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Federal Reserve Districts

Second District--New York

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The Second District's economy has given generally positive signals since the last report, despite some signs of slowing in consumer spending. There has been a further pickup in hiring activity in a number of sectors. Recent business surveys point to further gains in manufacturing activity in recent weeks. Consumer confidence rebounded in October, after declining for a number of months. On the other hand, most retailers report that sales were somewhat below plan in October and early November, partly due to weather.

Both residential construction and the market for existing homes have remained robust. Manhattan office vacancy rates were mixed in October, with some improvement Downtown but an uptick in Midtown. Strong profits and revenues in New York City's financial industry are reportedly driving up bonuses and prompting a pickup in hiring. Finally, bankers report some weakening in demand for consumer and especially home-mortgage loans, but across-the-board declines in delinquency rates.

Consumer Spending
Retailers report mixed but generally soft sales results for October and early November. While a majority of contacts report that sales were below plan, two chains indicate that they were slightly ahead of plan; year-over-year same-store sales changes ranged from a decline of 4 percent to a gain of 4 percent. All contacts, even those running ahead of plan, say that unseasonably mild weather hurt sales of winter apparel. Sales of household furnishings, as well as jewelry, have remained persistently strong. Most retailers indicate that inventories are in good shape; two chains report that stocks are a bit on the high side but note that the bulk of the season's sales come after Thanksgiving. Retailers report that selling prices are steady to down 3 percent from a year ago. In looking ahead to the upcoming holiday season, retailers are generally planning for sales to be flat to up modestly over comparable 2002 levels and are looking to hire roughly the same number of seasonal workers as last year.

Consumer confidence rebounded in October, based on two separate surveys. Siena College's monthly survey of New York State residents shows confidence jumping to its highest level in more than a year, led by the New York City metro area, while the Conference Board's confidence index for the Middle Atlantic states (NY, NJ, PA) posted a more moderate rebound.

Construction and Real Estate
Residential real estate markets continued to show strength since the last report, while commercial markets were steady, on balance. Realtors in both New York State and New Jersey report that median selling prices were up more than 10 percent from a year earlier in the third quarter, while unit sales were up moderately. A large Manhattan real-estate firm and a leading appraisal firm both report that sales were brisk across the board in October and early November, and that prices were steady at the high end of the market and up moderately for smaller units. They also report lean inventories of homes on the market.

Housing permits rose in the third quarter, with a pickup in the single-family segment overshadowing a dip in multifamily permits. Still, year-to-date, multifamily permits are running more than 10 percent ahead of 2002 levels and are on track for the strongest annual performance since 1987. More recently, homebuilders in northern New Jersey report persistent strength in the market through mid-November, with prices continuing to rise, though at a more subdued pace than earlier in the year. One industry contact reports a noticeable pickup in bridge loans, which is attributed to homes taking longer than expected to sell.

Manhattan's office market was mixed in October. Data from a major brokerage show Midtown's vacancy rate rising from 11 percent to 11.9 percent, but Lower Manhattan's rate edging down from 12.9 percent to 12.4 percent. However, asking rents, though still well below a year earlier, rose in both areas. An industry contact notes that Lower Manhattan's market has been helped by soon-to-expire tax incentives for new leases.

Other Business Activity
A major New York City employment agency, specializing in office jobs, reports that hiring activity remained generally brisk in October and the first half of November, and that there seem to be fewer people looking for work. Separately, a contact in New York City's securities industry reports that this year's strong improvement in industry revenues and profits has begun to drive a moderate pickup in hiring and expects variable compensation (bonuses) to rise nearly 20 percent from a year earlier. Manhattan hotels report strong results for October-typically the busiest month of the year-with room rates about on par with a year earlier and occupancy rates up noticeably. One major hotel reports that it is completely booked up for every weekend until Christmas. In contrast hotel occupancy rates in the Buffalo-Niagara Falls area were moderately lower than a year ago in September.

The manufacturing sector has continued to give positive signals in October and early November, even in terms of employment. Our latest Empire State Manufacturing Survey, conducted in the first half of November, points to further widespread improvement in business conditions, increased employment and little change in input costs or selling prices. Similarly, New York City area purchasing managers report further widespread improvement in the manufacturing sector in October, as well as a pickup in other sectors. Buffalo-area purchasers also report that manufacturing-sector conditions continued to improve in October, with accelerating production activity, steady growth in new orders and modest increases in employment. On the other hand Rochester-area purchasing managers report some softening in manufacturing sector conditions. Reports on input prices were mixed: some escalation was reported from Buffalo, but declines were indicated in Rochester, and little change in the New York City area.

Financial Developments
Small to medium-sized banks in the Second District report decreased demand for household loans over the past two months, but steady demand for commercial mortgages and commercial and industrial loans. As in the last survey, residential mortgages saw the largest decrease, with more than two in three bankers reporting lower demand. A sizable 40 percent of respondents also report weakening demand for consumer loans. Lower refinancing activity was reported by more than three-quarters of bankers.

On the supply side, almost all respondents report that credit standards did not change for any type of lending. Interest rates rose for residential and commercial mortgages, but did not change for other loan categories. Most bankers also indicate that average deposit rates remained constant. Finally, delinquency rates decreased noticeably for all categories of loans, with roughly five times as many bankers indicating an overall decrease as an increase.

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Last update: November 26, 2003