May 2, 2001 Federal Reserve Districts Second District - New York

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Despite some signs of softening, economic conditions in the Second District remain somewhat favorable, with growth continuing at a moderate pace. Cost pressures appear to have abated somewhat since the last report, and prices of finished goods and services continue to be stable. Labor markets remain tight, though somewhat less so than in the last report. Most retailers report that same-store sales were below plan in March and recovered only moderately in the first two weeks of April; retail selling prices were little changed. Commercial real estate markets, though still tight, have cooled since the last report--while office rents are still up sharply from a year ago, availability rates have risen and a substantial volume of leased space is available for sublet. Housing demand in the New York City area has softened, though prices are still up sharply from a year ago and market conditions remain tight; realtors in the Rochester area note a pickup in home sales and prices. Purchasing managers report mixed to improved conditions in manufacturing in March. Bankers report a strong pickup in demand for home mortgages, steady delinquency rates, and tighter credit standards on commercial loans and nonresidential mortgages. Consumer Spending General merchandise sales were well below plan in March, though most retailers noted some improvement in the first half of April--even after adjusting for the earlier Easter. Compared with a year ago, same-store sales for the two months combined appear to be running between 0 and 4 percent higher. While most contacts cite unseasonably cool weather as a factor in sluggish Spring sales, most of the softness was attributed to underlying weakness in demand resulting from reduced discretionary income and low consumer confidence. Sales of warm weather merchandise--mainly summer clothes and lawn & garden products--and home nondurables (linens, draperies, etc.) were described as particularly weak, while women's apparel sold better than men's and children's. Despite the disappointingly soft sales, most major chains say that inventories are in reasonably good shape; only two report some overhang. Retail contacts indicate that selling prices, merchandise costs and promotional activity continued to be virtually unchanged from a year earlier, though utility costs have risen substantially. Most major chains report that retail wage pressures have become somewhat less pronounced in recent months, with one contact reporting a noticeable decline in employee turnover. Separately, automobile dealers in the Buffalo area indicate that sales of new vehicles, which had fallen sharply late last year, have recovered somewhat in early 2001 but remain lower than in early 2000; sales of light trucks are especially low. In contrast, used car sales are reported to be up sharply. Construction and Real Estate Residential and commercial real estate markets, though still generally tight, have shown signs of easing since the last report. Home construction activity has remained strong--particularly in the New York City area. New Jersey homebuilders indicate that some recent slowing in demand has merely shortened the queue to 9 months from over 12 months, and has had no effect on the level of construction. Similarly, remodeling activity remains robust. House prices in the New York City area have leveled off, though they are still running roughly 10 percent ahead of a year ago. Manhattan's co-op and condo market has softened further in recent weeks, with prices edging down and unit sales falling sharply. A leading New York City residential realtor reports that the first half of April has brought "two of the deadest weeks in a long time." Decent traffic is reported at open houses, but buyers and sellers are often having trouble negotiating a price; this has translated into longer listing times and fewer transactions. Office markets in and around New York City continue to be tight, though less so than in the last report. While Manhattan's availability rates have risen only modestly from historically low levels and asking rents are still up 20 percent over the past year, a substantial amount of leased office space is said to be available for sublet. Similarly, in northern New Jersey, office vacancy rates held steady in the first quarter, but the space available for sublet has doubled over the past nine months. Moreover, with signs of weakening demand and increased supply--nine million square feet of office space is currently under construction, largely along the Hudson waterfront and in Somerset County--landlords are reported to be offering more incentives. Demand for high-tech telecommunications space ("telco hotels") has reportedly fallen off sharply since last year. In Long Island, however, there has been no noticeable softening: vacancy rates are little changed and rents are up 7 percent from a year ago, buoyed by corporate expansions in the financial services, legal services and technology industries. Finally, a commercial real estate firm in western New York State reports continued strong demand for office space near Buffalo's airport. Other Business Activity A major employment agency reports that New York City's labor market remains tight but a bit less so than in the last report. There continues to be a backlog of demand for workers--largely from the financial services industry--though it has become less pronounced in recent weeks, as some clients scaled back hiring. The agency also reports that wages, after rising sharply in 2000, have leveled off. In the manufacturing sector, purchasing managers report mixed, but generally improved conditions in March. Purchasers in the New York City area report that manufacturing activity continued to expand in March; those outside manufacturing report that conditions continued to weaken, though to a lesser extent than in January and February. Overall, input price pressures were reported to be more subdued in March than in January or February--both in manufacturing and in other industries. The notable exceptions were energy commodities, computer software, and contracted cleaning, engineering and architectural services. Buffalo-area purchasers report that conditions in the local manufacturing sector improved slightly in March--new orders rebounded from a February dip, production activity registered a normal seasonal pickup, but hiring activity receded. Input price increases were slightly less widespread than in February. However, Rochester-area purchasers report further weakening in business conditions and declining employment in March, along with intensifying input price pressures. Financial Developments Nearly 70 percent of Second District banks surveyed note increased demand for residential mortgage loans since the last report. Home mortgage refinancing also strengthened substantially. Demand for consumer loans posted a typical seasonal rise, while loan demand in other categories--nonresidential mortgages and commercial credit--was stable. On the supply side, banks report further tightening in standards for nonresidential mortgages and commercial and industrial loans; roughly 30 percent of respondents indicate tightening standards in both categories, while none report easing. Standards for other types of loans were reported to be little changed. Bankers reported lowering rates on both deposits and on loans in all categories. Delinquency rates for all types of loans were reported to be unchanged. 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