September 20, 1989
Economic activity continues at a modest pace in the First District. Manufacturing sales are flat to rising modestly, while retailers are experiencing sales declines as well as increases compared with last year. Capital spending plans are mixed. The commercial real estate market has softened, while residential realtors are seeing improvement.
Retail
Retail sales activity was generally soft through the month of
August, according to a panel of First District retailers. Receipts
were sluggish at department stores, both up-scale and discount
chains. Building materials did somewhat better, and sales at novelty
and sundry outlets were satisfactory and on plan. With this general
softness, inventories are reported to be a bit high.
Retail prices were generally stable but rose as much as 6 percent for novelty goods. Margins slipped a bit in August. Weak sales and increased competitive pressures forced merchants to absorb some increases in the cost of goods sold. Rising expenses, especially health insurance premiums, also cut into retail revenues. Profits are thus down from last year, and some firms are operating at or below break-even.
Despite the recent weakness, half of the retailers surveyed are optimistic about the rest of 1989 and plan to enlarge their operations over the next six to twelve months. The remaining half are less sanguine and are not planning significant expansion.
Manufacturing
Sales and orders exceed year-ago levels at most First District
manufacturers contacted. Reported gains range from zero to 8 percent
and order backlogs are at record levels in a few cases.
Nevertheless, the pace of growth is very modest at most firms, and
almost half the respondents experienced some slowdown in June and
July. Several contacts mentioned that activity has picked up very
recently, however. Firms serving the defense, construction and auto
industries continue to experience weak demand, while respondents
producing specialty textiles, paper and consumer products found
demand to be more robust. Foreign markets are said to be stronger
than their domestic counterparts.
Manufacturers continue to monitor inventories very carefully and are generally satisfied with their current levels. Employment levels are reportedly stable or declining slightly. Labor market conditions are generally described as unchanged or softer, but some types of labor continue to be hard to find in parts of Connecticut and New Hampshire.
All manufacturing contacts report that materials prices are unchanged or falling. Their own pricing behavior varied, however. One third said that their own sales prices are unchanged, but another third mentioned recent or anticipated increases ranging from less than 1 percent to 5 percent. Prices for computer-related products remain under pressure and machine tool prices have become "negotiable."
Capital spending plans are also mixed. Some firms expect 1989 expenditures to exceed their 1988 levels by as much as 25 percent while others anticipate declines of a similar size. One firm has reduced this year's capital spending budget by 15 percent because of a weak first half. One-third of all respondents plan new or expanded facilities in New England.
Manufacturing contacts describe their outlook as "cautious," "guarded" and "healthy." They generally expect economic activity to continue at its current pace with no further softening or real pick- up in the current year.
Real Estate
According to local real estate consultants and brokers, commercial
real estate markets in Boston and its suburbs are softening. While
vacancy rates remain lower than in the rest of the country, the
absorption of available space continues to slow. Developers are
finding financing harder to get as lenders become less optimistic
about the economy. Furthermore, as the amount of space available for
subleasing has increased, prime real estate rents have fallen.
By contrast, First District realtors sound more positive than in recent weeks about the residential real estate market. Realtors surveyed all report that current sales are comparable to or higher than last month's levels but remain sluggish compared with year-ago activity. A majority of realtors contacted said that small and large homes are moving quickly. However, mid-sized homes (in the $150,000 to $200,000 range) are staying on the market longer than last year. Several respondents believe sales will continue at about the same rate, while a few expect lower interest rates to lead to a busy autumn despite large inventories.