August 5, 1992
First District manufacturing contacts reportedly face mixed and variable demand conditions. Those serving the auto industry have seen a recent pickup in demand; others are experiencing renewed weakness in several sectors. Most expect the economy to make continued small gains for the remainder of the year. Retailers express dissatisfaction with the pace of improvement in economic conditions within the District, and none anticipates any significant change in the near term.
Retail
Most First District retailers contacted in late July report no
increase in sales over year-ago levels. They offer two explanations.
First, cool weather has limited demand for summer merchandise, like
gardening items and air conditioners. Second, consumers are said to
be reluctant to spend while labor markets remain slack. Among the
few retailers who have experienced increases in sales, only one
attributes the improvement to a bottoming-out of the economy. All
retail contacts agree that the New England economy is neither
improving nor deteriorating, but at a standstill.
All note that the cost of goods remains stable or has increased only modestly. Similarly, prices offered to consumers are largely unchanged. Only one firm has been able to increase prices, and the majority say that discounts and promotions are still required to stimulate consumer interact. Nevertheless, inventories remain under strict control. Capital spending plans are generally limited to updating and remodeling; only two contacts expect to add to the number of their locations within New England.
Few contacts have increased employment at existing stores. And even within this group, one describes the new hires as mostly temporary, while another added workers only after existing staff had consistently clocked considerable overtime. Only the respondents opening new stores plan to hire additional staff. Most are reluctant to increase wages; those who have done no have given only minimal raises. After seeing some improvement in the first months of the year, most retailers now feel that the economy has stagnated.
Manufacturing
First District manufacturing contacts describe business conditions
as mixed and unusually hard to interpret. For almost 40 percent of
the respondents, sales and orders are reportedly below year-ago
levels by as much as 9 percent. But for an equal number, sales and
orders are above 1991 levels, with gains reaching 20 percent. Recent
trends are also generating mixed signals. Over the last month or so,
half of the contacts have observed a modest improvement in demand,
largely from the auto industry; the others have seen signs of
renewed weakness. Orders for defense and commercial aircraft
products are weakening, and regional computer companies have
announced operating losses and declines in revenue in the second
quarter. In addition, several contacts express concern that formerly
robust European and Japanese markets may be slowing; by contrast,
Latin American prospects are said to be taking a turn for the
better.
A majority of manufacturing contacts report that employment is unchanged from or slightly below year-ago levels, but a minority cite gains of 7 to 10 percent. Moreover, by contrast with recent periods, most contacts expect to maintain their work force at its current size. A minority plan declines.
Most contacts indicate that capital spending in 1992 is unchanged from or below 1991 levels. This generally cautious approach reflects ongoing concern about debt levels and liquidity needs; some companies are requiring divisions planning capital projects to generate the necessary cash themselves. Despite their current caution, several firms plan increased capital spending in FY 1993. Investment goals include expending capacity, launching new products, meeting environmental or communications needs, and cutting costs. Small business contacts still report difficulty in obtaining bank loans, but most have found alternatives; suppliers are now making credit available, even for capital projects.
Input prices were generally said to be stable, some contacts indicate that they are still able to negotiate "deals" and continue to be pleasantly surprised by price developments. Nevertheless, rubber-related prices reportedly rose 2 to 4 percent on July 1, and a few respondents expect prices for paper and petroleum-based products to start up shortly. Respondents' selling prices are generally flat to down, with some discounting continuing both in this country and abroad. Several contacts mentioned that the auto companies are demanding price reductions, even on existing business. Only a minority of respondents have raised prices: the maximum increase was 3 percent.
Half of the respondents express optimism about their own company's prospects for the rest of the year. However, with recent trends so diverse, most contacts expect the U.S. economy to show little net change. Citing uncertainty, the debt overhang, and the steep yield curve, they see continued small gains as the most likely outcome through the end of 1992.