June 12, 2002 Federal Reserve Districts Second District - New York

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The District's economy has shown further signs of perking up since the last report, despite some softening in consumer spending and consumer borrowing. There has been no discernible pickup in price pressures. The labor market has shown signs of firming. Retail sales were generally below plan in May, partly due to unseasonably cool weather, with same-store sales little changed from a year earlier; still, inventory levels were reported as satisfactory, while selling prices were little changed. Surveys of regional manufacturing firms and purchasing managers suggest a slight deceleration in growth in May, but a pickup in cost pressures. Housing markets have strengthened further, especially in the New York City area. Office markets have stabilized, though rents are still down by well over 10 percent from a year ago. Finally, bankers report weaker demand for consumer loans, but stronger demand from commercial borrowers, along with declining delinquency rates for consumer and home mortgage loans and tighter lending standards. Consumer Spending Most retail chains report that sales were below plan in May; compared with a year earlier, same-store sales changes ranged from a 7 percent decline to a 4 percent increase. Unseasonably cool weather was blamed for some of this recent weakness. While various contacts noted sluggish sales of apparel, lawn and garden, and luggage, most indicate relatively strong sales of home appliances, furnishings and electronics. Despite the sluggish sales in recent weeks, most retailers report that inventories are in good shape. Retailers generally report that selling prices, merchandise costs, and wages are stable, but continue to note sharp escalation in medical and property insurance costs. One large chain reports that employee turnover has declined and that a growing proportion of workers are full-time; this has led to an increase in wage rates but also a large increase in worker productivity. Contacts express mixed levels of concern about the possibility of a West Coast longshoreman's strike this summer. Construction and Real Estate Housing markets have shown signs of gaining further momentum in recent weeks--particularly in the New York City area. Homebuilders in northern New Jersey report that demand remains strong and that supply shortages persist--although construction activity is lower than a year ago, price increases are sticking and buyers have been requesting more features and options. According to realtors in New York State and northern New Jersey, median selling prices of existing single-family homes are reported to be up 15-25 percent, year-to-date, from comparable 2001 levels in and around New York City, while gains in upstate New York have ranged from 1 to 9 percent. Unit sales are running 10-20 percent ahead of 2001 levels in metropolitan New York City and roughly 5 percent ahead in upstate New York. Regarding the multi-family sector, a leading New York City appraisal firm and a major real estate firm both report further strengthening in Manhattan's co-op and condo market in April and May. A number of recent transactions have had multiple bids, though only modestly above the asking price, and prices are reported to be roughly back on par with a year ago and increasing. These contacts also report that Manhattan's rental market, though still somewhat slack, has shown clear signs of picking up since the last report. In contrast, eastern Long Island's summer rental market is said to be much weaker than last year. Commercial real estate markets in the New York City area have shown more signs of stabilizing since the last report. In Manhattan, Midtown's vacancy rate edged up from 7.8 to 8.1 percent in April, but Downtown's rate held steady at 11.9 percent. Asking rents are reported to be down 10-15 percent from a year ago, and this is said to understate the decline in actual rents. Office rental markets in New York City's suburbs have been mixed, with vacancy rates declining in Westchester County, little changed in Long Island, but rising in central and northern New Jersey and Fairfield County, Connecticut. Separately, office vacancy rates in the suburbs of Albany rose to a nearly 10-year high in May, but vacancy rates in downtown Albany have declined over the past year. Other Business Activity A leading employment agency reports further improvement in New York City's labor market in April and May. Hiring activity has remained strong in the legal services industry and has picked up in the financial services sector. However, there is still reported to be a large pool of unemployed information technology workers, with only sporadic hiring in that area. Separately, Manhattan hotels have seen stable tourism activity--both occupancy and room rates were little changed in April, at or close to pre-attack levels. According to our May survey of New York State manufacturers, a smaller proportion of respondents reported improvement in business conditions than in April, but positive responses still outnumbered negatives. Moreover, expectations on the near-term outlook were overwhelmingly positive, even more so than in April. However, manufacturers increasingly indicate that input costs have risen, but that they have been unable to raise selling prices. Separately, a growing proportion of New York City area purchasing managers report favorable business conditions in May, though those in the manufacturing sector report some deceleration from the rapid pace seen in April. Meanwhile, Buffalo-area purchasers report some weakening in manufacturing-sector conditions and production activity, but a modest pickup in hiring. Purchasers in both Buffalo and New York City note some pickup in price pressures in May. Financial Developments Bankers at small to medium-sized Second District banks report sagging loan demand on the consumer side, but rising demand from commercial borrowers. Roughly twice as many respondents report increased demand for commercial and industrial loans and nonresidential mortgages as report decreases. For consumer loans, in contrast, responses were roughly the reverse. Demand for residential mortgages was little changed on balance, while refinancing activity continued to recede. On the supply side, bankers report tightening credit standards for all types of loans except for residential mortgages, for which standards remained stable. Loan rates decreased for most types of loans, though rates on nonresidential mortgages held steady. Deposit rates also fell since the last report. Lenders report lower delinquency rates on consumer loans and residential mortgages, but little change in rates for non-residential mortgages and commercial and industrial loans. Return to top Boston Philadelphia