July 31, 2002 Federal Reserve Districts Second District - New York

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Economic growth in the Second District appears to have eased off since the last report, with signs of renewed weakness in commercial real estate, and employment, but resilience in housing. There continue to be no signs of price pressures. The labor market has shown signs of softening since the last report. Retail sales have picked up since the last report, though most of the improvement was attributed to the belated arrival of hot weather; retail inventories are described as lean, despite some intentional inventory accumulation in anticipation of a possible longshoremen's strike. Manufacturers, after indicating improvement through most of the second quarter, report some slowing in activity in late June and early July, though business contacts remain fairly optimistic about the near-term outlook. Housing markets have shown resilience, characterized by strong construction and resale activity, further increases in selling prices and stabilization in the rental market. In contrast, commercial real estate markets in and around New York City have shown renewed signs of weakening. Finally, bankers report a continuation of most of the same trends seen in the last report: weakening demand for consumer loans, rising demand for commercial loans, and tighter lending standards; however, delinquency rates, which had been declining, leveled off in July. Consumer Spending Major retailers report that sales, which had been below plan in May, improved somewhat in June and early July and were back on or close to plan. However, much of the recent strength--as the earlier weakness--was attributed to the belated arrival of hot summer weather, which boosted sales of air conditioners, summer apparel, and lawn and garden merchandise. More generally, electronics, home furnishings, and women's apparel were described as the strongest categories, while men's and children's apparel were said to be weak. Retailers report that inventories remain at very favorable levels--roughly 5-10 percent lower than a year ago, on average--even though some contacts have accumulated extra inventories in anticipation of a longshoreman's strike. Selling prices, merchandise costs, and retail wages remain steady, though non-wage costs continue to escalate. Consumer confidence edged lower again in June, according to the latest survey of New York State residents, conducted by Siena College. While there was little change in the public's assessment of current conditions, residents of both upstate and metropolitan New York City expressed increased concern about future conditions. Construction and Real Estate Housing markets continue to show resilience across most of the District. Homebuilders in northern New Jersey say the underlying tone of the housing market remains strong, though prices appear to be leveling off. The only sign of slack market conditions was along the "Gold Coast" (across the river from New York City), where a substantial number of new multi-family units have come on line in the past year. However, builders indicate that demand for single-family homes continues to outstrip supply. Contacts in Manhattan's real estate and appraisal industries report that market conditions remain fundamentally strong, despite weakness in the financial markets. The number of co-op and condo transactions in the second quarter was reported to be up nearly 50 percent from a year earlier and one of the highest on record. Moreover, the average selling price, adjusted for changes in the mix of units, was up roughly 3 percent from the prior quarter and also up 3 percent from a year earlier. One contact notes that, while it is too early to gauge the effect of the recent decline in the equity markets, as of the third week in July, there have been no reports of any buyers pulling out of deals. New York City's apartment rental market has also shown signs of stabilizing--a major rental real estate firm reports that rents have stopped falling but are still down 5-7 percent from mid-year 2001 levels. Most of the improvement in the rental market is reported to be at the upper end. Commercial real estate markets, which had shown signs of stabilizing in the last report, appear to be slackening once again. In Manhattan, Midtown's vacancy rate climbed to 8.5 percent at mid-year, from 7.8 percent at the end of the first quarter. At the same time, Downtown Manhattan's rate soared from 11.9 to 14.5 percent, a five-year high. Office rental markets in New York City's suburbs also slackened, to varying degrees, in the second quarter. Long Island's vacancy rate rose 2 points to 13.3 percent, while Fairfield County, Connecticut's rate climbed to an eight-year high of 18.3 percent. Vacancy rates rose only modestly in Westchester County and northern/central New Jersey, ending the second quarter at 17.1 and 15.8 percent, respectively. Asking rents are down 10 percent from a year ago in both Manhattan and Fairfield County, but are little changed in New York City's other suburbs. Other Business Activity A major New York City employment agency reports that local labor demand, which had been showing signs of improving for much of this year, has tapered off in June and early July. Hiring activity is described as disappointing--particularly in the financial, business and legal services industries--but not as weak as in late-2001, and not nearly as bad as in the early-1990s recession. Separately, temporary help agencies in upstate New York State report sharp declines in demand for contract and temp workers compared with a year ago--particularly in the information technology area. However, in recent weeks, two agencies note a pickup in demand for mortgage processors and light manufacturing workers. Recent surveys of purchasing managers and manufacturers paint a mixed picture of current conditions but indicate continued optimism about the near-term outlook. Buffalo-area purchasers report some improvement in business conditions in June, with increases reported in both production activity and new orders. Similarly, Rochester-area purchasers report a noticeable pickup in business activity in June, following weak conditions for most of this year. New York City area purchasing managers remain optimistic about the business outlook but report that current conditions were mixed in June--those in the manufacturing sector indicate widespread improvement, but other types of firms, particularly not-for-profits, report increased weakness. More recently, though, New York State manufacturers report weakening in business conditions in our latest monthly survey, conducted in early July, though respondents continue to express widespread optimism about the near-term outlook. Manufacturers and purchasing managers report little change in merchandise costs and steady to lower selling prices. Finally, Manhattan hotels report that occupancy rates were little changed in June and continued to run slightly below year-earlier levels. However, average room rates weakened somewhat and were down 13 percent from a year earlier. Financial Developments Small to medium-sized Second District banks report mixed demand for loans since the last report, with increasingly widespread weakness in demand for consumer loans, but continued strength in demand for commercial and industrial loans. Refinancing activity continued to decrease, on balance. On the supply side, bankers again indicate tightening credit standards for all types of loans except for residential mortgages, where standards remain stable. Interest rates on both loans and deposits decreased across all categories; most notably, four out of five bankers report lower rates on home mortgages. Lenders report stable delinquency rates for all types of loans. Return to top Boston Philadelphia