November 30, 1988
Economic sentiment in the First District has a more positive tone than in recent months, although actual results are mixed. Manufacturing sales are good and orders are up at a majority of firms contacted. Retail sales are ahead of last year and generally on plan, but plans have been scaled back. Price pressures have moderated except for steel and copper. Manufacturers have now joined retailers in expressing concern about the tight regional labor market, The outlook is "steady as you go," with most contacts expecting a continuation of current activity levels.
Retail
First District retailers report business in October and early
November to be generally satisfactory and within their conservative
expectations. Sales are moderately ahead of last year's level, and
also better than soft third quarter results. Respondents even
expressed optimum that a turn-around in the sluggish women's apparel
trade is imminent. Inventories are nevertheless light, reflecting a
desire to enter this Christmas season in a lean position. Prices
remain relatively stable at both the wholesale and retail level.
Profits are consistent with plans, for the most part, as increases
in margins and improvements in sales mix offset greater promotional
activity and rising labor cost. Wages for retail clerks, in
particular, are up 13 to 15 percent from year-ago levels. But
despite the prolonged tightness in regional labor markets, some
respondents have been pleasantly surprised by the availability of
part-time workers for the Christmas season.
Regional retailers generally expect a good Christmas. But over the longer term, most respondents foresee a sharper competitive environment. One sees a permanent increase in promotional activity while another spoke of an over-built regional retailing sector. Most contacts express a continued interest in building new stores should the right site appear, but they are focusing their capital programs on remodeling, warehouse, and office construction. One retailer found contractors unexpectedly eager to undertake a warehouse expansion; the bids were 15 percent below expectations.
Manufacturing
Most First District manufacturers characterized current business
conditions as good, with sales 3 to 20 percent above year-ago
levels. The order situation is mixed, however. Almost half of the
respondents report that orders are flat or down slightly - with two
citing seasonal factors. The other contacts indicate that orders are
10 to 15 percent above last year's levels and for one the order
backlog is its highest in several years. Demand for machinery,
paper, and aircraft-related products was described as particularly
strong. Demand for consumer, defense and computer-related products
is less robust. Several contacts mentioned good export growth or
reduced import competition.
Inventories are generally reported as "comfortable" although a few manufacturers have increased inventories because some materials such as paper require longer order times. Most First District contacts indicate that materials prices have continued to rise. While manufacturers generally see paper prices stabilizing now or in early 1989, they expect no relief from steel and copper price increases. Although most respondents have recently raised prices on some of their own products, several report that materials price increases continue to hurt their margins on some lines. Prices on consumer products are set far in advance, for instance, and raising the prices of auto, defense or computer-related products remains difficult.
Employment levels at First District manufacturing firms are flat or up slightly. Almost half of the respondents described labor markets as tight or indicated a need to train recruits. Views on wage pressures were mixed. While some contacts described recent wage increases (of 2 to 4 percent) as "moderate," others are giving more than in recent years. One firm is shifting some functions to the Southwest to avoid offering premium wages.
Capital spending plans are also mixed. While some firms' capital expenditures are substantially above last year's level, others report that capital spending is down slightly. Several respondents that undertook big capital spending programs over the last couple of years expect expenditures for 1989 to be down somewhat. Other contacts foresee an uptick in capital spending; two mentioned plans for new plants.
A majority of contacts foresee sales growth continuing at a "strong" 10 to 15 percent annual rate during the first half of 1989. Others expect a gradual slowing. One respondent, who expects reduced sales, pointed out that his firm can achieve better profits even on the basis of reduced volume because of cost cutting programs already in place. No contact forecast a recession in the first half of 1989. One characterized 1989 as likely to be "boring," but suggested that the country needs a boring year to reduce current imbalances.
Outlook
The New England Economic Project (NEEP), a non-profit organization
comprised of 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 nonfarm jobs to grow 2.5 percent in 1988 and 1.9
percent in 1989, compared to 2.6 percent in 1987.
Because of continued improvement in the nations trade deficit and associated increases in business fixed investment, manufacturing jobs in the region are expected to grow modestly in 1989. The region's factory job gains will be concentrated in durable goods industries, especially nonelectrical and electrical machinery. Despite the improvement in manufacturing, nonmanufacturing industries will still account for most of the additional jobs. Nonmanufacturing employment growth will be more modest than in recent years—averaging about 2.2 percent in 1989. The region's unemployment rate will continue to be 2 percentage points below the national average. Personal income growth is also expected to remain stronger in New England than in other regions of the country.