Beige Book Report: Boston
December 1, 1987
Most First District manufacturing contacts enjoyed a strong third quarter. A majority report no impact from the decline of the stock market, but some manufacturers have had customers delay orders. Recent retail results have also been mixed. Some retail chains, notably discounters, have seen no fallout from the stock market; these chains continue to register substantial sales increases compared to a year earlier. Others report a noticeable weakness in November to date. There is a near-unanimous expectation among manufacturers and retailers, even those continuing to do well, that customers will be more conservative in coming months as a result of the recent volatility in financial markets.
Retail
Among the merchants contacted, retail sales in October and November
ranged from 41 percent ahead of year-earlier figures to 7 percent
below. Those experiencing a slowdown could find no change in local
conditions to explain it—the slowing was fairly general across
product lines and geographic areas. They attribute the weakness to
national economic conditions in general and to the stock market
decline and rising import prices in particular. Only toys and
children's apparel have been doing better than expected.
Inventories are said to be generally satisfactory. Orders are being carefully scrutinized to assure "sufficient but not excessive" Christmas merchandise. The perception is widespread that suppliers have additional merchandise available to fill late orders if business picks up more than expected.
Plans for the future are characterized as "conservative," responding to the uncertainty generated by the stock market's volatility. However, no drastic changes are projected. New England merchants remain moderately optimistic about the Christmas season and 1988. Fourth-quarter sales are expected to exceed last year's, in some cases by a modest amount, in others by as much as 20 percent. A similar growth range is forecast for 1988.
Manufacturing
Third-quarter sales for the fabricated metals and machinery firms
contacted were 3 to 25 percent above year-earlier levels, while
earnings were up 14 to 27 percent. New orders also increased by
double digits from 1986. Among the strongest sources of demand were
the food, paper, energy, consumer hardware, and defense industries.
Sales were softer for products destined for the oil and gas, auto
and some parts of the construction industries.
With respect to the period since the third quarter, one-third of respondents report some fallout from the stock market decline. They generally cite delays rather than cancellations of orders and believe that customers are drawing down inventories in order to avoid commitments. Among the majority of firms that have seen no effects, two capital goods makers caution that their orders tend to lag other economic changes.
First District manufacturers also report little evidence of resurgent inflation. A few respondents mentioned increases in copper, paper, chemicals and trucking costs; however, most said their own prices were steady or falling while a minority reported increases of up to 3 percent.
Employment levels are generally holding steady or are declining through attrition. Firms remain very reluctant to hire, although one large firm plans a major hiring program.
Capital spending is at or, in several cases, well above last year's levels. While most respondents see no reason to change these spending plans, two or three are holding back on discretionary purchases and are considering ways to maintain their flexibility by leasing rather than buying, for instance.
A majority of First District manufacturers are looking forward to a good 1988 with no adverse impact from the stock market. However, one firm that expects excellent sales growth in 1988 has reduced its forecast for its industry's growth by about one-third. Moreover, a significant minority of First District firms expect a flat fourth quarter and very slow growth in the first half of next year. Even among those expressing confidence, several contacts said they will be watching consumer spending very closely and one tool maker expressed concern about the impact of stock buybacks on its customers' capital spending plans.
Outlook
The New England Economic Project (NEEP), a non-profit organization
comprising businesses, government agencies, and educational
institutions, held its semi-annual outlook conference in mid-
November. The NEEP forecasts for the six New England states, taken
together, call for slower employment growth in 1988 than in 1987,
primarily attributable to slower growth in the national economy in
the aftermath of the stock market decline. In keeping with the
national outlook, New England's rate of growth will pick up in 1989.
Unemployment in the region will remain at roughly 3-1/2 percent
throughout the forecast period. Growth is expected to be more
balanced than in recent years, with manufacturing employment
increasing modestly in both 1988 and 1989 while rates of growth slow
somewhat in non-manufacturing, especially construction.