Beige Book Report: Boston
March 15, 1989
First District retailers and manufacturers generally experienced good sales growth in January and February. Cost pressures seem to be abating for manufacturers but not for retailers, who continue to find labor markets tight. Nonetheless, merchants remain optimistic because consumer demand seems strong. Most manufacturers are also bullish about their own firms potential in 1989. Retailers view recent increases in interest rates as a necessary evil; manufacturers feel somewhat immune.
Retail
A sample of First District retailers reports generally healthy sales
during January and February. While tracing some of this strength to
the mild weather, respondents see underlying vigor in consumer
demand. The continuing pickup in women's apparel contributed
importantly to the general satisfaction with retail conditions.
Retailers report no major price movements. However, operating expenses are increasing, and retail profits are generally down. With the supply of entry-level labor especially tight, personnel shortages continue and compensation costs are rising. Interest expenses are also climbing, as all retailers contacted are financing significant expansions as well as operating inventories.
Because of rising interest rates, retailers are growing cautious about inventory and other expenditures. However, no respondent has curtailed or stretched out construction programs. Indeed, respondents report that the optimal size of a retail chain has increased of late. Investments in centralized distribution - the retail version of just-in-time inventory management - apparently allow firms to operate more outlets from a given warehouse, with lower inventory levels, less in-store labor, and greater overall control.
Most retailers see inflation as a cause for concern, especially in the labor market. While expressing anxiety about current interest charges and the extent of credit sales, the respondents thus support recent Federal Reserve anti-inflation policies. They also remain optimistic about 1989 because of continuing strength in consumer demand.
Manufacturing
Most First District manufacturing contacts began 1989 with good
sales growth, For the majority, sales and orders are running 5 to 15
percent above year-ago levels. Only one firm reports declines in new
orders, but two others detect recent signs of slowing. Pockets of
weakness involve defense-related products and electronic components.
Almost all respondents indicate that exports are "booming."
Unlike the recent past, few manufacturers complained about cost pressures. Most report that input prices are leveling off. In contrast, half of the respondents are raising their own prices (3 to 10 percent) in an effort to increase profit margin. For others, selling prices are stable or down, reflecting falling costs or continued competition in their industries.
On the employment front, all contacts are trying to run lean. The majority report that employment levels are stable or declining slightly.
In contrast to retailers, only two manufacturers complain of tight labor markets. One respondent suggested that the New England labor market has softened recently. Others are trying to avoid this market, for example, by moving high-labor-content jobs to Mexico, or by subcontracting much of their routine manufacturing work. Contacts do not believe that wage pressures are building. Reported wage increases were between 2 and 4 percent.
Among firms discussing capacity, half reported some constraints. Contacts reporting no constraints indicated they could add shifts or lease space if necessary. One observer suggested that new technology has raised manufacturers' preferred capacity utilization rates by a couple of percentage points. Capital spending plans were mixed, with most contacts reporting no dramatic changes from last year's expenditures. Spending plans focused on retooling and maintenance.
Most First District manufacturing contacts have a "bullish" view of 1989. However, firms that depend on military contracts and firms that are targets of hostile takeovers expressed caution. One-third of the respondents project very slow GNP growth in the second half of the year, but they generally expect their own firms to outperform the economy. Most contacts are not distressed about recent interest rate increases. Some firms believe that, because they and their major customers are conservatively capitalized, they may benefit from higher interest earnings and opportunities to make acquisitions from highly leveraged firms. Another respondent suggested that just-in-time inventory systems may have reduced the impact of high interest rates on most manufacturers.