May 6, 1992
A majority of First District business contacts express guarded optimism that a recovery is imminent, if not already under way. Retail results were mixed, however, and retail respondents voice concern that the recovery may not reduce the intense competitive pressures within the sector. Manufacturing contacts say that first-quarter sales were equal to or slightly above year-ago levels. With most manufacturers observing mixed signals, they are somewhat less confident than the retailers; half conclude that a modest recovery has begun, but others see no significant change. All intend to pursue a cautious approach towards employment and inventory management; manufacturers' capital spending plans are more expansive.
Retail
Sales results for First District retailers were mixed in the first
months of 1992. Those with increases in sales attribute their
performance to a strong market position rather than to regional
economic conditions. Other retailers report that sales are flat or
slightly lower than a year ago, and blame these declines on the
delayed arrival of spring weather.
Prices remain under pressure as consumers hesitate to spend and retailers prepare for the entry of rivals from outside the region. While the cost of goods is generally stable or declining, price competition continues and is expected to intensify over the next two years as new entrants seek market share. At present, gross margins and profits are stable, while inventories are closely monitored.
Employment and capital spending plans generally vary with retailers' sales performance. Firms with sales increases are adding new personnel to staff new locations. Others are limiting capital spending to improving existing facilities while holding employment and wage levels steady. Even though they expect further consolidation in their market, virtually all retailers believe the New England economy is currently bottoming out or beginning to improve.
Manufacturing
First District manufacturing contacts indicate that U.S. sales were
either even with or modestly above year-ago levels in the first
quarter. Reported increases ranged from 2 to 8 percent. Most
respondents are receiving mixed signals, with pockets of strength
offsetting pockets of weakness. Several contacts report improved
demand for housing- and auto-related products, sporting goods, and
some telecommunications equipment. By contrast, commercial
construction, aerospace, and defense remain relatively weak markets.
Reports on exports were mixed, with some contacts developing new
export business and others observing a slowdown in European sales.
Most contacts report that employment is below year-ago levels, with the declines ranging from slight to 25 percent. Half of the respondents plan further reductions, and one has recently instituted a hiring freeze. By contrast, a minority are currently seeking small numbers of skilled workers or have returned short-time workers to standard hours or overtime.
Over half of the manufacturers plan to increase capital spending from its 1991 level. A few mentioned that 1992 would be a big year for such investments. While equipment continues to absorb the bulk of these expenditures, half of the firms contacted are building or expanding facilities. By contrast, some firms indicate that capital spending is restrained by the need to pay down debt or match each flow. Small business continues to report difficulty in obtaining bank credit. Although banks are said to be seeking new business, they are unwilling to lend to firms with real estate collateral or classified liabilities. Nevertheless, most small business contacts seem to have found satisfactory alternatives, particularly supplier credit; and several express reluctance to return to bank lenders.
On balance, input prices are described as stable. Sales prices are flat to down, with a few contacts achieving increases of up to 3 percent on selected items. Several respondents point out that long-term contracts with suppliers or customers regulate most prices.
Half the manufacturing contacts report improved demand and believe the economy has turned the corner. Others, citing erratic monthly data or new sources of weakness (like the slowdown overseas), are not yet convinced that the recovery has begun. All expect the upturn to be modest; thus, all intend to remain cautious on employment and inventories. Several expect 1992 earnings to improve more than sales.
Outlook
The nonprofit New England Economic Project (NEEP) released its semi-
annual forecast in mid-April. According to the forecast for the six
states, total nonagricultural employment in the region will begin to
grow in the current (second) quarter, albeit very gradually. The
recovery is expected to be more modest in New England than the
nation through 1995. Among industries, NEEP predicts that most of
the employment growth this year will be in services; manufacturing
employment losses are expected to continue until the end of 1992.
Even in 1993 and 1994, predicted job growth is concentrated in
services and trade.