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Beige Book Report: Boston

September 19, 1990

Economic activity continues to slow in the First District. Retailers and wholesalers generally report flat or marginally higher sales compared to a year ago, but some are recording substantial declines. Most manufacturers are finding 1990 tougher than expected. A majority of manufacturing contacts face sales below year-ago levels, and several are eating into their order backlogs. Three-fourths have cut employment levels, and half are paring their capital spending plans. Neither retailers nor manufacturers see reason to expect improvement during the next 6 to 12 months, although some retailers believe their promotional activities or cost controls provide a buffer against the poor economic climate.

Retail
For the most part, retailers and wholesalers report flat or marginally higher sales compared to a year ago. Only pharmaceutical sales are said to be rising at a double-digit rate. Some retailers are experiencing declines of up to 20 to 30 percent for building materials and higher-priced clothing. Respondents generally note that consumers are emphasizing essentials, trading down, and shopping around for bargains. Sales in the northern areas are holding up better than in the three southern states and the northern parts of New Hampshire and Maine.

Respondents report little increase in prices, and many durable goods prices are down from a year ago. About half the sample reported that gross margins are stable, and half declining.

In the context of much negative economic news, the majority of respondents expressed satisfaction with successful strategies in advertising and promotions, or in control of inventory and capital costs. No respondent expects an upturn soon. The majority think that demand will be flat for another year, but a significant minority expect further declines before the economy stabilizes.

Manufacturing
According to First District manufacturers, this year is turning out to be "rougher than expected." A majority of these firms report that shipments are flat to down from year-ago levels, with declines ranging from 2 to 10 percent. The respondents with sales increases saw gains of 2 to 10 percent. Companies reporting slowing orders or dwindling backlogs outnumber those seeing improvement.

Products reported to be facing relatively strong demand include "recession proof" consumer necessities, plastics for the auto industry (where current production levels may reflect strike preparations) and equipment with long lead times, such as power- generating and medical systems. Demand is weak for paper goods and for products related to the computer, construction or defense industries. Even the export markets appear less robust. Only one firm reports strong export growth (albeit slower than in 1989); others mentioning exports say they are flat or down versus their 1989 performance. Accordingly, while a majority of contacts describe their inventory levels as satisfactory, a sizable minority find them excessive and are trying to bring them down.

In this environment, all respondents describe materials prices as stable or below 1989 levels so far. They mention declines in prices for metals and computer components in particular. By contrast, in the aftermath of recent oil price increases, plastics prices are expected to rise by year-end. As for selling prices, while discounting prevails in the computer industry, one-half of all respondents have raised prices in 1990, generally by 3 to 5 percent.

Employment and capital spending plans are being cut. Three-fourths of the First District manufacturing respondents have reduced their employment levels - by 2 to 15 percent - during 1990. Over one- fourth expect additional layoffs before year-end. Most contacts had budgeted capital spending for 1990 to be equal to or less than 1989 levels. Half have now pared these spending plans or have made "judicious delays."

A minority of First District manufacturers contacted expect 1991 to be flat with 1990. The rest are less sanguine and, "seeing problems everywhere," are revising their forecasts downward. They cite the bite of decreased defense spending, deferred capital spending, declining consumer confidence, high debt levels, conservative banks, and, most recently, uncertainty about the Middle East and the price of oil.

Residential Real Estate
First District realtors agree that the real estate market is slow this summer. A general uneasiness about the regional economy is the most frequently cited cause. Realtors also feel that recent world events and uncertainty over the national economy have contributed to the slowdown. Prices are falling; sellers are listing their homes at more realistic levels in order to move them, and smaller homes (for first-time buyers) are selling better than larger homes. New construction has slowed considerably since this time last year. Realtors do not expect an upswing in home sales this fall unless the regional economy turns around.