December 3, 2008
Federal Reserve Districts
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The Second District's economy has deteriorated substantially since the last report. Both manufacturers and other firms report widespread declines in business activity and employment levels, and a growing number plan to curtail capital spending in the months ahead. Firms in a broad array of industries report that both their input costs and selling prices have leveled off, after rising through the third quarter. Retailers report weak sales for October and early November, though inventories are not said to be too out of line; retailers say that prices are flat to lower. An annual survey of consumers in the region suggests that holiday season spending will be considerably lower than in 2007. Tourism activity in New York City is reported to have declined sharply in recent weeks. Both residential and commercial real estate markets have softened substantially since the last report, most notably in Manhattan. Finally, bankers report widespread weakening in loan demand across all segments, substantial tightening in credit standards, and higher delinquency rates on all types of loans.
Tourism activity in New York City has weakened sharply since the last report. Overall revenues of Manhattan hotels have plummeted in recent weeks: after running about 10 percent ahead of comparable 2007 levels in the third quarter, revenues are reported to be down more than 10 percent from a year earlier in October and are estimated to be down more than 20 percent in early November. The recent drop-off reflects declines in both occupancy rates and room rates. Also, Broadway theaters report that business slowed in mid-October and has remained weak since. Comparisons with 2007 are not relevant, due to a strike last November, but both attendance and revenues have been sluggish, running more than 10 percent lower than two years ago. Average ticket prices have been relatively steady.
Construction and Real Estate
New Jersey's housing market has also deteriorated substantially since the last report. A building industry expert describes buyer traffic at new developments as almost non-existent and notes that larger construction firms are backing out of new developments and cutting jobs, while a number of smaller firms are contemplating either moving into the rehab segment of the market or going out of business. Multi-family development, which had been holding up somewhat through the summer, has ground to a halt more recently. A real estate contact in northern New Jersey indicates that selling prices for existing homes are down 20 to 25 percent from a year ago, but that the number of transactions has held up, as sellers are increasingly negotiable; many potential sellers have taken their homes off the market, keeping the inventory of unsold homes relatively low. The low end of northern New Jersey's housing market is said to be holding up fairly well, whereas the market for higher-priced homes (over $400K) is described as moribund. In contrast, real estate contacts in western New York State report that prices have continued to increase modestly through October, though sales volume has tapered off moderately.
Commercial real estate markets in the New York City area have weakened noticeably. Manhattan's office vacancy rate continued to climb in October, rising more than ½ point, led by Midtown. Leasing activity has slowed markedly, and many tenants are requesting short-term renewals, with landlords generally willing to oblige. Actual rents have continued to decline, while asking rents, which had remained slightly above 2007 levels through the third quarter, have now turned down as well. There has been a particularly sharp increase in the amount of available sub-lease space--largely from financial firms. Office markets on the outskirts of New York City are also reported to be softening, but not as dramatically as Manhattan's.
Other Business Activity
More generally, paralleling the weakness reported in our recently-released survey of New York State manufacturers, non-manufacturing firms in the District report widespread deterioration in employment, as well as in business activity. Non-manufacturing firms also anticipate further declines in both employment and business activity in the months ahead, and a growing number plan to reduce capital spending. A growing proportion of firms--both manufacturers and other firms--report tightening credit conditions over the past three months. Firms across a wide range of industries report that their selling prices have leveled off, while their prices paid have decelerated.