "bargains," as suppliers have avoided building excess inventory. Retail inventories also remain in line. Margins are under pressure, however, as overhead costs continue to rise and promotional and low-margin items make up an increasing share of sales. Retailers surveyed remain profitable, but earnings are below 1988 levels.
Respondents are uniformly cautious about the rest of 1989, and several have lowered their expectations for sales ad profits. Capital spending plans are generally modest, and staffing levels are projected to be flat to lower over the coming months.
First District auto sales are reportedly slightly lower than sales last month and significantly below year-ago levels. Although the extent of the year-to-year drop varies, some dealers report sales to be off as much as 50 percent. Layoffs have occurred, and inventories are building despite previous cutbacks in orders. While the summer is usually slow, dealers cite two reasons for the sharp year-to-year decline. First, they believe that economic uncertainty is reducing buyer confidence. In addition, the unusually long-term financing plans introduced a few years ago have extended the normal buying cycle. Consumers who usually buy a car every two to three years now find that their remaining car payments exceed their vehicle's trade- in value; thus, prospective buyers needing finance may delay new purchases. Many dealers expect the slowdown to continue until declining interest rates or "creative financing" entice buyers back to the showrooms.
Manufacturing
Most First District manufacturing contacts continue to report good
year-to-year growth. Shipments and orders are 6 to 18 percent above
year-ago levels at most surveyed firms. Nevertheless, half the
respondents indicate that incoming orders are starting to flatten
out. Contacts describe demand for products related to defense,
autos, computers, and construction as relatively weak. One
manufacturer said that the government is renegotiating contracts
while auto makers are cutting inventories. By contrast, respondents
see demand from the commercial aircraft, paper, packaging, and food
industries as more robust. Two firms mention strong export growth,
but one sees weaker demand in Japan, its major market last year.
Manufacturers describe employment levels as little changed and wage increases as "noninflationary." Although several respondents report a softening in the region's labor markets, others see little change above the entry level. Inventories are closely monitored and are currently satisfactory. Contacts agree that input prices have peaked. Their own prices are reportedly stable or rising very modestly.
A majority of manufacturing contacts expect capital spending to be below last year's levels, although one-third project current outlays to be well above 1988 figures. Three optimistic firms have recently raised their investment plans. Investment programs include bricks and mortar as well as equipment.
Half the manufacturers surveyed expect business to slow somewhat further. The others see little evidence of a slowdown in their own order books. Nevertheless, they describe themselves as "watchful," lest declining confidence levels prove self-fulfilling.
Residential Real Estate
First District realtors report that residential sales have improved
slightly from last month. They credit lower interest rates and
prices for causing the modest improvement. Smaller homes continue to
sell better than larger units, and sellers far outnumber buyers in
the condominium market. Buyers appear very cautious overall, and
realtors expect sales to maintain their current slow pace.