October 18, 1988
Caution characterizes business sentiment in the First District. Residential real estate sales have slowed compared with a year ago. In contrast, manufacturers' sales are well above year-earlier levels, but over one-third of those contacted have experienced softer demand since July or August. While manufacturers indicate that upward pressure on materials prices has eased, most contacts report reduced constraint on their own prices. For most First District retailers, sales fell short of expectations in September. Retailers also expressed concern with rising labor coats and selected wholesale price increases.
Retail
Sales were up slightly or flat in September according to most retail
reports. One exception was building supplies; demand recovered
"nicely" after a dismal period attributed to the summer's heat.
Among general merchandisers, women's sportswear continues to be the
weakest line. Back-to-school purchases also did not measure up to
expectations. Despite disappointing sales, inventories are not out
of line.
All contacts mentioned rising wages and difficulty hiring in-store help, but the price picture was mixed. Prices are reportedly stable at the lower end of the market but are rising noticeably for higher- end merchandise. For example, the cost of basic apparel is rising 5 percent, while high-fashion women's clothing is up 10 to 15 percent. Discounters are finding low-cost merchandise in third-world countries whose currencies have not appreciated against the dollar.
Flat sales, price-cutting promotions, and rising costs are all cutting into profits. Nevertheless, capital spending plans remain "ambitious." For several merchants, however, this spending is aimed at increasing efficiency rather than expansion. Some contacts with idiosyncratic explanations for their recent poor showing are quite optimistic about the remainder of the year; others are less upbeat.
Manufacturing
First District manufacturers report that sales and orders are
generally 10 to 25 percent above last year's levels; profits—when
mentioned—have gained even more. Manufacturers say demand is well
dispersed across a range of industries and customer groups. As
exceptions, contacts mentioned that defense-related and consumer
goods were relatively weak. In addition, some firms that had
experienced several quarters of accelerating gains in sales and
orders now report that the trend flattened late this summer.
Most First District manufacturers believe that materials price increases have leveled off. Although one firm mentioned rumors of an additional steel price increase in November, others suggest that steel and food prices have peaked. Contacts pointed out that new capacity will curb price rises for computer chips, paper, and chemicals, while the strong dollar reduced the price of imported inputs during the third quarter. By contrast, most firms seemed less reluctant than in previous quarters to raise their own prices. The 3 to 5 percent increases mentioned more than offset most firms' rising materials coats. In explaining their pricing actions, respondents mentioned a decline in discounting, competitors' price changes and their own capacity constraints.
Manufacturing contacts indicate that employment levels are generally rising, but in contrast to retailers, few found labor markets tight or wage pressures mounting. While inventories are considered a bit high, they are not seen as worrisome. In most cases, capital spending continues at last year's pace, with productivity increases and expansion the primary goals.
Half the respondents expect a recession or significant slowdown within the next months. The others see favorable prospects for themselves and the economy. Even among the optimistic, however, caution prevails. For example, one corporate economist is concerned that economic activity may be less robust than widely believed because the prolonged fall in computer prices is distorting measured growth in "real" investment and GNP. Another respondent is "nervous" that talk of recession will prove self-fulfilling. A third who sees no evidence of recession has nevertheless counseled his management to "tread water." As one manufacturer who usually describes himself as "cautiously optimistic" put it, "Now I'm just plain cautious."
Residential Real Estate
Some residential realtors in the First District say activity has
slowed recently; others, with an earlier summer sales peak, noted a
slowdown in August and moderate comeback in the past few weeks. Moat
report that business is slower now than a year earlier. This
weakness is attributable to cautious buyers, not to a lack of
inventory. More expensive homes are generally selling better than
less expensive ones, and houses are selling better than
condominiums. Half the realtors surveyed foresee healthy activity
through year-end; the rest think sales will fall.