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Federal Reserve Districts

Second District--New York

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The Second District's economy has clearly gained further momentum since the last report, and the labor market has taken on a firmer tone. While cost pressures persist, prices of final goods and services generally remain stable. Manufacturers continue to report fairly widespread improvement in business conditions, as well as a pickup in hours worked. Reports from the retail sector, though mixed, are generally more favorable than in the last report, with holiday-season sales roughly in line with expectations.

Residential real-estate markets showed continued strength in the fourth quarter, while office markets were steady to stronger. Tourism is characterized as increasingly robust in both New York City and upstate New York. The securities industry reports an upsurge in business activity, as well as a pickup in hiring, in the fourth quarter. Finally, bankers report a normal seasonal pullback in household loan demand, unchanged credit standards, and lower delinquency rates on commercial loans.

Consumer Spending
Holiday-season sales were mixed but, on balance, close to plan. Chain stores showed mixed results for the region in December: some indicate that sales were up 3 percent to 4 percent, which was moderately ahead of plan, but a number report that sales fell short of plan, declining by 1 percent to 3 percent. Similarly, a survey of smaller retailers across New York State indicates wide variation in sales results but decent sales overall. Both groups of retailers report that sales were weaker in the first half of the month but strengthened in the week before Christmas and continued strong through early January. Retailers generally attribute the late surge to discounting, as well as increased popularity of gift cards. Inventories were generally said to be at satisfactory levels. Virtually all retail chains indicate that prices were little changed from a year earlier, though a few contacts anticipate some declines in both costs and selling prices for apparel products in 2005 due to the recent expiration of import quotas.

Consumer confidence improved sharply in December, based on two separate surveys. Siena College's survey of New York State residents shows confidence jumping to a five-month high, led by a sharp gain in the New York City area. Similarly, The Conference Board's survey of Middle Atlantic state (NY, NJ, PA) residents shows confidence rebounding to a three-month high in December, led by a surge in the public's assessment of current conditions, which reached its highest level since September 2001.

Construction and Real Estate
Housing markets continued to show strength in the fourth quarter. New Jersey homebuilders report that the housing market remains steady and strong, though there are scattered reports that prices at the high end of the market leveled off or pulled back in late 2004. Prices of construction materials were generally steady in recent months, after significant escalation in 2003 and the first half of 2004. Similarly, New York State Realtors report persistent strength in the market for existing homes in late 2004, with transactions volume up about 5 percent from a year earlier and average prices up 15-20 percent. In Manhattan, a major residential broker indicates that selling prices for co-ops and condos, on average, were up 5-10 percent from a year ago, while a leading appraisal firm reports gains of more than 10 percent; both contacts note a dwindling supply of apartments on the market in recent months.

Commercial real estate markets were steady to stronger at year-end. Manhattan's Class A office vacancy rate fell to a 2½-year low of 9.8 percent, down from 10.3 percent in November. Midtown's market showed particular strength, with available space (both direct and sublease) continuing to shrink, and asking rents 10 percent higher than a year earlier. Downtown's vacancy rate fell by more than a point in December, but asking rents have been little changed over the last year. An industry contact notes that the recent pickup in both the Midtown and Downtown markets mainly reflects brisk leasing activity from the financial sector and may signal a pickup in hiring in the securities industry. Suburban markets around New York City showed little change: vacancy rates edged down in northern and central New Jersey and Fairfield County but edged up in Westchester County.

Other Business Activity
Manufacturers continue to report improving business conditions and ongoing price pressures. Preliminary results from our January survey of New York State manufacturers indicate continued widespread improvement in business conditions, along with a pickup in hiring and hours worked, and some acceleration in selling prices. Similarly, Buffalo-area purchasing managers indicate improved business conditions in December; however, purchasing managers in the New York City area indicate some moderation in manufacturing-sector activity in December, but continued strength in non-manufacturing sectors.

The securities industry ended 2004 on a strong note, according to an industry contact. Investor sentiment improved and activity picked up in virtually all business segments starting in late-October and this trend gained momentum through December. The industry anticipates increased hiring in 2005 and stronger compensation growth than previously projected. More broadly, a major New York City employment agency, specializing in mid-level office jobs, reports that business was unusually brisk in both December and the first week of January, and that financial firms, in particular, have picked up their pace of hiring. Moreover, on the supply side, a growing share of job-seekers is reported to be looking to change jobs.

Tourism also ended 2004 on a strong note. Broadway theaters report a pickup in activity in December; though attendance and revenues for the month were slightly below the lofty levels of a year earlier, the last week of the year set a box-office record. Manhattan hotels report strong business in December: occupancy rates were up 2 percentage points from a year earlier, while room rates were up roughly 15 percent; also, bookings for January are said to be relatively strong. Hotel occupancy rates in the Buffalo and Rochester areas were also up noticeably from comparable 2003 levels, and Buffalo's airport notes robust growth in passenger traffic in November and December.

Financial Developments
Small to medium-sized banks in the Second District report a typical seasonal pullback in demand for consumer and home mortgage loans, while demand for commercial credit held steady. Demand for residential mortgages continued to slip, though declines were less widespread than they have been in six months. Bankers again report little or no change in their credit standards. Interest rates rose across all loan categories, particularly in commercial and industrial loans and commercial real estate. Deposit rates increased according to a majority of respondents, with only 6 percent of bankers reporting lower rates. Bankers report lower delinquency rates for both commercial real estate loans and commercial and industrial loans, while delinquency rates on both consumer and home mortgage loans were little changed.

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Last update: January 19, 2005