December 7, 1994
The First District economy continues its gradual recovery, with manufacturers reporting more widespread gains than retailers. Both sectors face selected price increases. The region's commercial real estate market is moving ahead, but at an uneven pace.
Retail
Most retail contacts in the First District report stronger sales
growth in October (from a year earlier) than in early November.
November's slower growth rate was attributed to warm weather and the
elections.
Retailers expect moderate holiday sales growth in New England. The majority anticipate December sales no more than 5 percent higher than a year ago. Inventories are higher than last month, in preparation for the holiday season; however, retailers are planning only modest increases in staff, if any, in December.
Over the next six months, building and hardware contacts expect sales to decline 5 percent, because of higher interest rates. They report 5 to 10 percent increases in the cost of building materials, paint, insulation, and lumber, which they are passing on to customers. Other retail contacts report stable prices, except for cotton and corrugated cardboard. Gross margins and profits vary considerably among retailers. This year's wage increases ranged from 3 to 5 percent. Only one retail contact reports major capital spending plans for 1995.
Manufacturing
First District manufacturers report that recant revenues are ahead
of last year's levels, with double-digit increases for consumer
durables, newer types of computer equipment, and some construction-
related products, and single-digit increases for printed matter and
paper goods. Contacts report a recent pickup in machine tool orders,
after several years of weakness. Sales of medical instruments also
appear to be firming up. Demand for apparel-related textiles has
been erratic, while aerospace markets remain soft.
Contacts note sharp cost increases for paper products, polyethylene, alcohol-based products, and wool; costs have also risen noticeably for a variety of metals, other chemicals, and lumber. About one-half of the manufacturing respondents have raised or intend to raise their prices by between 2 and 6 percent, but makers of machinery and equipment are maintaining or reducing selling prices.
Employment trends over the past year have been mixed, but downsizing efforts appear to be nearing completion, and about one-half of the respondents anticipate making net new hires in the months ahead. Several contacts in New Hampshire and Vermont mention that it is becoming more difficult to hire and retain workers. Wage and salary increases mostly hover around 3 to 4 percent, but are lower for some companies facing weak demand and higher for some highly productive workers.
Most contacts are at least guardedly optimistic about their company's business prospects in the next six to 12 months, citing factors such as momentum in the U.S. economy, prospects for improved exports to Europe, and successful strategies by their firm. A couple indicate that higher interest rates are reducing their company's earnings, and some express longer-term worries about cost pressures or a downturn in consumer spending.
Commercial Real Estate and Construction
The commercial real estate market continues to recover in most parts
of the region, but the pace is uneven across property types.
Contacts in southern New England note that retail real estate is
particularly "hot," with growth coming from large national chains,
while the industrial and apartment markets also are strong. On the
down side, vacancy rates for office buildings in downtown Providence
and Hartford exceed 20 percent and contacts expect little change in
the near future. Office markets in the Boston and Portland areas
have recovered more quickly, with effective downtown vacancy rates
below 10 percent in Boston. New office construction is expected in
the Boston and Providence suburbs. Office rents in the region are
mostly flat, but increasing slightly in the growing markets.
Respondents note that rising interest rates are having little effect
on new deals, with one contact seeing a surplus of capital looking
to invest in real estate.
Nonbank Financial Services
Sixty percent of contacted investment management companies report
small increases in assets under management since this summer. The
remainder have experienced reductions and cite net outflows from
bond funds and declines in the market value of their portfolios.
Despite the market downturn, all respondents report either stable
employment levels or continued hiring in the third quarter and for
the remainder of the year. However, several contacts have scaled
back their hiring plans from the beginning of the year.