December 5, 1984
Economic activity in the First District has slowed in the past several months, according to representatives from both the retail and manufacturing sectors. Retailers attribute the recent weakness, at least partly, to unseasonably warm weather; they continue to look forward to a strong Christmas season. Manufacturers have also seen a slowing since the summer, although a couple of respondents report that orders appear to be picking tip again. Manufacturers are concerned that the recent slowdown and that there will be little or no growth in 1985. Even so, manufacturers' capital spending plans for 1985 are greater than or equal to spending in 1984. Some retailers and manufacturers report that inventories are higher than desired; but for the most part, inventory control is said to be good. Price increases continue to be very modest; competition is intense in both retailing and manufacturing.
Retail Sales
Retail sales growth slowed in the First District in October and the
first half of November. More recent signs are mixed. Price
competition is reportedly fierce. In spite of recent results, most
contacts expressed optimism about the upcoming holiday season.
Explanations for the recent slowdown were varied. Warmer-than-usual fall weather reportedly inhibited purchases of cold weather apparel, with sales of outerwear noticeably below plan. One merchant also blamed poor product availability caused by difficulty hiring employees for a distribution center. (New England's unemployment rate is currently about 4 1/2 percent). However, a chain selling consumer durables, with well into double digit sales growth for the last few years, had no explanation for an unprecedented drop to "near zero" growth beginning in mid-September. Shoppers just stopped coming to their stores.
There is extensive promotional price activity. Off-price retailing is growing, reducing margins. One contact commented that merchants are fighting so hard for market share that they are losing sight of the bottom line. Another, selling hardgoods, said ready-to-wear stores are facing particularly tough times. A mail order firm predicted a shakeout in the catalog sector and, citing competitive pressures, reported recent price increases averaging only 2 percent; 1985 price increases are also expected to be modest.
Two retailers with supply troubles have lower inventories than desired. They are concerned that customer service levels and, hence, sales could be adversely affected in the next critical month. Other stores, with unexpectedly weak sales, are currently overstocked but expect to work inventories down in December.
A local department store reported "fantastic" sales volume the day after Thanksgiving; but results were spottier on the ensuing weekend days. The slower weekend sales were attributed, at least in part, to the return of warm weather. With more seasonal cold temperatures, retailers project good holiday sales and strong, but not spectacular, increases over last year.
Manufacturing
Manufacturers in the First District report that orders have slowed
from the pace set in the first half of the year. The slowdown has
been fairly general, encompassing high technology products,
traditional metalworking, packaging and some consumer products. One
respondent has continued to enjoy strong, steady growth and two
others have seen a pickup in orders after a slowdown earlier in the
fall; but these are exceptions. The slowdown caught manufacturers by
surprise; several report that inventories are a little higher than
desired. However, most contacts feel that their inventory control is
very good. The slowdown does not seem to be viewed as a serious
problem in itself, but respondents are concerned about what it
implies for 1985. Most expect business to be flat or up slightly
next year.
Capital spending plans call for expenditures in 1985 to be about the same as or higher than in 1984. More additions and new plants seem to be planned, although the emphasis in capital spending is still on replacement expenditures and productivity enhancement. A couple of contacts mentioned that workers have become more receptive to productivity enhancing equipment and the more flexible work rules this requires.
There are no signs of increasing inflation. Materials prices are rising only modestly and several manufacturers noted that even these modest increases cannot be passed on to customers. Wage increases remain moderate.
One comment heard for the first time is that the decline in the value of the pound has made the United Kingdom a much more attractive location from which to supply world markets. Two manufacturers, in very different industries, said they are expanding or thinking of expanding their U.K. operations. Several respondents also mentioned that the strong dollar and the pressures of foreign competition have forced them to devote more attention to developing new products and also to searching out new markets overseas for existing specialty products that are not very price sensitive.