May 5, 1993
Economic conditions continue to improve modestly in the First District. Although New England retailers experienced sales declines that they attribute to late winter storms, they nevertheless observe a minor improvement in consumers' willingness to spend. In the manufacturing sector, the recovery generally strengthened in the first quarter. While improved business is causing an expansion in employment for some suppliers of automotive parts, most manufacturers expect to hold employment steady or to implement small reductions in 1993. Some pickup is evident in the residential real estate and insurance markets.
Retail
First District retail contacts report that sales declined slightly
during March, largely because of snowstorms coinciding with weekend
promotions. Had weather not prevented consumers from reaching
stores, retailers estimate that sales would have been above year-ago
levels.
The sales decline caused some deterioration in gross margins and an increase in inventories. Only one contact plans to increase employment; others continue to shrink by attrition. Wage gains are reportedly limited to 4 percent.
Capital spending is mixed, with some firms adding stores and others conducting only minor remodeling. Retail contacts think that the New England economy has bottomed out and that the degree of consumer caution has lessened somewhat.
Manufacturing
On balance, First District manufacturing reports are more positive
than they have been for many months. Three-fourths of the sample
report that recent sales have been flat or improved compared to
year-earlier figures. Almost one-third of the contacts indicate
double-digit increases.
Manufacturers report strong increases in demand for automotive parts, semiconductors, defense exports, and engineering services. Domestic consumer goods sales also are increasing. On the other hand, aircraft and aerospace markets remain very weak. A variety of other capital goods, including items related to pharmaceuticals and environmental applications, also exhibited some falloff.
Contacts are mixed in their assessment of export markets. For example, one contact notes that the U.K. market is recovering, but another terms Europe a "disaster." Markets in Latin America and the Far East excluding Japan are reported to be expanding handsomely.
The majority of respondents report that employment is flat to down 8 percent from 1992 levels. At a minority of contacts, higher demand for automotive products has or is expected to lead to new hiring and added investment. Most other contacts plan either to hold employment steady or to implement small reductions.
Several contacts note either a deflationary environment or a resistance to price increases. However, a couple of manufacturers predict that consumer goods prices will firm up, thereby allowing for higher profit margins.
All of this month's manufacturing contacts project that their business will show improvement in 1993, although some add that the rate of recovery will remain weak, or that foreign markets continue to be a source of concern.
Residential Real Estate
Although the market for residential real estate is showing signs of
picking up, most contacts express frustration about the slowness of
the pace of improvement. Several contacts see a firming of vacant
land prices as a positive sign and consistent with the recent
increase in building permits. Brokers stated that their biggest
problem was many buyers' difficulty in obtaining financing, with
closings now taking at least 8 weeks. These financing problems are
attributed to weak credit histories (with buyers holding several
jobs in the last two years because of layoffs) and the lack of a
down payment because the value of a buyer's current property has
fallen.
Despite comments from contacts over the last six months that the mid-priced trade-up market is improving, average sales price statistics are still significantly below year-ago levels; this trend suggests that most activity is in low-priced homes. Values are steady in most geographic areas except Connecticut, where an appraiser said that values are still falling as a result of poor economic news. One contact noted that the decline in the condominium market may be ending, with sales volume up significantly, but that many banks are still leery of financing condominiums in complexes with a low percentage of owner-occupants.
Nonbank Financial Services
On the whole, insurance companies report an increase in sales,
though a few respondents continue to lag because of concerns about
credit quality. The strongest sellers were among traditional life
insurance products, annuities and mutual funds. Trends were mixed in
health insurance, pensions, and property/casualty lines. Most
respondents have kept their employment steady, but a few have either
reduced employment in the last quarter or foresee a reduction later
in the year.