August 7, 1996
Business conditions are generally good in the First District. Retail results are mixed, with hard-goods chains and tourism doing especially well. Manufacturers report rising demand for most products. Input prices are reportedly stable or declining. Commercial real estate activity is robust in New England markets. Insurance companies indicate sales vary by type of product, with their mutual funds having the largest sales gains.
Retail
Although June and July are normally a slow time for retailers, hard-
goods chains in the First District report good news--double-digit
sales gains compared with year-earlier levels. By contrast, apparel
specialty and off- price chains report sales declines of from 0 to 5
percent. Respondents' expectations for the next six months are
similarly mixed, ranging from 15 percent growth to 5 percent
decline. While most are optimistic about the economy, two contacts
express concern with rising consumer debt.
Vendor prices remain stable, with the exception of paper prices which have reportedly fallen 20 to 30 percent in the last year. Retail prices are generally level. All respondents express satisfaction with inventory levels. Wage increases range from 3 to 5 percent. Only one contact anticipates significant growth in capital spending and employment in 1996.
New England's tourist offices report strong activity this summer, boosted by double-digit increases in the numbers of international visitors over the previous summer. The two airline carriers that provide most of the region's European service note that foreign travel is up an average of 20 percent. Boston area hotel occupancy and room rates for June were up 3 and 8 percent, respectively, compared with the previous June. Advance reservations suggest New England's fall tourist season will be exceptionally strong.
Manufacturing
First District manufacturing contacts report that demand is higher
than a year ago for most products. Some indicate double-digit
improvements for health care, industrial, and aircraft equipment. By
contrast, orders for heavy duty truck parts and memory chips are
said to be slowing sharply, and the market for apparel textiles
remains sluggish. Automotive equipment markets are mixed. Car
production reportedly is increasing, but automakers are shifting
suppliers--to the advantage of some First District contacts and the
disadvantage of others. Shifts in microelectronics and automotive
demand are prompting some manufacturers to make inventory
corrections.
Most manufacturers indicate that, overall, materials costs are steady, with declines for steel and copper as well as some chemicals and selected grades of lumber. Selling prices generally are flat to up slightly. Because of automakers' continued demands for price cuts, some suppliers are deciding to emphasize equipment sales to other industries.
Employment is increasing at a majority of respondent firms, although these expansions are generally modest. Highly skilled machinists and computer specialists are reportedly hard to find, but general labor availability is not viewed as a constraint. Although a couple of respondents report wage and salary freezes, most anticipate increases this year in the 3 to 5 percent range.
Capital spending trends are mixed. Several contacts with ambitious investment plans note they could be scaled back if market conditions weaken.
The consensus among manufacturers is that the economy is in good shape for the remainder of 1996. However, evaluations for individual companies vary depending on particular products or technologies, and some contacts mention analysts' worries about an economic slowdown in 1997.
Commercial Real Estate
Improved economic conditions in New England have led to a strong and
active commercial real estate market. Contacts report high levels of
activity and significantly lower vacancy rates throughout the
region. The market is particularly strong in the Greater Boston
area, with very low levels of inventory and office and industrial
vacancy rates around 10 percent and 7 percent, respectively. Lower
vacancy rates are also reported in Connecticut and Maine. Contacts
note variation across different market sectors. Apartment buildings
represent the strongest sector, with low vacancy rates and high
rents throughout, while the retail market is the weakest.
Commercial rents have gone up in the Greater Boston and Portland markets. Contacts anticipate rent increases elsewhere as inventory levels decrease further in response to the high level of activity and limited new construction.
Nonbank Financial Services
Respondents at insurance companies report mixed sales of insurance
products in the second quarter. Among their lines of business,
mutual funds tallied the biggest sales gains. Employment was flat or
lower in the second quarter of 1996 compared to the second quarter
of 1995. The downward trend in employment is expected to continue as
the industry consolidates.
Respondents see two important trends in the insurance industry. One trend is continued consolidation. Consolidation is occurring both because of the requirement for high capital expenditures in many segments of the industry and because of ongoing competition within the industry and with other financial services firms selling investment products to the consumer. The second trend is restructuring of the distribution system. In particular, contacts note that selling insurance products through banks provides an opportunity to the industry since it can be more cost-effective than the agency system.