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Federal Reserve Districts

Second District--New York

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The Second District's economy has generally softened since the last report, with the notable exception of housing, which appears to have regained some momentum. Signs of weakness are particularly evident in the labor market. While business contacts report increased cost pressures, mainly for insurance and energy, these pressures show no signs of feeding into finished-goods prices. The Presidents Day snowstorm had a large effect on the retail sector but little disruptive effect on manufacturing or shipping.

Retailers note that sales were below plan in recent weeks, particularly during and after the blizzard. Selling prices and merchandise costs were described as steady to lower than a year ago, while retail inventories were said to be in fairly good shape. Manufacturers indicate mixed but generally softer conditions in recent weeks; they also note increased upward cost pressures but flat to declining selling prices.

Home construction and the housing market generally have picked up since the last report, though the upper end of the market remains weak. Manhattan's office market has been stable to slightly weaker in early 2003, with rents continuing to fall. Conditions in New York City's financial industry have reportedly deteriorated since the last report. Finally, bankers report some weakening in consumer loan demand, a modest upturn in consumer delinquency rates, and tighter lending standards on commercial borrowers.

Consumer Spending
Retailers report that sales were generally below plan in January and the first three weeks of February. Most contacts were not too concerned with January, which is considered a clearance month. However, the Presidents Day snowstorm had a substantial effect on February sales, and contacts generally do not expect to recoup those sales for quite some time. The storm shut down a number of stores on what is typically a busy sales day and continued to depress business for two to three days. February same-store sales are expected to range from 3 percent to 15 percent lower than last year, mainly due to the snowstorm.

Apparel sales were generally described as weak, though outerwear again performed better than other categories; a number of contacts noted particularly strong sales of jewelry. Demand for home furnishings and appliances was described as mixed. Despite the recent weakness in sales, most retail contacts say that inventories are in good shape. Retailers report that selling prices are flat to down moderately and describe the pricing environment as highly competitive. Merchandise and labor costs are said to be little changed, but retailers report steep increases in utility and insurance costs.

Regional surveys of consumer confidence have given mixed but generally weak signals. Siena College's monthly survey of New York State residents showed confidence rebounding from a cyclical trough in January, led by the New York City area. However, the Conference Board reports that confidence in the Middle Atlantic states--New York, New Jersey, and Pennsylvania--fell to a new cyclical low in January.

Construction and Real Estate
Residential real estate markets have shown signs of regaining steam since the last report, while commercial markets remain soft but stable. New York State realtors report that sales of single-family homes rebounded in December, while selling prices continued to run more than 10 percent ahead of a year earlier, with the steepest gains in the New York City area. Contacts report that sales of Manhattan co-ops and condos picked up in January and early February and that selling prices have been stable in recent months. The high end of the market, however, continues to lag.

Both single-family and multifamily housing permits in the District rebounded in December, after drifting down in the prior two months. More recently, homebuilders in northern New Jersey report that demand remains strong for homes selling for under $1 million, but note that demand has weakened further at the top end of the market, particularly in areas near New York City. An industry contact notes that labor and material costs are not a problem but that liability insurance coverage is increasingly difficult--builders are more concerned about availability than the rising cost.

Manhattan's commercial real estate market was steady to slightly weaker in January. Lower Manhattan's availability rate inched up, after improving slowly but steadily in the second half of 2002. However, rates held steady in Midtown and edged down in Midtown South. Still, asking rents throughout the city continued to decline; they have fallen by roughly 20 percent from their early-2001 peaks, and industry experts note that the decline in actual rents has been much steeper. On the supply side, there is a moderate amount of new office space currently under construction in Manhattan: roughly 3 million square feet is scheduled for completion this year and another nearly 4 million in 2004. Together, this represents slightly over 1 percent of the total stock, and all of this new space will be in Midtown.

Other Business Activity
A major New York City employment agency, specializing in midlevel office jobs, reports that that hiring activity, which appeared to be on the rise in late 2002, dropped off in January and February. The market for temps is also described as slack. Legal firms are still hiring, and there has been some pickup at magazine publishers; however, there has been very little activity from the usually dominant financial sector. Moreover, a large and growing number of unemployed financial industry workers are looking for jobs.

A contact in New York City's securities industry reports that conditions have deteriorated noticeably since the last report. In addition to increased weakness in the financial markets, stock issuance, and mergers and acquisitions, recent litigation settlements and increased liability have further affected securities firms' bottom lines. Bonus payments are estimated to be down 20 percent to 30 percent from last year's levels, and there is no indication of a pickup in hiring on the horizon.

The manufacturing sector has given mixed signals since the last report. Purchasing managers in both the Buffalo and Rochester areas report some pickup in manufacturing activity in January but further declines in employment levels; they also note widespread increases in input prices. New York City-area purchasers report that manufacturing sector conditions were flat in January, after broad improvement in December, and indicate little change in input prices; while they express increased optimism about the near-term business outlook, a majority anticipates staff cutbacks in the industry in 2003. More recently, our February survey of New York State manufacturers indicates some leveling off in business conditions, following three months of improvement. Manufacturers note increased upward pressure on input costs but downward pressure on selling prices. Respondents also expressed less optimism about the near-term outlook than in recent months. While the survey was taken prior to the Presidents Day blizzard, there has been no indication that the storm had any substantial effect on production.

Separately, a major freight shipping firm reports that the snowstorm had little disruptive effect at the seaports during the subsequent workweek, causing only scattered minor delays. More generally, this contact characterizes shipping activity as very strong.

Financial Developments
Small to medium-sized Second District banks report a further decline in demand for consumer loans, which appears to be partly seasonal, but steady demand in other segments. In particular, 31 percent of bankers indicated lower demand for consumer loans, compared with only 3 percent indicating higher demand. Bankers reported no change in overall refinancing activity.

On the supply side, bankers continue to report tightening credit standards for commercial borrowers--roughly one in six bankers reports tighter standards for commercial and industrial loans, while none reports an easing of standards. Credit standards for residential mortgages and consumer loans remained little changed. Both loan rates and deposit rates continued to decline across the board. Lenders report an upturn in delinquency rates on consumer loans, which cannot be attributed entirely to seasonal fluctuations--twice as many respondents indicate that they are rising as rates are declining. Delinquency rates are reported to be stable in the other categories.

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Last update: March 5, 2003