March 20, 1986
The pace of economic activity in the First District is quite unbalanced. Retail sales are expanding modestly, according to plan. The manufacturing situation is mixed, with some responders experiencing a softening in order rates and others, most notably those in housing-related areas, enjoying an upturn. The residential real estate boom continues. Perhaps the most notable development in this month's report is the divergent import price experience of manufacturers and retailers. While manufacturing respondents have not observed any appreciable increases in the prices of imported components and materials, several retailers have seen very substantial increases in import prices. These increases will appear in prices to the consumer in a month or so.
Retail
Retail sales in the First District in January and February were
generally consistent with plan, but contacts reported an increase in
volatility. Inventories are also according to plan for most
merchants contacted. Several firms expressed concern about consumer
acceptance of projected price increases for imported goods resulting
from the decline in the dollar.
Aside from one chain experiencing a downward sales trend, contacts report moderate sales growth in January and February, about at planned levels. Several contacts said consumers are becoming even more promotion-minded, with sales revenues swinging widely in response to advertising and perceived value. For example, a home furnishings chain reported that sales rise in a predictable way for major promotional events, but that the traditional correlation between sales and new home production has disappeared.
Inventories were reported to be as planned. Firms with increasing sales have been increasing inventories to support them while the one contact with weak sales has been reasonably successful in keeping inventories in check.
Prices are reported to be stable except by firms with considerable imports. One respondent cited a 30-35 percent increase in costs for selected home furnishing items from Europe. The firm is concerned that consumers will balk when these price increases are passed on in the next month or so.
First District merchants expect moderate but not robust sales growth in 1986. Warehouse expansions and store openings continue on schedule, but several contacts said they will be more comfortable after a few months of steadier growth.
Manufacturing
Reports from the manufacturing sector are mixed. Some respondents
have experienced a softening in orders relative to a year ago, while
others have enjoyed a pickup. Orders for housing-related products
and communications equipment are rising. According to one
respondent, demand for housing products is increasing daily. Sales
of both capital equipment and supplies to the U.S. automakers are
holding up well. Sales to the machine tool and apparel industries,
on the other hand, are disappointing; respondents attribute the poor
sales to the effects of foreign competition on their customers.
Respondents continue to encounter strong resistance to price increases, except where they have a unique product. Prices of purchased materials and components, including imports, are well behaved. For this group of manufacturers, the most important effect, to date, of the decline in the value of the dollar has been to make the earnings of foreign subsidiaries appear more attractive. However, one contact from the machine tool industry reported that a colleague had received a number of orders from Europe as a result of the dollar's decline and another contact reported that European shoe producers are finding it more difficult to sell in the United States.
Most respondents will spend as much or more on plant and equipment in 1986 as they did in 1985. Employment levels are expected to be fairly steady.
Real Estate
The residential real estate market in the Boston metropolitan area
is very strong. Housing prices, which increased about 70 percent
over the past two years, are still rising. In a number of
communities prices are said to have risen 5 to 10 percent just since
the end of 1985. Realtors attribute the sharp rise in prices to the
strong economy and tight supply. Home production is up, but has not
kept pace with demand-in part because of limited building space and
no-growth attitudes in many communities. The greatest growth in
housing has been the outer suburbs to the west and southwest of
Boston. The housing market is also said to be strong in southern New
Hampshire and the Providence area.
In commercial real estate, many new office buildings have recently been built in the Boston suburbs and more are coming on-line. Absorption rates have been healthy, but so much space is available that the vacancy rate has reached 20 percent and developers expect it to go higher. Demand and supply are more in balance in downtown Boston, where the vacancy rate is about 10 percent. While a lot of new space has been added, the percentage increase was not as large as in the suburbs. Because Boston's vacancy rates are still lower than those of other major cities, developers from other parts of the country are becoming interested in Boston. At the same time, some Boston developers are beginning to look at other New England cities. Providence and Hartford are said to have vacancy rates of about 15 percent. Vacancy rates in southern New Hampshire are about 25 to 30 percent but some developers find the area attractive because absorption rates are high and there is a lot of land available to develop.