January 25, 1989
Economic activity in the First District continues at a moderate but healthy pace for manufacturers and retailers contacted in early January. Most manufacturers report that shipments and orders are above year-earlier levels, with exports contributing to their growth. Retail results were generally less robust than those in manufacturing, with sales flat to slightly higher. Price increases are modest. Capital expenditures planned for the region's stores and factories exceed 1988 levels.
Retail
First District retail contacts generally report sales during
December and early January to be flat to moderately higher compared
with year-ago levels. Most respondents are satisfied with these
results, as retail business in the region stands at a very high
level. A mild and snowless winter has dampened the movement of
seasonal merchandise, but apparel retailers are heartened by good
sales of spring fashions.
Several large chains report making significant and capital-intensive changes in the way they do business. These retailers are undertaking major refurbishments and opening additional outlets. They are also expanding their warehouse operations, further computerizing their business systems, and streamlining their administrative structures. Some firms plan major initiatives in 1989 while others intend to digest investments made in 1988. All retailers already embarked on these programs report significant gains in operating efficiency.
Prices are rising moderately according to most retailers in our survey. One firm reports the cost of sundries increasing 5 to 6 percent in 1988; another retailer indicates that previously declining prices are now flat. Wages for retail clerks continue rising briskly.
Manufacturing
All First District manufacturing contacts, except those in computer-
related areas or serving the construction industry, report that
shipments exceed year-earlier levels by at least 5 percent. New
orders were generally even stronger - in some cases 30 percent above
year-ago levels. The commercial aircraft, auto and most capital
goods industries provided particularly good markets for First
District manufactures. By contrast, most firms in or selling to the
computer industry and firms supplying the construction industry
report shipments and orders to be flat or down slightly from year-
ago levels. Export orders generally continue to grow although the
rate of increase has slowed in a few cases.
First District manufacturers report that price for many raw materials, such as paper, wood, and most metals, may be stabilizing. But they see little slowing in price increases for semi-finished goods such as petrochemicals, specialty steel, motors and bearings. Contacts mentioned that the weak dollar had promoted exports of petrochemicals. With U.S. capacity limited, these exports contributed to rising prices. Most First District manufacturers have recently increased their own prices enough to cover part but not all of their rising materials costs. Exceptions are firms serving the auto, computer, and aircraft industries; these firms have not been able to increase prices.
Employment levels at most First District manufacturers are flat to down slightly. Only two firms mentioned a lack of skilled labor as a production constraint. Contacts expect wages to rise 4 to 5 percent in 1989 as they did in 1988.
First District manufacturers generally plan to increase capital expenditures from 1988 levels. Most will emphasize equipment rather than plant in 1989; only one-third of the respondents intend to build or expand plants. The emphasis on equipment is attributed to recently completed expansion programs and the fact that just-in-time inventory systems and simplified production procedures (leading to shorter assembly lines) have freed significant space. Only one firm suggested that uncertainty about foreign exchange rates is discouraging 11.5 firms from building plants to serve the export market. Most respondents plan to include computer in their equipment purchases; however, two firms suggest their total spending on computers may slow as upgrading replaces expanded use.
All manufacturers contacted claim that they have adequate capacity overall, but one-third mentioned a product for which capacity has recently been a constraint. In general, respondents do not feel that U.S. capacity limits are curbing exports or supporting imports to any significant extent; a few mentioned imports of chips, bearings and VCRs as special cases. Most contacts believe that price and quality of product and support service are sustaining current imports.
All First District manufacturers express modest optimism about the coming year. While they all expect growth to slow (with real GNP forecast to rise 2.5 percent), they generally view this slowdown as a healthy development with favorable implications for inflation and interest rates. They remain concerned about the impact of take-over activity and the overall debt level on investment.