May 4, 1987
The First District economy continues to perform well. Retail sales continue to rise; manufacturers report some signs of a pickup; and with a few exceptions, the market for commercial real estate remains strong. Most First District retailers report good sales results in March and early April in spite of rainy spring weather. Inventories are not seen as posing serious problems even for those stores with sales below plan. Some merchants are being adversely affected by rising prices for imported goods. Reports from manufacturers were also fairly encouraging. In most cases, business was described as "not bad"—an improvement over the past. Increases in orders were reported for a number of products. Inventories were said to be consistent with sales. In the commercial real estate market, rapid absorption rates are holding vacancy rates to acceptable levels despite substantial space additions.
Retail
Contacts in the retail sector report recent sales increases ranging
from 3 percent and "barely" ahead of last year to 25 percent ahead.
The stores with disappointing sales attributed the weakness to
unusual circumstances. Seasonal merchandise sold poorly because
spring hasn't "sprung" in most of New England; two chains said the
only product line with outstanding sales in recent months was sump
pumps. One contact reported very strong March sales of VCRs and
other consumer electronics, which he attributed to consumer worries
about price and availability if the trade sanctions against Japan
are maintained.
Contacts selling mostly American-made products report fairly stable prices, with increases of 3 percent or less. Those selling imported goods. in contrast, have experienced substantial price hikes. One respondent has been "massacred" by increases in the prices of high- quality European furniture. While trying to shift purchasing back to the United States and Canada as fast as possible, the store is having difficulty finding the necessary quality and volume. A discount department store contact has seen prices rise for both hard and soft goods from Japan; the store has raised prices but not fully, so both profits and sales volume have suffered. This store plans to cut hard goods imports by about 50 percent if comparable domestic producers can be located.
New England merchants continue to be optimistic about the remainder of the year. Those with disappointing sales have taken actions they believe will put them on an uptrend. Those with very strong sales expect to move closer to plan in the coming months, but their plans call for respectable sales growth.
Manufacturing
Reports from First District manufacturers were moderately positive.
The most notable exceptions were, on the one hand, a manufacturer of
fabricated metal products, primarily for consumer and housing
markets, who is "euphoric" at the strength of incoming orders and,
on the other, a representative of the machine tool industries who
has suffered a broad-based slowing in orders. For most other
respondents business is "not bad". Pickups of varying strengths were
reported by producers of data processing equipment, various
fabricated metal products, electronics and production equipment for
the electronics industry.
Appliances and packaging were said to be doing well; and, for the firms contacted, the defense business remains strong. Demand for garden equipment was apparently hurt by the long, snowy winter. Respondents enjoying the strongest results generally saw this strength as attributable to their firms' actions rather than to an industry-wide situation. Several contacts reported strong European sales; volumes are good and when subsidiaries' earnings are converted to dollars the impact on the bottom line is significant. One contact commented that many companies may enjoy relatively strong earnings in the coming year because of the combination of currency translation gains and the effects of stringent cost controls introduced in the past couple of years.
Inventories are being watched carefully. None of the individuals contacted regarded inventories as out of line to a significant degree. Capital spending at these firms will be the same or higher in 1987 as in 1986. The emphasis is still on automation and productivity enhancements.
With respect to prices, a couple of contacts reported that they are still reducing or discounting prices in order to make sales. Detroit is putting a lot of pressure on its suppliers to reduce costs. However, one fabricated metals producer that cut prices substantially last year in response to Korean and Taiwanese competition has recently been successful in introducing an increase. Most contacts have not seen any major changes in input prices, but increases were reported for steel, castings and pulp.
Commercial Real Estate
The commercial real estate market in New England remains strong for
the most part. Although new office space continues to open up in
Boston, the city's vacancy rate ties that in Manhattan as the lowest
in the nation. The city of Cambridge, however, is having some
difficulty absorbing a large increase in space. In Hartford there
has recently been a 25 percent increase in office space, but growth
in the financial services industries has kept occupancy rates
healthy. In Providence two large class A-buildings have become
available for occupancy, but two-thirds of the space absorbed
recently has been rehabbed space. In Burlington, VT rents in the
suburbs are rising and vacancy rates are dropping; the area appears
to be successfully attracting out-of-state tenants. A building boom
in southern New Hampshire has caused a glut of office space but some
analysts say that if the economy continues to grow at the current
rate, demand for class A space will soon exceed the supply. Many of
the projects in the region that are scheduled to open in the coming
year are pre-leased. It would appear that developers are waiting for
tenant commitment before beginning new projects.