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Federal Reserve Districts


Second District--New York

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The Second District's economy has weakened since the last report. Manufacturers report that business activity declined moderately in September and early October, while non-manufacturing firms report more widespread softening in activity and anticipate cutbacks in employment levels. Both manufacturers and other firms report some letup in price pressures, though a sizable proportion of manufacturers plan to increase selling prices in the months ahead.

Consumer confidence has recovered somewhat since the last report, though the latest survey data were collected prior to much of the recent financial sector turmoil. Still, retail sales were moderately below plan in September, though inventories were said to be at or near desired levels. There has also been some pullback in tourism activity in New York City. Most residential and commercial real estate markets have continued to weaken since the last report; real estate contacts note that it is too early to gauge any potential fallout from the recent financial turmoil. Finally, bankers report slowing demand for home mortgages and consumer loans, tightening in credit standards, and higher delinquency rates on loans--especially home mortgages.

Consumer Spending
Retail sales were said to be moderately below plan in October, with same-store sales running 1 to 5 percent below a year earlier. New York City continued to out-perform the rest of the region in terms of sales gains. Inventories are reported to be at or near desired levels generally, and prices are reported to be steady to up moderately. Consumer surveys indicate some recovery in sentiment: the Conference Board's survey of Middle Atlantic residents showed confidence rising modestly in August and September after slumping to its lowest level on record in July; similarly, Siena College's survey of New York State residents shows some rebound in confidence in the third quarter. In both cases, though, most of the surveys were completed prior to the mid-September financial turmoil.

Tourism activity in New York City has shown some signs of softening since the last report. After climbing above 90 percent in August, Manhattan's hotel occupancy rate retreated noticeably in September, based on preliminary figures, slipping below comparable 2007 levels. At the same time, room rates rose less than the seasonal norm and were up 6 percent from a year earlier, compared with a gain of 8 percent in August and 9 percent in July. Moreover, a number of major hotels indicate that advance bookings--mostly for October and November--have weakened noticeably. Separately, Broadway theaters report that both attendance and total revenues were up roughly 6 percent from a year earlier in September, which is a slightly larger increase than reported for August.

Construction and Real Estate
Housing markets in the District have generally weakened since the last report. Virtually all contacts emphasize that there has been little activity in recent weeks and that it is too early to gauge the impact of the recent financial crisis on the market; there were frequent mentions of both buyers and sellers being in a "wait and see" mode. A contact monitoring New Jersey's residential construction sector reports that both new home sales and new construction activity were exceptionally weak in August and that prices have continued to decline, with builders increasingly offering steep discounts. The inventory of homes on the market remains fairly high, though two contacts note that many sellers are discretionary and would take their homes off the market before reducing the asking price substantially. A number of contacts in northern New Jersey estimate that single-family home prices are down 20 to 25 percent from their peak levels; one contact notes somewhat steeper declines in prices for townhouses and condos. Housing markets on New Jersey's Gold Coast (near Manhattan), where both multi-family development and apartment sales and prices had been showing some resilience, are reported to have weakened recently.

New York City's co-op and condo market also showed signs of softening in the third quarter: prices were still reported to be up slightly from a year earlier, but lower than in the second quarter. Moreover, sales activity weakened noticeably, and the inventory of unsold units, though still fairly low by historical standards, was up an estimated 35 percent from a year ago. Manhattan's rental market was steady to somewhat softer in September: on average, rents were running 4 to 5 percent lower in September than a year earlier, while the inventories of available rental units and the vacancy rate have been relatively stable.

Commercial real estate markets in the New York City area have also weakened noticeably. In Manhattan, leading brokerage firms report that office vacancy rates climbed about point in September and were up for the quarter as a whole. Asking rents retreated but were up modestly from comparable 2007 levels; however, an industry expert notes that asking rents are overstating actual market rents, due to both the mix of available space becoming more upscale--with financial firms pulling back--and landlords becoming increasingly willing to negotiate and offering more concessions. Suburban office markets also showed some softening during the third quarter, though to a lesser extent than in Manhattan; asking rents have generally remained stable outside New York City. Finally, an expert on Manhattan's hospitality industry notes that hotel development has slowed: developers that have yet to begin physical construction are largely unable to get financing to go forward and most such projects are being curtailed. Currently, no new developments are being started.

Other Business Activity
New York State manufacturers report that business activity weakened moderately in September and early October. Contacts report some decline in new orders but steady employment levels. Manufacturers report some letup in price pressures, though close to half of those contacted plan to increase their selling prices in the months ahead. While a large number of manufacturers report tightening credit conditions and increased borrowing costs, more contacts say that their own borrowing needs have diminished than increased. General weakness is also reflected in goods distribution: a trucking-industry contact reports that this pre-holiday season is shaping up to be the weakest in a long time. Credit availability is not reported to be a major issue, and truckers are getting some relief from declining diesel prices, with few, thus far, scaling back fuel surcharges. However, these positive industry factors are more than being offset by the general falloff in business. More generally, non-manufacturing firms in the District report widespread deterioration in general business conditions and declining business activity; a growing proportion also indicate recent job reductions, and a majority now expect job cutbacks in the months ahead; these firms' capital spending plans have also weakened fairly dramatically. Non-manufacturing firms report continued price pressures, but a declining proportion plan to raise their selling prices in the months ahead. In contrast with manufacturers, contacts at non-manufacturing firms indicate somewhat increased borrowing needs, on balance.

Financial Developments
Small to medium-sized banks in the District report fairly widespread weakening in demand for consumer loans and residential mortgages, but no change in demand for commercial mortgages and commercial and industrial loans. For all loan categories, respondents indicate a tightening of credit standards--particularly in the residential mortgage category. Respondents state an increase in the spreads of loan rates over cost of funds in all loan categories except consumer loans, where they report no change. Finally, bankers report no change in delinquency rates for commercial and industrial loans but increased delinquencies for all other loan categories--most noticeably in the residential mortgage category, where nearly a third of bankers indicate higher rates and just 6 percent report lower rates.

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