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Federal Reserve Districts

Second District--New York

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The Second District's economy continued to expand at a good pace, on average, across sectors in the first two months of 2006, though housing and consumer lending have softened. Input price pressures persist and there are scattered signs of increased wage pressures, but there is little evidence of any broad-based acceleration in consumer prices. The labor market has shown further signs of strengthening, particularly in New York City's financial sector, and there are signs of a pickup in hiring in the manufacturing sector. Retailers report that sales were somewhat below plan, largely due to the mid-February snowstorm and unseasonably cold weather in the second half of the month. Housing markets have generally been softer, though Manhattan's apartment rental market has remained strong. The New York City area's office market has tightened further. Conditions in the financial sector remained strong in early 2006, and bonus payments are estimated to be up 17 percent from last year. Finally, bankers report widespread weakening in demand for consumer loans and residential mortgages but little change in credit standards or delinquency rates.

Consumer Spending
Retailers report that sales were slightly above plan in January, but slightly below plan in February. The more recent weakness was largely attributed to the February 12th snowstorm and, to a lesser extent, unseasonably cold weather in the second half of the month. Virtually all retail contacts note that higher-end merchandise has generally sold better than lower-priced categories. Inventories are reported to be at satisfactory levels, while selling prices for comparable items are said to be little changed on balance.

Tourism has remained strong since the last report, despite some slowing in late February. Manhattan hotels report that business was strong during January and the first half of February, with occupancy rates up from a year earlier and room rates up more than 10 percent, though there are scattered reports of softening in recent weeks. Similarly, Broadway theaters report strong conditions in January and February, with attendance up roughly 5 percent from a year earlier and revenues up 15 percent, though theaters also report some weakening in the last week of February.

Consumer confidence in the region was steady to stronger in February. Based on the Conference Board survey of Middle Atlantic residents, consumer confidence rose for the fourth time in five months, reaching its highest level since last July. At the same time, Siena College's survey of New York State residents shows confidence rising only marginally, following a decline in January.

Construction and Real Estate
The region's housing market was mixed but, on balance, softer in early 2006. New Jersey homebuilders report a growing inventory of homes at the higher end of the market. The number of transactions has been well below comparable 2005 levels, selling prices have been basically flat since last autumn, and builders are offering more concessions. However, an industry contact notes one exception: redevelopment in older urban areas, a growing segment of the market, has met with persistently strong demand. Albany area Realtors report that sales fell 13 percent from a year earlier in January, while selling prices were up 10 percent. Similarly, sales of Manhattan co-ops and condos are reported to be down 10 to 15 percent from a year earlier in January and February, despite strong demand for high-end apartments and townhouses reportedly driven by strong bonus payouts on Wall Street. Overall, real estate contacts report that the inventory of unsold apartments has grown and that prices have leveled off, though they remain more than 10 percent ahead of a year ago. In contrast, Manhattan's rental market has shown persistent strength, with rents rising steadily but moderately.

Commercial real estate markets across the New York City metropolitan area were generally stronger in early 2006. Manhattan's market continued to strengthen in February, according to a major brokerage firm, largely buoyed by strong leasing activity from financial, legal and media firms, with a large number of small leasing deals noted in Lower Manhattan. Suburban office markets were mixed, however, with vacancy rates edging down in northern New Jersey, but rising in Long Island, Westchester and southwestern Connecticut. Industrial markets were stronger across the metropolitan area, as vacancy rates were steady to lower and asking rents continued to climb. Long Island's market has been particularly tight, with an industrial vacancy rate below 5 percent.

Other Business Activity
A leading New York City employment agency reports a sustained pickup in the labor market, led by strong hiring from the financial and legal sectors. This contact reports a lack of available office workers and notes that a majority of hires are people switching jobs; average salary offers are up about 10 percent from a year ago for mid-level jobs and up 20 percent for high-paying openings. Scattered labor shortages are also reported from the manufacturing sector.

A contact in the securities industry characterizes January and February as strong months, largely driven by strong growth in derivatives trading and a more general shift in asset allocation away from money markets to equities and bonds. Annual bonuses, mainly paid out in January and February, were estimated to be up 17 percent, in aggregate, from last year.

Manufacturing contacts in New York and New Jersey report continued improvement in business conditions, a pickup in hiring activity, and ongoing widespread increases in input prices. Purchasing managers in the region report mixed to stronger results for February--those in the Buffalo and New York City areas indicate acceleration in activity, while those in the Rochester area note some slowing following an exceptionally strong January. Purchasers in all three areas report continued input price pressures.

Financial Developments
Small to medium-sized banks in the district report ongoing declines in demand for residential mortgages and a sharp decrease in demand for consumer loans; however, demand for commercial loans and mortgages was little changed. Over 45 percent of bankers report declines in demand for consumer loans, while just 3 percent indicate increases; responses on residential mortgages were similarly lopsided. Credit standards are reported to be virtually unchanged across all loan categories. Bankers report increased loan rates for all loan categories, most notably on commercial mortgages. There were also widespread increases in deposit rates. Delinquency rates remained unchanged across all loan categories.

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Last update: March 15, 2006