December 9, 1992
Led by a reported pickup in consumer confidence, economic activity in the First District improved modestly in November. Most manufacturing contacts indicate that demand is even with or slightly above year-ago figures. For 1993, they generally expect a small increase in real GDP. A pickup in November sales has raised spirits in the retail sector; retail contacts now feel that consumer confidence may have rebounded in time for the Christmas season. Commercial real estate remains in the doldrums.
Retail
The modest upturn reported in October has strengthened further in
November, according to First District retail respondents.
Previously, retailers attributed sales increases to their
promotional activities; now contacts unanimously agree that
consumers' willingness to spend rose in the weeks following the
election. A majority report sizable sales increases across product
lines, and only one contact expressed concern that the current
improvement in sales represents early buying that will reduce the
important "last minute rush."
While pricing remains competitive, consumers are not showing the same degree of price-consciousness seen last year. Retailers believe that inventory levels are adequate but not excessive for the holidays, and seasonal hiring has occurred. Permanent staff levels and wages remain largely unchanged.
As demand has increased, margins and profits have begun to improve. However, capital spending plans in most cases remain limited to remodeling existing locations. All contacts express optimism for the 1992 Christmas season.
Manufacturing
Most manufacturing respondents report that demand is flat to up 5
percent compared to a year earlier. The strongest sales increases
involved some computer and home-related products. Auto-related
demand was described as flat by a couple of contacts, but up
substantially for another. Commercial aircraft-related sales are
also highly variable. Defense business is flat at best, and down
substantially for some contractors. Manufacturers generally expect
that the U.S. economy will show modest growth in 1993.
Manufacturing contacts indicate that foreign sales have been mixed. In some cases they have achieved surprising success by offering an attractive product or technology, despite a generally weak economic climate. Several expressed concern that declining foreign markets will pull down their sales in 1993.
Except for selected items facing strong demand, manufacturers describe both materials and selling prices as flat to down. Just over half of this month's manufacturing contacts indicate that they have reduced U.S. employment--by up to 12 percent--in the past year. At the others, employment levels were unchanged. Most manufacturers report that capital spending has been flat to slightly up over 1991 investment.
Commercial Real Estate
The commercial real estate market in the First District is very slow
and shows no signs of recovery. Office vacancy rates are now about
20 percent with little net absorption. Even the most optimistic
contacts see future absorption rates of only 2 to 3 percent per
year. Most new leasing activity involves tenants moving to higher
quality space, so vacancy rates on Class B and C space could be as
high as 30 percent while vacancy rates on Class A space are below
average and falling. Effective rents for low quality space in poor
locations have now declined below operating costs. Contacts say that
many vacant buildings may eventually be torn down because they
cannot recover the renovation costs necessary to attract new
tenants. Conditions in Connecticut are reported to be worse than in
other areas because of problems in the financial services and
defense industries. Throughout the region, the retail and apartment
markets are holding their own, and contacts suggest that the retail
market may see some growth if the economy improves. Nonresidential
construction is limited to the public sector and a few industrial
buildings constructed to meet specific needs.
Nonbank Financial Services
Investment management companies surveyed report increases in assets
under management in the range of 2 percent to 10 percent in the
quarter. Tax-free funds and government bond funds were especially
popular, followed by growth equity funds. The majority of
respondents have increased employment in recent months and plan
further increases in their work force.
Venture capital firms report mixed results for firms in their investment portfolios. According to these contacts, software and semiconductor firms had strong sales, while capital equipment firms had sales below projections. Retailers had trouble meeting their targeted margins, especially in the Northeast, although they experienced improvements over the second quarter; broadcasters were affected by declines in advertising revenue.