Beige Book Report: Boston
June 22, 1994
Economic activity continues to pick up in the First District. Among manufacturers, the recovery appears to have broadened considerably. Retailers, by contrast, seem to fall into either a high- growth or a no-growth camp. While prices charged by manufacturing and retail contacts are generally holding steady, some materials costs reportedly are increasing.
Retail
First District retail sales results varied widely in recent months.
Two discount specialty chains reported increases in sales of roughly
20 percent in April and May compared to year-earlier levels. By
contrast, other retail contacts experienced a drop in sales for one
or both months, which they attribute to unseasonably cool weather,
rising interest rates, and a truckers' strike. Even these retailers,
however, have seen a sharp rise in shopping since the arrival of hot
weather just before Memorial Day, especially for summer goods, such
as garden supplies, patio furniture, and barbecue equipment.
Retail contacts' expectations also vary widely, with a range from 0 to 20 percent in anticipated sales growth over the next six months compared to a year earlier. Most contacts report little or no change in their own or vendor prices, with the exception of increases for wood products. Many retailers say they are struggling to maintain gross margins by cutting operating costs and reducing inventories. Employment levels remain flat, but a few contacts plan major capital expansions this year or next.
Manufacturing
Overall manufacturing sales growth appears to be accelerating,
according to reports from First District contacts. Producers of
automotive parts, computer components, and residential construction
materials note double-digit rates of increase from a year ago. Sales
of industrial machinery and replacement parts are rising strongly,
with some contacts remarking that this phenomenon is relatively new.
Makers of aircraft parts report scattered increases in demand, while
noting broader signs of weakness in aerospace. Demand for consumer
nondurables is growing in the low single-digit to low double-digit
range. Contacts report declining medical equipment and mixed utility
equipment sales.
Manufacturers producing consumer nondurables have increased prices by 2 to 5 percent, but most others report no possibility of raising prices. A majority of respondents cite some materials cost increases. Prices of steel, aluminum, copper, paper, chemicals, and plastics are reported to be creeping up, although one producer notes that paper prices remain below their level of a year ago. Prices of cotton and flax fibers have risen noticeably since the beginning of the year.
Most contacts do not appear concerned about materials inflation, in part because some other costs are falling. One-third of the respondents report success in negotiating reductions in purchased goods and services prices. Half express intentions to continue to prune their work force or introduce other efficiencies.
Manufacturers generally expect continued growth in the U.S. economy and their own business. However, those who depend on consumer durables spending expect their growth to slow as a result of rising interest rates.
Commercial Real Estate
Commercial real estate markets are improving throughout most of New
England, except Connecticut. Vacancy rates in the Boston area office
market continue to decline, with the conventional wisdom now
suggesting that new office construction will be proposed in Boston
within two or three years. Portland is reported to have limited
availability of class A space. Hartford office vacancy rates are
increasing.
The nonresidential construction industry is reported to be in fairly good shape after a hard winter, with one contact reporting that new business is coming from renovations of existing retail and institutional space. Margins are up and are expected to continue to rise.
Nonbank Financial Services
Investment management companies report that after a very strong
first quarter, mutual fund sales have slowed considerably in April
and May. The decrease was primarily in bond funds and was attributed
to rising interest rates. Sales of equity funds continue to grow,
though more slowly than in the first quarter, with international
funds particularly popular. Even after the recent slowdown, the
investment companies surveyed plan to increase employment at least 2
to 3 percent in 1994.
The Outlook
The New England Economic Project (NEEP), a nonprofit forecasting
group, released its semi-annual regional forecast in mid-May. NEEP
projects 2 percent growth in total New England employment in 1994.
Work forces in construction, services, and retail trade are expected
to expand at above-average rates, while manufacturing employment in
the region continues to contract.