March 12, 1985
Economic activity in the First District appears to be expanding at a modest rate. Retail sales continued to grow in January and February, with sales in some cases exceeding expectations and in other cases falling short. Inventory levels vary, depending upon past relationships between sales and expectations and upon individual stores' planning decisions; however, no one reports that inventories are seriously out of line. Prices are generally stable and the outlook is positive. Reports from the manufacturing sector are varied, with expectations playing an important role in manufacturers' assessment of recent results. Most manufacturers expect 1985 to be a reasonably good year. Capital spending plans are up, but much of the money spent on equipment will go to foreign suppliers. Price Increases in the manufacturing sector are said to be negligible.
Retail
Most retailers contacted this month reported stronger-than-expected
sales in February on the heels of a fair-to good January. One chain,
however, reported robust sales growth in January followed by an
anemic increase in February. Several merchants mentioned slow sales
of women's clothing and men's footwear; other items generally
performed well.
Inventories are lean in those stores that enjoyed sales above expectations from December through February. Prices are rising only moderately. Some increases are attributable to commodity price increases, such as leather and rubber for footwear. Upgrading of merchandise has also created the appearance of price increases. Competitive pressures and widespread promotions were cited as causes of the moderation in inflation.
One month into fiscal year 1985, the retail outlook is promising. Projections of sales growth range from 6 to 12 percent over 1984; these projections for 1985 equal or exceed 1984's strong growth rates. Capital spending plans support these expectations, with new stores and additional warehouse space planned throughout the region.
Manufacturing
Most manufacturers contacted described business as fair, but a few
reported disappointing results. To some extent, differences in
manufacturers' assessment of current conditions reflect differences
in expectations rather than differences in results. A "decent"
increase for one firm Is disappointing for another. A number of
firms have seen a pickup in orders and production in the past 2 or 3
months; however, in the computer and semiconductor industries, there
is reported to have been a marked slowing in the rate of growth.
This slowing is attributed to combination of factors, especially
customers' uncertainties about economic conditions and the tax
environment and the delaying effects of announcements of future new
products. The slowdown is not expected to persist for very long.
In addition, manufacturers of capital goods report that orders are not as strong as one would expect given the stage of the recovery and business' ambitious investment plans. Foreign competition is said to be the explanation: much of business spending is going for equipment produced abroad. Several firms confirmed this from the buying side; their capital spending is up substantially but much of the equipment is coming from Japan and Europe. Interestingly, these contacts did not cite price as the primary reason for buying from abroad. Foreign equipment is said to be state-of-the-art; also, according to one contact, lead times for complex machinery are shorter if one buys from a Japanese rather than a domestic supplier.
Inventories are said to be a little higher than desired. This is a legacy from the slowing in demand that many firms experienced in the second half of 1984 rather than a recent development. Most of the firms contacted report that prices for materials and supplies are not increasing at all. Most also report that they cannot raise their own prices; increases for one product are offset by discounts for others. A couple of firms report keeping costs down by taking advantage of the strong dollar and importing from their own overseas subsidiaries; these subsidiaries previously served only overseas markets.
Manufacturing respondents expect 1985 to be a reasonably good year, but they are uneasy. The value of the dollar is the source of much of this unease; contacts are concerned about both the level and the possibility of large changes. Two executives were particularly concerned about how monetary policy would respond to a slowing in the foreign capital inflow.