September 6, 1988
Retail activity in the First District continued to be generally lackluster through the summer, with high-fashion/high-price apparel and housing-related goods especially weak. Manufacturing activity is mixed, with some firms reporting more than double-digit gains in sales and orders compared to a year earlier but others only holding steady. Price increases appear to be picking up for a range of manufacturing inputs, perhaps including labor. Cautious optimism characterizes the manufacturing outlook, but some retailers are now scaling back 1988 plans.
Retail
First District retailers report that recent sales activity is
generally sluggish. Vendors of core consumer items appear to be
doing best: unit sales of moderate and higher quality conservative
clothing and of pharmacy prescriptions are holding to last year's
robust levels; purchases of high-fashion/high-price clothing, health
and beauty aids, furniture, and building supplies are reportedly
lagging. The hot summer has spurred sales of seasonal items while
dampening customer interest in materials for do-it-yourself home
improvements.
Retail profitability is declining, as gross margins move in tandem with sales and the labor market remain tight. Firms with good sales results are increasing wages and improving working conditions; weaker firms are trying to reduce their expenses, and some are laying off costly employees. While earnings are flat among the healthiest firms, most respondents report profit declines, and some are operating at a loss.
Compared to earlier reports, capital spending plans of retailers have turned conservative. Most of the more profitable respondents are expanding their operations, but slowly and cautiously. The weak firms are disinvesting—selling stores and reducing inventories—and spending funds on only the most necessary and immediately rewarding projects. Some retailers are strapped for cash. One regional distributor, noting weakness in its customer base, is tightening credit.
Manufacturing
First District manufacturers give mixed reports on recent sales
activity. While a majority indicate that sales are strong, with
gains of 18 to 25 percent above year-ago levels, over one-third say
that sales are flat or disappointing. Order rates vary too: some
firms have backlogs 15 to 19 percent above 1987 levels but others
sense some softening. Demand for electrical machinery and
instruments, particularly by the auto and chemical industries, was
especially strong. Half of the First District manufacturers
contacted have benefited from strong exports, and two firms
mentioned transferring production to the United States from
overseas. In contrast, demand for building products and personal
care products was sluggish, in part because retailers are reportedly
keeping inventories under tight control. Government purchases are
also down.
Earnings are generally described as very good. For the most part, inventories are also seem to be in good shape. A third of the firms contacted report that their capital spending is 10 to 20 percent above last year's level. For the majority, however, capital spending is below or even with 1987.
Many firms continue to face price increases for materials like paper, plastics and metals. Increasingly, however, they also mention rising prices for other inputs such as motors, electronic components and castings. By contrast, one-third of respondents have experienced little or no cost pressure, either because of long-term contracts, or because they have worked closely with suppliers to achieve cost reductions. Most First District manufacturers are raising their own prices whenever competitive conditions permit.
While a few manufacturers are hiring or recalling workers, most report that employment is flat or declining. Two major regional employers have announced layoffs affecting their operations worldwide. Respondents discussing wage pressures are evenly divided between those who believe labor costs—particularly fringe benefits—are accelerating, and others who see no such development.
Most First District manufacturers foresee reasonably clear sailing through year end but express considerable caution as well. One spoke of "walking on eggs." Another firm wants to be able "to jump either way" but is "erring on the side of caution." While most respondents appear unconcerned about rising interest rates, two mentioned that continued dollar appreciation might weaken their exports.