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Federal Reserve Districts

Second District--New York

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The Second District's economy has slowed further since the last report, though contacts in a variety of sectors largely view this as a war- and weather-related postponement of activity. Despite some scattered price hikes, most contacts report that prices and costs of finished goods are steady or declining. The labor market has weakened further, though there has been a slight pickup in hiring of temporary help. Most retail contacts report that sales were below plan in March, with war and inclement weather cited as major factors. Inventory levels are generally described as manageable, though most contacts report high stocks of warm-weather merchandise. Consumer confidence has shown signs of modest improvement since the war began. Manufacturing activity has been mixed but generally flat since the last report.

Housing, while still characterized as strong, showed signs of softening in February and March, particularly at the high end of the market, though there are scattered reports of a pickup in early April. Office markets across metropolitan New York City weakened in the first quarter, particularly in some of the suburban areas. Finally, bankers report a pickup in demand for home mortgages, steady-to-lower delinquency rates, and further tightening in credit standards for commercial borrowers.

Consumer Spending
Most major retail chains report that sales in the District were below plan in March, with a good part of the weakness attributed to the war and unseasonably cold and wet weather. Comparable store sales for March ranged from flat to down 11 percent from a year earlier, though the later date for Easter this year was seen shifting some sales from March into April. A few contacts did note some improvement in sales in the first ten days of April. Sales of home furnishings held up relatively well, compared with other categories. In fact, the two chains most concentrated in durables for the home reported that sales were on or above plan. However, sales of apparel continued to be sluggish, in terms of unit volume and especially dollar volume.

Both selling prices and merchandise costs are described as flat to down moderately, with particularly sharp price declines for apparel and electronics. Inventories are reported to be at manageable levels. Most contacts report heavy stocks of spring merchandise, but these are expected to sell once warm weather arrives. A number of contacts emphasize that the next two weeks will be critical for sales and inventories.

Regional surveys of consumer confidence showed some signs of stabilizing in March. Siena College's monthly survey of New York State residents showed a modest recovery in confidence in March, with most of the pickup occurring after the war began. Separately, the Conference Board reports that confidence in the Middle Atlantic states--New York, New Jersey, and Pennsylvania--held steady at close to a seven-year low in March, though most of the survey was conducted before the war.

Construction and Real Estate
Residential real estate markets appear to have slowed since the last report. Home construction activity, as measured by housing permits, fell noticeably in the first quarter, hampered by heavy snow accumulations across much of the District. New Jersey homebuilders report that demand for moderately priced homes has remained fairly sturdy, but that the high end of the market has deteriorated further since the last report. Separately, realtors across New York State report that sales of existing single-family homes slowed sharply in January and February--partly reflecting harsh weather--while prices leveled off.

Manhattan's co-op and condo market has weakened somewhat since the last report, particularly at the high end. Overall, selling prices were said to be down roughly 10 percent from a year earlier, with unit volume down 5 percent to 10 percent, though an industry contact notes that early 2002 was an extraordinarily strong period. According to a leading appraisal firm, the inventory of homes on the market is reported to be up about 40 percent from a year ago, with much of this increase concentrated at the high end. More recently, though, a large real estate firm notes that activity has improved somewhat in early April and that there has been a notable pickup in sales in Lower Manhattan.

Office markets across most of metropolitan New York City continued to weaken in the first quarter. Westchester's office vacancy rate, which had remained fairly stable throughout 2002, jumped 2 percentage points to 18.4 percent, its highest level in nearly eight years. Vacancy rates also edged up in Midtown Manhattan, Long Island, and central New Jersey but edged down half a point in Fairfield County. Rates were little changed in Lower Manhattan and northern New Jersey. Within northern New Jersey, urban areas are said to be performing noticeably better than suburban markets. In general, asking rents are down 10 percent to 20 percent from their 2001 peaks, though industry contacts note that actual rents have slid more sharply.

Other Business Activity
A major New York City employment agency indicates that the job market has deteriorated further since the last report, though there have been signs of a modest pickup in hiring temporary workers. Hiring activity at law firms, though still stronger than in other industries, has slowed measurably, while the financial services industry is still shedding jobs. This contact attributes at least some of the current hiring slump to war-related uncertainty. Separately, a contact in the financial sector reports that New York City's securities industry appears to have bottomed out in late 2002, at least in terms of profits, but that employment will not likely bottom out until at least this fall.

The manufacturing sector continued to give mixed signals in March and early April, both in terms of business conditions and price pressures. New York City-area purchasing managers report a rebound in manufacturing-sector conditions in March, after some softening in February, but those in other sectors report further weakening. Respondents in both manufacturing and other sectors continue to report steady input prices. Buffalo-area purchasers report steady business conditions in the manufacturing sector in March, with some acceleration in new orders, but a deceleration in production activity; they also indicate continued upward movement in input prices. Finally, our latest monthly survey of New York State manufacturers, conducted in early April, indicates weakening in general business conditions, but expectations of activity over the next six months have strengthened. Respondents note increased upward pressure on input costs but little change in selling prices.

New York City bus, subway, and commuter-rail fares will be hiked roughly 25 percent, on average, in early May, and there will be more modest increases in some bridge and tunnel tolls. This is expected to boost the metro-area Consumer Price Index no more than half a point. Tokens will no longer be accepted on the subway system, after the fare increase.

Financial Developments
Bankers at small to medium-sized Second District banks report a widespread--and partly seasonal--increase in demand for home mortgages, but steady demand for other types of loans. Specifically, 54 percent of bankers indicated higher demand for residential mortgages, compared with only 11 percent reporting lower demand. Bankers also indicated increased refinancing activity. On the supply side, bankers reported tighter credit standards for most types of loans--in particular, commercial and industrial loans and commercial mortgages. No bankers reported an easing of standards in any category. Widespread declines in both loan and deposit rates were reported across all categories. Lenders reported declining delinquency rates for commercial and industrial loans but stable rates across other categories.

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Last update: April 23, 2003