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Federal Reserve Districts

Second District--New York

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The Second District's economy has given mostly positive signals since the last report. The mid-August power outage evidently had a minimal effect on overall economic activity-some impact was reported on retailers and contract employers. Retail sales, which were above plan in July, were close to plan, on balance, in the first three weeks of August; inventories were generally reported to be at desired levels. Manufacturing activity continued to improve in July and early August, and there was a noticeable pickup in port traffic.

Housing markets have continued to show strength, although some contacts view brisk summer activity as an artifact of rising mortgage rates. New York City's office market continued to improve in July, with particular strength in the Class B segment, and city hotels report increased business. Finally, bankers in the district report stable loan demand, little change in credit standards, and increased delinquency rates on commercial loans but decreased rates on home mortgages.

Consumer Spending
Major retail chains report that sales in the District were generally above plan in July, but were more mixed in the first three weeks of August. Three retail chains report that the blackout adversely affected sales. One reports that sales are ahead of plan despite the outage, but the other two describe sales as slightly below plan, primarily due to the outage, and do not expect all of the shortfall to be made up by the end of the month. Overall, year-over-year changes in comparable-store sales ranged from up 2 percent to up 7 percent in July, and from down 3 percent to up 6 percent in August. In general, sales of back-to-school merchandise were described as strong-women's apparel, lawn and garden, and home furnishings and appliances were also reported to be especially brisk. The pricing environment remained weak. Most retailers say inventories are in good shape.

Manhattan hotels report that business was fairly strong in July and early August: while room rates were down about 3 percent from a year earlier, occupancies were up nearly 5 percent. As a result, total revenues were up, on a year-over-year basis, for the first time this year. While two major New York City hotels had to evacuate during the blackout, most were fully occupied-some offered discounts and even free rooms.

Construction and Real Estate
The housing market has remained robust in recent weeks. New Jersey home-builders report that housing demand has been unusually strong for August, as rising mortgage rates have reportedly spurred a sense of urgency among buyers. Construction is lower than in 2002, mainly due to a dearth of available land, and selling prices are said to be leveling off but still higher than a year ago. Buffalo-area realtors indicate that home sales were strong in July and that selling prices were up roughly 10 percent from a year earlier. Across most of New York state, compared with a year earlier, there were fewer sales transactions but median selling prices posted double-digit gains. Manhattan's co-op and condo market was described as unusually busy during the first half of August; selling prices were steady but still noticeably higher than a year ago. Apartment rental markets have been mixed but generally sluggish. In Manhattan, while rents remain moderately below a year earlier, they are said to have firmed modestly since the end of 2002. In contrast, New Jersey's Hudson riverfront rental market has experienced persistently high vacancy rates and little or no rebound in rents.

Manhattan's office market showed continued improvement in July, led by strong leasing activity in the Class B segment, largely from small to medium-sized firms. Overall, vacancy rates declined moderately in Midtown and Midtown South; Lower Manhattan's rate inched up but is still substantially lower than at the end of the first quarter. Asking rents appear to have leveled off this year but are still roughly 8 percent lower than a year ago.

Other Business Activity
A major New York City employment agency reports more than the usual seasonal slowing in hiring activity in recent weeks, following a strong June and July, but suggests that the August lull is probably temporary, reflecting a growing trend toward concentrating vacations in August. This contact also notes that the pace of layoffs has slowed noticeably in recent months and anticipates a brisk rebound in hiring after Labor Day. The blackout had a noticeable but short-lived effect on contract employment: lost hours and wages for temp workers and reduced fees and commissions for the agency.

The manufacturing sector has shown continued positive momentum in July and early August. Our monthly survey of New York State manufacturers shows continued improvement in conditions in early August. Buffalo-area purchasers report a strong snapback in manufacturing-sector conditions in July, following a brief slowdown in June. Similarly, Rochester purchasers report improved business conditions in both manufacturing and other sectors. Finally, New York City area purchasing managers report continued improvement in the manufacturing sector in July; there was some leveling off outside of manufacturing, where New York City respondents had been reporting weakening throughout the first half of the year. Purchasing managers in all three metropolitan areas report an upturn in input prices.

A major freight shipping terminal reports a noticeable increase in volume (mostly imports from Asia) since the beginning of August; total volume is reported to be up roughly 10 to 13 percent from a year earlier, and largely represents holiday-season retail merchandise. Part of the pickup reflects a trend toward more "all-water" services to the East Coast ports from Asia, and is spurring increased warehousing and distribution in New Jersey. The power outage at the port lasted less than four hours and had a minimal effect.

Financial Developments
Small to medium-sized Second District banks report relatively stable loan demand in the latest survey. Demand for residential mortgages was mixed, with nearly half of bankers indicating lower demand, but a similar proportion reporting higher demand. Widespread declines were reported in refinancing activity. On the supply side, over 90 percent of bankers in each category report no change in credit standards.

Interest rates rose for all types of loans-in particular more than three in four bankers report higher rates for residential mortgages, and more than half report an increase in rates for commercial mortgages. However, average deposit rates declined, with over half of bankers reporting lower rates, as opposed to one in six reporting higher rates. Bankers report that delinquency rates increased for commercial and industrial loans but decreased for residential mortgages.

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Last update: September 3, 2003