August 11, 1999
Federal Reserve Districts
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The District's economy continues to expand, though at a somewhat slower pace than in the last report. There are indications of an increase in wage and price pressures in some key sectors. Most retailers report that sales retreated to more normal levels in July, following exceptionally strong activity throughout the second quarter. Manhattan's office market tightened further in the second quarter, but commercial real estate appears to have softened in most of the outlying suburbs. Housing demand continues to strengthen--especially in the New York City area, where builders and realtors report sharp price increases and cite lack of inventory as the number one problem.
Regional purchasing managers report steady growth in manufacturing in July, along with increased price pressures. The merger of Conrail into CSX and Norfolk Southern has caused persistent shipping delays, though they were said to be less severe in July than in June. Banks report a normal seasonal dip in loan demand, some tightening in credit standards, and little change in delinquency rates.
All retailers report that inventories were in very good shape at the end of June, and that there was less discounting in July than last year. Major chains report that selling prices and merchandise costs have leveled off, after declining in 1998 and early 1999. Most retailers report increased difficulty in finding and retaining workers but add that the real test will come during the peak Christmas season.
Construction and Real Estate
Anecdotally, realtors and homebuilders across the New York City metropolitan area report brisk demand, double-digit price appreciation and widespread bidding wars; they cite supply shortages as the housing sector's number one problem. Contacts in the construction industry report that shortages of skilled workers (particularly carpenters and framers), rising costs of insulation materials and drywall, and sharply rising land costs have all put upward pressure on new home prices. An industry contact in northern New Jersey notes that, with demand strong and inventories lean, there is a more than 7-month wait for new homes; he also says that the recent rise in mortgage rates "has only intensified the buying frenzy." Similarly, a major Manhattan realtor describes the market as "phenomenal," with total sales volume up 40 percent from a year ago. Market conditions in upstate New York appear more subdued but still favorable, with an Albany-area builder describing supply and demand as "balanced."
Commercial real estate markets were mixed in the second quarter. Manhattan's office markets tightened further, as vacancy rates fell to cyclical lows at the end of June--Midtown's rate fell from 7.7 to 7.2 percent, while Downtown's rate decreased from 12.0 to 11.6 percent. Similarly, Long Island's vacancy rate edged down to a record low of 8.9 percent in the second quarter. However, in most of New York City's suburbs--northern New Jersey, Westchester and Fairfield--vacancy rates rose. Office rents across the metropolitan area have been fairly stable so far this year, after rising sharply in 1998.
Other Business Activity
There have been reports of significant shipping delays due to the merger of Conrail into CSX and Norfolk Southern, though contacts do not see any problems comparable to last year's merger between Union Pacific and Southern Pacific. One contact at a short-line railroad in upstate New York says that, while delays persisted in July, they were not as bad as in June; conditions are expected to be back to normal by around the end of October. Some shipping has been diverted to trucks, but not much.
Hotel occupancy rates in New York City held steady throughout the second quarter at just above 80 percent--a high level but about 5 points lower than a year earlier. After registering double-digit increases through much of 1998, room rates are currently running just 2 percent higher than a year ago.