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Beige Book Report: Boston

January 24, 1990

Reports on First District economic conditions were mixed in early January. Retail results were generally disappointing, but most manufacturers and realtors reported modest gains in sales. All types of contacts face intense price competition, with discounting becoming increasingly widespread. First District manufacturers indicate that international demand is stronger than domestic and that growing shares of their sales are made overseas. Most contacts expect the first half of 1990 to continue soft, with a pickup possible later in the year.

Retail
First District retailers report weak sales, slow traffic, and a heavily promotional atmosphere through the Christmas season. Discretionary items and building supplies sold especially poorly. Some firms that had expected stronger sales are now carrying excess inventories.

Most respondents report wholesale prices rising at the same rate as earlier in 1989 - flat to up 7 percent, depending on the line of business. Prices at retail rose less than at wholesale, as large retail establishments reduced gross margins in response to stiff competitive pressures. Smaller establishments, which seem less subject to price competition, either maintained or increased their gross margins.

Retailers surveyed said that the cost of doing business continues to increase. Commercial rents are reportedly still rising, even though vacancies are up. Total labor compensation is growing at an annual rate of about 10 percent, with benefit costs rising much faster than wages. Faced with weak sales and rising costs, several firms report work force reductions; all report increased labor availability.

A majority of retailers foresee weak sales through the first half of 1990, with possible improvement late in year. Most have no plans for expansion, and are using available funds to pay down debt.

Manufacturing
Conversations with First District manufacturers generally had a positive tone. A majority report modest growth in sales and orders - with gains ranging from slight to 10 percent above year-ago levels. International markets remain stronger than domestic, with contacts benefiting from a mini-boom in European capital spending and a few reporting gains in the Japanese market. Several respondents now obtain close to half of their sales revenue from overseas (through subsidiaries as well as exports). While some firms have seen a pickup in demand for automotive, commercial aerospace, and computer- and construction-related products, others see no such trend. Paper and defense products are said to be weakening.

All manufacturers are making concerted efforts to remain "lean." Most report that inventories are at satisfactory levels, although one-third describe them as undesirably high. Employment levels remain largely unchanged.

Most First District manufacturers report that materials prices are flat or falling. They cite plastic resin, steel, paper, DRAMs, and printing costs. Faced with intense worldwide competition, most manufacturers have passed some of these cost savings on to their customers. While two contacts have raised prices 5 percent, almost half mentioned discounting within their industry. Among firms discussing margins and profits, reports were mixed; however, two contacts expect a big improvement in profits this year.

The majority of First District manufacturers contacted this month expect to increase capital spending from 1989 levels. Budgeted increases range from 8 to 40 percent. Capital spending plans target replacement, consolidation, productivity improvements and, in a few cases, modest capacity expansion; however, little construction is planned.

A majority of First District contacts characterize their outlook as "guarded," although two expect 1990 to be an exceptionally strong year. Most anticipate U.S. GNP growth of less than 2 percent, with a weak first half followed by a modest pickup later in the year - "a soft landing and a soft take-off," as one respondent described it. Several expressed concern about the financial viability of their customers in the retail industry. Almost all contacts view the 1990s with optimism. Many firms feel well positioned in foreign markets where they expect rapid growth. Although concern has been expressed about defense cutbacks, the defense contractors contacted anticipate very gradual declines in real defense spending in the first half of the decade.

Real Estate
First District realtors expressed renewed optimism as the volume of home sales increased through the start of the new year. This improvement was attributed to lower asking prices and recent declines in mortgage interest rates. Properties continue to remain on the market longer than a year ago. The nascent pickup in residential real estate transactions has been driven largely by lower-priced (below $150,000) single-family homes. Commercial property sales remain quite sluggish. All the realtors contacted expect sales to increase in future months, provided present market conditions prevail.