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Federal Reserve Districts

Second District--New York

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The Second District's economy has shown further signs of improvement since the last report, though the labor market remains soft. There are no indications of any significant price pressures. Manufacturing sector contacts report steady to increasing activity and continued improvement in general business conditions, and a large majority remain optimistic about the near-term outlook. Auto dealers report a rebound in sales in recent weeks. General merchandise retailers also say that sales have improved since the last report. There are signs of a pickup in tourism activity in New York City.

Commercial real estate markets--in both the office and industrial categories--have been steady to moderately weaker since the last report. Residential real estate markets have been mixed since the last report, but generally weaker, especially at the high end of the market; New York City's sales and rental markets have been particularly weak. Finally, bankers report rising delinquency rates--articularly on mortgages, both residential and commercial; they also note continued tightening in credit standards, and weaker loan demand.

Consumer Spending
Retail sales showed further signs of picking up in October, though early indications for November are mixed. Non-auto retailers generally report that sales picked up in both September and October and appear to be running on or ahead of plan. Some contacts in upstate New York attribute part of the strength to increased demand from Canadian shoppers. While some contacts say that sales remained fairly buoyant into early November, one mall manager and a major retail chain note some pullback in sales in recent weeks. Inventories are reported to be in good shape and well below comparable 2008 levels; one contact notes that holding lean inventories carries the risk of losing out on sales for items in high demand, because manufacturers and distributors are also keeping inventories low. Prices are reported to be stable, though discounting is not expected to be nearly as steep as in last year's dismal holiday season. Auto dealers report that sales rebounded briskly in recent weeks, after a brief drop-off once the "cash-for-clunkers" program expired.

Consumer confidence measures declined modestly in October: residents of the Middle Atlantic states (NY, NJ, Pa), hold an increasingly negative view on current conditions, and have recently become a bit less optimistic in their near-term expectations. Similarly, Siena College reports that consumer confidence among New York State residents edged down in both September and October, after reaching its highest level in more than a year in August.

Tourism activity in New York City has picked up since the last report; leisure travel has been increasingly brisk, even as business travel remains sluggish. Manhattan hotels report that occupancy rates exceeded year-earlier levels in both September and October, for the first time in more than a year, though this was mostly attributed to the unusually low levels of the latter part of 2008. More notably, room rates climbed by substantially more than the seasonal norm in September and October, though they are still down 15-20 percent from last year. Bookings for more than a month ahead remain sluggish as visitors seem reluctant to commit in this uncertain environment. Broadway theaters report a pronounced pickup in attendance, as well as revenue, in recent weeks; these measures, respectively, are up roughly 14 and 20 percent from a year ago--a good deal more than in September.

Construction and Real Estate
Commercial real estate markets in the District were again steady to softer since the last report. Manhattan's office vacancy rate climbed again in October, while asking rents continued to fall and are running 25 percent below comparable 2008 levels; effective rents are reported to have fallen even more steeply--especially when concessions are factored in. Northern New Jersey's market has been particularly slack, though office markets in Long Island and the northern suburbs appear to be somewhat firmer: in all these markets around New York City, vacancy rates have been relatively steady, while asking rents are running 4-5 percent lower than a year earlier. Office rental markets in upstate New York are mixed: vacancy and rent data suggest that metropolitan Rochester's market has softened somewhat, while Buffalo's market has been steady to slightly stronger. On the other hand, a commercial real estate firm in western New York State maintains that demand for both office and retail space is weak and that there is virtually no new development activity.

Housing markets have been mixed but, on balance, a bit softer since the last report. Home sales and prices have reportedly weakened moderately in the Buffalo area, in part due to the impending expiration of the [now extended] homebuyer tax credit. Contacts in northern New Jersey report that resale transactions remain low but have picked up a bit, and that selling prices appear to have stabilized at low levels. However, builders have reportedly stepped back on new development as they remain skittish about having excess inventory. New York City's housing market has continued to weaken: while sales activity for existing apartments has rebounded from depressed levels, sales of new units remain very sluggish. Selling prices for existing units are reported to be down roughly 25 percent from a year earlier, with even steeper declines at the high end of the market; weakness at the high end is also evident in northern New Jersey. Developers looking to unload large inventories have begun to auction off condo units with steep discounts--primarily in Brooklyn, but also in the Bronx. New York City's rental market also continues to weaken, with contract rents in Manhattan falling roughly 10 percent over the past 12 months; moreover, when concessions are factored in, the decline in effective rents has been a good deal steeper. On the supply side, one industry expert estimates that nearly 3,000 new rental units have been completed in Manhattan thus far in 2009--roughly double the figure for all of 2008.

Other Business Activity
A major New York City employment agency, specializing in office jobs, reports that hiring remains very sluggish, though recruitment activity has reportedly picked up marginally in the finance and legal sectors. In general, contacts in both manufacturing and other sectors report that employment at their firms has leveled off; whereas a large and growing proportion of manufacturers plans to ramp up employment in the months ahead, non-manufacturing contacts generally plan to hold their staffing levels steady. Retailers mostly plan on giving existing staff more work hours during the holiday season, as opposed to hiring temporary workers.

Looking at business activity more generally, manufacturing firms in the District report continued growth in business activity in October and early November, and most contacts anticipate further improvement in the months ahead. Non-manufacturing firms indicate that business is generally steady to rising moderately, but they too are fairly optimistic about the near-term outlook. In general, contacts report only modest input price pressures and are holding their own selling prices steady.

Financial Developments
Medium to small-sized banks in the District report decreased demand for all types of loans--particularly residential mortgages--as well as a decrease in refinancing activity. Part, though not all, of this recent weakening appears to be seasonal in nature. Respondents indicate a tightening of credit standards across all loan categories, and to a somewhat more widespread degree than in recent months. No banker reported an easing of credit standards. Bankers note an increase in the spreads of loan rates over costs of funds for all loan categories except residential mortgages, where they report no change. The widening in spreads is most prevalent in the commercial mortgage category. Respondents indicate ongoing declines in average deposit rates. Finally, bankers report increased delinquency rates for all loan categories, but these increases are most widespread in residential mortgage and commercial mortgage segments.

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Last update: December 2, 2009