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Federal Reserve Districts

Second District--New York

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The Second District's economy has continued to grow, on balance, since the last report, with considerable variation across sectors. There have been increasing signs of price pressures in some industries. Manufacturers report a slowing in growth of activity and note fairly widespread increases in input costs but only a moderate escalation in selling prices. Retailers indicate that March sales were on or below plan, largely reflecting unfavorable weather; however, hotels and other tourist-related businesses continue to report pronounced strength.

Residential real estate markets were extraordinarily robust in the first quarter and that strength appears to be carrying over into the current quarter. Office and industrial markets were moderately stronger in the first quarter. Although the securities industry showed strong growth in activity, revenues and profits in the first quarter, business has slowed noticeably in recent weeks; escalating input costs are reported in the industry. Finally, bankers report continued modest declines in delinquency rates; they also indicate steady to slower loan demand from the household sector but increased demand for commercial loans.

Consumer Spending
Retailers report that sales were mostly below plan in March, held down by unseasonably cold and wet weather; most contacts also surmise that their customers have been pinched by high energy costs. Compared with a year earlier, same-store sales ranged from a 4 percent gain to a 13 percent decline, despite the early date for Easter, which was expected to boost apparel sales. Sales of lawn and garden merchandise, casual apparel and other seasonal goods were described as especially weak, while goods for the home were generally characterized as sluggish. Though one contact indicates some overhang, inventories were generally said to be at desired levels. Retail chains indicate that selling prices have risen slightly, though this is partly attributed to a gradual shift in the sales mix towards more upscale goods. Consumer confidence retreated in March, based on the Conference Board's survey of Middle Atlantic state (NY, NJ, PA) residents.

Indicators of tourism, primarily in New York City, signaled exceptional strength in the first quarter. Manhattan's hotel occupancy rate was nearly 7 percentage points higher in February than a year ago, and total revenues were up more than 20 percent; there are indications that March was almost as strong. Hotels in the Buffalo-Niagara Falls area also report that occupancy rates were up noticeably in early 2005 compared with a year earlier. Broadway theaters report a sharp pickup in activity since the last report: in March, attendance was up 7 percent from a year earlier, while revenues were up 9 percent, with the strongest gains coming at the end of the month. Two major Manhattan department stores report that brisk tourism has buoyed their sales. Passenger traffic at district airports is reported to be increasingly robust--volume at New York City area airports recently rose above pre-9/11 levels, with one airport currently said to be at full capacity; Buffalo's airport also reports brisk passenger traffic. Very strong growth is also reported in bridge and tunnel traffic.

Construction and Real Estate
Housing markets appear to have gained further momentum in March. Contacts in Manhattan's real estate industry report 15 to 20 percent price appreciation for apartments over the past year and 6 to 10 percent increases in unit sales. The inventory of homes on the market is said to be lean and little changed from a year ago, and units are staying on the market for an unusually short time. One large real estate firm reports that March was their strongest month ever, in terms of revenue, and that bidding wars remain fairly common. Another contact notes that several large mortgage lenders will soon be entering the New York City market. Demand for single family homes across New York State has shown persistent strength in early 2005--though sales volume has tapered off somewhat recently, prices have continued to appreciate at a double-digit rate.

Commercial real estate markets across the New York City metro area strengthened moderately in the first quarter. Office markets in Manhattan and northern New Jersey tightened in the first quarter, with vacancy rates declining and rents rising; some softening in Lower Manhattan's market was more than offset by further strength in the Midtown and Midtown South areas. Sales of office space weakened slightly in Northern New Jersey, but continued to strengthen in both Lower and Midtown Manhattan. Office vacancy rates edged up in Long Island and Westchester and Fairfield Counties but were still down from a year earlier, while rents were up modestly. Sales of office buildings were reported to be exceptionally strong in both Lower and Midtown Manhattan, though some weakening was reported in northern New Jersey. Industrial markets also strengthened: compared with a year earlier, vacancy rates were down and industrial rents were up nearly 7 percent across the New York City metropolitan region.

Other Business Activity
Manufacturing contacts report a loss of momentum in March and early April. The April Empire State Manufacturing Survey indicates a leveling off in activity. Many manufacturing contacts cite soaring energy prices as a major concern. More broadly, though, while respondents continue to note widespread increases in input costs, selling prices are reported to be stable to up moderately. Purchasing managers report mixed results for March: those in the New York City and Rochester areas indicate some leveling off in activity and steady costs for manufacturing inputs; however, purchasers in the Buffalo area note an acceleration in business activity and persistent widespread cost pressures. There are reports of expansion in Long Island's defense industry.

The securities industry, which had shown brisk growth in activity, revenues and profits in the first quarter, is reported to have weakened noticeably starting in mid-March and continuing into April, portending a second quarter slowdown. An industry contact reports fairly rapid escalation in wages and costs of most business inputs--consultants, auditing, printing, software engineering and other business and professional services, as well as catering and various business supplies.

Financial Developments
Small to medium-sized banks in the Second District report increased overall demand for commercial loans and non-residential mortgages, but little change in demand from the household sector. Bankers again indicate declines in refinancing activity. Little or no change is reported in credit standards, except for commercial and industrial loans, where there was some tightening, on balance. Respondents report widespread increases in interest rates, both on deposits and loans--particularly on commercial mortgages and commercial and industrial loans. Finally, bankers report declining overall delinquency rates, with 17 percent reporting overall decreases and no bankers reporting increased delinquencies in any loan category.

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Last update: April 20, 2005