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Federal Reserve Districts

Second District--New York

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The Second District's economy has continued to expand at a well-sustained pace since the last report, despite some weather-related softness in consumer spending. While there are some signs of increased cost pressures, retail prices have remained stable. Manufacturers generally report that business has picked up again in recent weeks, after a lull in April and early May; they also indicate some acceleration in input prices. Retailers indicate that sales were generally below plan in May, but hotels and other tourist-related businesses again report brisk business and sturdy revenue growth.

Residential real estate markets showed continued strength in May, though there were scattered signs of softening at the high end of the market. Office markets have gained momentum in April and May, particularly in Midtown Manhattan and northern New Jersey, while industrial markets have strengthened modestly. New York City's financial industry reports some slowing in business activity in April and May. Finally, bankers report a pickup in demand for home mortgage loans but some softening in consumer loan demand, as well as some tightening in credit standards and lower delinquency rates in that segment.

Consumer Spending
Retailers report that sales were below plan in May, as cool weather hampered sales of seasonal merchandise, such as summer clothing, swimwear, and lawn and garden supplies. Sales of home goods were also weak. However, sales of cosmetics, jewelry and accessories were characterized as strong. Overall, on a year-over-year basis, same-store sales were little changed, with reports ranging from a 6 percent decline to a 3 percent increase. Inventories were said to be in good shape, with excess warm-weather merchandise expected to sell well in June. Retailers indicate that both selling prices and merchandise costs are stable to up slightly.

Tourism remained exceptionally strong in April and May, especially in New York City. Manhattan's hotel occupancy rate was more than 2 percentage points higher in April than a year ago, and average room rates soared 17 percent. Indications are that a similar pattern continued into May. Broadway theaters report increasingly robust attendance and revenues since the last report; from mid-April through the end of May, attendance was up 10 percent from a year ago, while total revenues rose 15 percent--the strongest year-over-year gain since March 2004. Buffalo-area hotels also indicate that business was stronger in April than a year earlier, buoyed by strong convention business.

Consumer confidence was mixed in May. Siena College's monthly survey of New York State residents shows confidence edging up in May--confidence jumped in the New York City area but slipped to a 2-year low upstate. Based on the Conference Board's survey of Middle Atlantic region residents, consumer confidence slipped to a 6-month low in May, and the expectations component fell to a 15-year low.

Construction and Real Estate
Housing markets showed continued strength in April and May, though residential construction activity has tapered off a bit. New Jersey homebuilders report that demand generally remains strong, though there are signs of softening at the high end of the market where queues of buyers are said to have shortened. Prices of new homes are estimated to be up about 8 percent over the past year, while construction activity has slowed somewhat from 2004 levels. A contact at a major builders' association expresses concern about the growing preponderance of adjustable-rate mortgages and no-equity financing.

Manhattan's co-op and condo market continued to show strength in April and May. Prices retreated following a first-quarter spike but remain well ahead of a year ago, while sales volume held steady at a high level. Moreover, the inventory of available apartments declined in May, except at the high end of the market where there has been a good deal of new development. New York City's rental market is reported to have picked up a bit: the available inventory has decreased, and rents are up roughly 5 percent over the past year.

Commercial real estate markets across the New York City metro area showed signs of strengthening in April and May. In particular, office markets in Midtown Manhattan and northern New Jersey have gained momentum, with vacancy rates falling noticeably and rents escalating. Office vacancy rates also declined modestly in Lower Manhattan and Westchester, though rents remain lower than a year ago, while markets in Long Island and southwestern Connecticut were steady. Industrial markets strengthened in Long Island, New York City, Westchester and southwestern Connecticut, and were steady in northern New Jersey.

Other Business Activity
A major NYC employment agency, specializing in office jobs, reports that hiring activity quickened again, after a lull in April. This contact notes that firms are offering somewhat higher starting salaries than earlier in the year. However, a financial industry contact indicates that there has been a sharper slowdown in the industry than expected, following a robust first quarter: trading volume and profits, as well as debt issuance, have declined noticeably; also, the performance of hedge funds is reported to have been weak in April and May. More generally, this contact indicates that securities industry hiring and overall spending is likely to slow in the second half of this year.

Manufacturing activity, however, has shown signs of rebounding since the last report. Factory contacts report that business activity has picked up noticeably in recent weeks, after slowing in April and early May; they also continue to be quite optimistic about the outlook for orders and shipments in the second half of 2005. Purchasing managers report mixed results for May: those in the New York City area report some deceleration in manufacturing activity, but Buffalo-area purchasers report ongoing improvement in business conditions. Both groups of purchasers, as well as manufacturing contacts, note some increase in price pressures.

Financial Developments
Small to medium-sized banks in the Second District reported some weakening in demand for consumer loans, but a pickup in demand for residential mortgages--despite continued declines in refinancing activity. Bankers indicate some tightening in standards on consumer loans: 17 percent say they have tightened standards while just 6 percent indicate easing. Bankers note increased interest rates on all types of loans except residential mortgages. Bankers also report increased rates on deposits; nearly four in five bankers indicate an increase in rates, while none reports a decrease. Finally, on balance, loan delinquency rates were unchanged in all categories except consumer loans, where delinquencies declined.

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Last update: June 15, 2005