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Boston: March 1994

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Beige Book Report: Boston

March 9, 1994

Manufacturing continues its gradual recovery in the First District, but severe winter weather has temporarily set back area retailers. Contacts in both sectors see little price pressure and anticipate moderate growth for the remainder of the year. Commercial real estate continues steady, while investment management firms report strong growth.

Retail
Winter storms and cold temperatures took a considerable bite out of retail sales in the First District. Sales in January and early February were either flat or down, in some cases as much as 15 percent, compared to year-earlier levels. Apparel stores were particularly hard hit; fewer shoppers took advantage of January promotions, leaving retailers with excess inventories of seasonal clothing. Contacts reported no significant rebound in sales after storms. The fortunate retailers were those with stocks of winter survival items, such as salt, dry gas, shovels, and cold medicine.

Despite the short-term setback, retailers seem more optimistic about this year than last, anticipating 2 to 10 percent growth in sales. Many expect to see gross margins and profits increase as a result of fewer markdowns, better management of inventories, and continued cost controls. Retailers are encouraged by gains in the economy and consumer confidence; however, they remain cautious in their capital spending and hiring plans.

Manufacturing
First District manufacturing contacts generally report that the economic recovery is strengthening. Automotive suppliers indicate sharp sales gains from a year earlier. Demand also is rising noticeably for construction materials, furniture, small computer, and related supplies, publications, biotechnology instruments, and sporting goods, while sales of industrial machinery and equipment are just beginning to pick up. Contacts report continued weakness in the defense and aerospace, environmental, and pharmaceutical markets, as well as a pronounced slump in hospital equipment.

Most manufacturers indicate that severe winter weather caused little disruption in their operations, but a few believe it may have been responsible for a slowdown in orders during January. Cold temperatures have reportedly delayed spring housing construction in some areas, but the California earthquake and last year's Midwest floods have generated considerable construction-related demand.

Most contacts report that their selling prices are flat to down. Sellers of paper and metal products have increased selected prices by up to 3 percent, while cutting other prices. Several manufacturers note that customers are much more sensitive to price than they had been in the past. Automakers are continuing to require price reductions from vendors. Hospitals are forming buying pools. In other markets, prices are being held down by competition. Most raw materials prices remain flat, although contacts report increases for some metals and non- petroleum-based chemicals, as well as cotton fiber. Worldwide capacity constraints are causing increases or an end to decreases for some computer component prices.

Contacts producing for consumer durables markets have increased employment over the past year and are considering further expansions of their work forces. Some industrial goods manufacturers report that employment is flat to up slightly. Most of the remaining contacts, representing over one-third of the sample, have reduced the size of their work forces and will continue doing so in order to cut costs.

Almost all manufacturers plan to increase capital expenditures during the coming year, the majority by substantial amounts. The new capital will serve to expand capacity, produce new products, and raise productivity.

Commercial Real Estate
The last three months have brought little change to the region's commercial real estate markets. The Boston area office market continues to exhibit slow steady gains, especially in the suburbs, and the industrial market has now turned the corner with positive absorption and rents firming up. Hartford office vacancy rates exceed 15 percent for class "A" space and 40 percent for "B" and "C" space, with heavy real estate tax bills based on outdated high assessed values adding problems. Demand for distribution facilities and space for smaller firms is leading to some industrial construction in the Hartford area. A Portland, ME contact noted that poor weather on top of an already bad winter season has pushed some smaller retailers on the coast to consider seasonal operations.

Nonbank Financial Services
Investment management companies continue to report strong sales since the beginning of 1994. None of the respondents reports adverse effects on operations or sales from the recent snowstorms in the Northeast. The respondents report that assets under management have increased in the range of 30 to 50 percent in January 1994 compared to January 1993. Sales were strongest in globally oriented equity funds. All the respondents plan to increase their employment this year, with increases ranging from under 5 percent to 10 percent for the year.