Beige Book Report: Boston
May 3, 1989
Business took on a softer tone during March and the first half of April, according to First District reports. Retail sales were generally below plan, and most manufacturers report moderate growth in sales but weak new orders. Price pressures are receding, and many contacts noted that the region's labor markets see less tight.
Retail
New England retailers report goods moving slowly and below plan in
March and early April. The slowdown is broad-based, covering both
up-scale and discount chains, hard goods and soft. Sales of building
materials have come down considerably from a strong 1988. Auto
dealers report similar experiences. However, several respondents
detect a very recent upturn and spending has held up in northern New
England. Inventories have not become a problem, although some
retailers are relying on a rise in spending later this spring to
reduce stocks.
Wholesale prices are generally rising at the same rate as last year, while the rise in retail prices has slowed; thus, gross margins have eroded somewhat. Several respondents also report recent softening in the labor market. Although increases in medical insurance premiums trouble some merchants, wage pressures are generally receding.
Several contacts are involved in corporate restructuring that has led to reorganization, automation of office and distribution facilities, and cuts in managerial staff. The resulting increases in operating efficiency are helping these firms adjust to the pressure on gross margins.
Most retailers' capital spending plans for 1989 were already below last year's levels. In response to disappointing sales growth and rising interest rates, several are now further curtailing their capital programs. Spending is focused on remodeling and upgrading office and distribution systems, not new construction.
Retailers generally expect growth in 1989 to be less than last year. Some remain hopeful that sales growth will return to its former pace in the traditionally strong fourth quarter. Merchants in the still- vigorous northern states are more optimistic, but building suppliers expect a cyclically down year.
Manufacturing
Reports from First District manufacturers suggest that shipments
remain moderately strong while new orders are less robust. For most
contacts, sales are up 5 to 8 percent from year ago levels, but one-
third report that shipments are flat or down. Looking to the future,
most respondents report new orders are flat to down while the rest
have year-to-year gains of as much as 5 percent. Several firms
mentioned that customers are delaying orders or, more often,
payments. Firms serving auto, appliance and computer makers,
contractors and restaurants report relatively weak demand. Despite
current signs of softness, all manufacturing contacts are keeping
inventories in line with targets.
Manufacturers also express less concern about materials prices than in recent months. Most find input prices steady to up slightly— "nothing alarming." Only two firms mentioned that metals prices are still climbing. One-third of the respondents have raised their own prices by 4 to 15 percent during 1989. While most of the others have not changed their sales prices in the last six months, computer- related prices continue to fall.
Some respondents sense that New England's tight labor markets are loosening up, but others disagree. Employment levels are generally unchanged. However, some contacts are hiring sales staff (available) and software engineers (harder to find). Two others are reducing employment through layoffs or attrition. A "low tech" firm reports attracting more applicants per job opening and getting good programmers and analysts laid-off by high-tech firms. Almost no one sees wage pressures building, but several complained of rising medical and insurance costs.
Capital spending plans are mixed—with roughly half of the manufacturers planning to increase expenditures from last year's levels, but one-third investing practically nothing. The rest expect expenditures to remain even or decline. The focus of this spending is maintenance, cost reduction and the introduction of new products, not buildings. Indeed, several firms mentioned leasing as the preferred way to acquire additional space.
Among First District manufacturers, respondents are divided about the prospects for a recession in 1989. Half expect a modest recession; the others do not foresee a downturn but anticipate slow growth in the second half.