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Federal Reserve Districts

Second District--New York

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The Second District's economy has expanded at a somewhat more moderate pace since the last report than in earlier periods. Reports on the labor market have been mixed but, on balance, a bit softer. Retailers generally report that sales were strong in June, though a number indicate some softening in early July. Tourism activity was robust in June. While housing markets continue to be characterized as sturdy, there has been some deceleration in selling prices and a modest dip in activity since the last report. Office markets strengthened moderately in the second quarter, but the market for industrial space was mixed. New York City's financial industry has shown signs of improvement in early July, after a sluggish second quarter; moreover, hiring activity is said to have picked up and compensation has accelerated. Manufacturers and purchasing managers report a considerable diminution of input price pressures in June and early July. Finally, bankers report a pickup in demand for commercial mortgages but little change in other loan categories; they also report some tightening in credit standards and further declines in delinquency rates.

Consumer Spending
Retailers report that sales were generally on or above plan in June, but have softened and appear to be a bit below plan in early July. After a relatively cool spring, unseasonably hot weather in June boosted sales of summer merchandise--particularly apparel. More generally, sales of premium lines of clothing were characterized as strong, as were sales of jewelry and accessories. However, sales of home-related goods were weak across the board. In general, retail inventories were said to be at desired levels at the end of June, though a number of wholesale trade contacts indicate that inventories were on the high side. Selling prices were little changed.

Tourism continued to show strength in June. Manhattan's hotel occupancy rate climbed above 90 percent in June--close to a record high and up more than 3 percentage points from a year earlier; moreover, with average room rates up nearly 18 percent from a year earlier, total revenues are up more than 20 percent over the past 12 months. Similarly, Broadway theaters indicate that attendance remained robust in June, with revenues running roughly 10 percent ahead of a year earlier, though attendance has tapered off moderately in the first half of July.

Consumer confidence improved in June, based on two separate surveys. The Conference Board's survey of Middle Atlantic residents shows consumer confidence rebounding strongly in June, after slipping to a 6-month low in May. Siena College's survey of New York State residents shows confidence climbing for the second month in a row--whereas May's gain was concentrated in the New York City metropolitan area, all of the June gain was in upstate New York.

Construction and Real Estate
The housing market generally continued to be robust in June and early July, though there were some signs of slowing in activity and deceleration in prices. New Jersey homebuilders report that conditions remain strong, though the rate of price increase has slowed; residential construction activity has been stronger in 2005 than it has been since the late 1980s, but there is still a fairly long queue of homebuyers. Two contacts maintain that Manhattan's co-op and condo market remains robust across the board, though not as frenzied as during the spring. Apartment prices were estimated to be running 10 percent to 15 percent higher than a year earlier in June--a bit less than in April and May--while unit sales were down moderately.

Office markets in and around New York City have continued to show signs of strengthening. At the end of June, office vacancy rates declined to 4-year lows in both Midtown and Lower Manhattan, and this improving trend has continued during the first half of July. Similarly, Westchester County's vacancy rate fell to a 5-year low at mid-year, while Fairfield County's rate was down slightly for the quarter. In Long Island, however, vacancy rates rose by nearly a full point in the second quarter, though they are still 1/2 point lower than a year earlier. Industrial markets in and around New York City were mixed in the second quarter. Industrial vacancy rates edged down to near a 3-1/2 year low in Fairfield County and were steady at record lows in Westchester County; rents in both areas were up slightly from a year earlier. In New York City, Long Island, and northern New Jersey, industrial vacancy rates were little changed, though asking rents were up roughly 10 percent from a year earlier.

Other Business Activity
A contact at a major New York City employment agency describes the job market as lukewarm, noting that hiring activity has been a bit slower in June and early July than anticipated. In contrast, a contact in the financial industry notes that employment and compensation have accelerated in recent months; more generally, business activity is said to have picked up in early July, after a sluggish second quarter.

According to our latest survey, New York State manufacturers report a further rebound in activity in early July and have become increasingly optimistic about the near-term outlook. Still, hiring activity is reported to have slowed, and a number of contacts indicate that inventories are higher than desired. They also note a marked deceleration in input prices, and anticipate substantially less upward pressure on prices in the months ahead. Regional surveys of purchasing managers also point to considerable moderation in input price pressures.

Financial Developments
Small and medium sized banks in the district report little change in demand for consumer loans, residential mortgages, and commercial and industrial loans since the last report, but an increase in demand for commercial mortgages. Refinancing activity continued to weaken. Bankers reported tightened standards on residential mortgages, consumer loans and commercial mortgages. Higher rates were reported across all loan categories, particularly in the consumer loan category. Increased average deposit rates were reported by 67 percent of bankers versus only 6 percent reporting lower rates. Finally, banks report lower delinquency rates on consumer loans, commercial mortgages, and commercial and industrial loans.

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Last update: July 27, 2005