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Federal Reserve Districts

Second District--New York

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The Second District's economy has shown signs of stabilizing since the last report, though not in all sectors. Manufacturers report that business activity has steadied in recent weeks, after weakening for a number of months, and factories continue to report fairly widespread increases in both input costs and selling prices. Contacts at non-manufacturing firms generally also report some stabilization in business conditions but continue to indicate modest declines in employment. Consumer confidence was reported to be at record lows in July. Still, retail sales remained on or close to plan in July and early August, and were up slightly from a year earlier; moreover, tourism activity in New York City has firmed. Housing markets have been mixed but generally softer, and office markets have slackened. Finally, bankers report weakening demand for both residential and commercial mortgages, widespread declines in refinancing activity, continued tightening in credit standards, and increasing delinquency rates on home mortgages.

Consumer Spending
Retail sales were said to be on or close to plan in July and early August and were up 1 to 3 percent from 2007 levels, once again led by strength in New York City. Inventories are reported to still be at desired levels generally, and prices are little changed. Consumer surveys indicate further declines in confidence: The Conference Board's survey of Middle Atlantic state residents (NY, NJ, PA) shows consumer confidence falling for the tenth straight month, to a record low, in July, and Siena College's survey of New York State residents shows confidence remaining at its lowest level in that survey's nearly ten-year history.

Tourism activity in New York City has strengthened in recent weeks. Manhattan's hotel occupancy rate remained near 90 percent in July, which is typically a relatively slow month; room rates were up roughly 10 percent from a year ago, compared with 8 percent in June and 6 percent in May; preliminary indications for August suggest continued strength. An industry contact attributes the strength primarily to large numbers of overseas visitors. Broadway theaters report that business has improved moderately since the last report. Both attendance and revenues are reported to have risen by 1 to 2 percent from a year ago in July and by 3 percent in the first half of August. Average ticket prices have remained essentially flat.

Construction and Real Estate
Housing markets in the District have been steady to weaker. Manhattan's rental market has slackened somewhat: average asking rents were reported to be running 2 to 4 percent lower in July and August than a year earlier, and the rental vacancy rate, though still below 2 percent, is reported to have climbed noticeably over the past year. A major appraisal firm reports some further softening in Manhattan's co-op and condo market: sales activity has been increasingly sluggish, with resale prices flat to weaker. A growing number of deals are said to be falling through, due to difficulty in getting financing--largely at the middle of the market. The sales market has weakened more noticeably in Brooklyn and Queens, as well as in eastern Long Island.

On a more positive note, a contact monitoring New Jersey's housing industry reports that the resale market has shown signs of stabilizing, though at a weak level, especially for single-family homes. Inventories of unsold existing homes have declined in northern New Jersey, as many discretionary sellers have taken their homes off the market and other sellers have become more negotiable. Both prices and sales volume have leveled off, though they remain lower than a year ago. Concerns over foreclosures are noted, though their absolute number is described as relatively low.

While single-family construction remains at low levels, multi-family activity has remained fairly brisk. In New York City, multi-family building permits ballooned in June, in advance of a change in building codes that took effect July 1. The number of multi-family units authorized increased more than four-fold in June from a year earlier--surging from just under 4,000 to slightly over 17,000. Overall, multi-family permits were 63 percent higher for the first half of 2008 than in the first half of 2007. In urban areas of northern New Jersey proximate to New York City, multi-family re-development is reported to be persistently robust and above comparable 2007 levels.

Commercial real estate markets in the New York City area have shown signs of weakening. In Manhattan, office vacancy rates were little changed from June to July, but were up nearly 2 percentage points from a year earlier; moreover, leasing activity is reported to be running well below comparable 2007 levels. An industry contact maintains that firms with upcoming lease expirations are increasingly inclined to hold off on leasing, reflecting some anticipation that rents could move down from current levels. Asking rents in Manhattan have leveled off, though they are still up by roughly 6 to 8 percent from a year ago; however, a major brokerage firm estimates that actual (effective) rents are lower than a year ago, by roughly 5 percent. Suburban office markets are mixed: Northern New Jersey's market is reported to be increasingly slack, while markets are described as stable in Westchester and Fairfield Counties, and slightly softer in Long Island. Finally, a contact in Manhattan's hospitality industry notes some pickup in interest, among developers, in new hotel projects.

Other Business Activity
New York State manufacturers report some stabilization in business activity in early August, following a number of months of weakening, based on our Empire State Manufacturing Survey. A growing number of firms report declining employment. Contacts continue to note fairly widespread escalation in their selling prices (prices received) and expect increasingly widespread increases in the next six months. Moreover, survey participants now view the cost of resources (energy and other commodities) to be the most widespread problem; a year ago, it was finding qualified workers.

In general, non-manufacturing firms in the District generally report that business activity has stabilized, after deteriorating for a number of months. Respondents continue to report flat to declining employment levels at their firms, but expect them to remain steady over the next three to six months. Among these contacts, finding qualified workers remains a major concern. Non-manufacturing firms report continued price pressures, but a somewhat smaller proportion than last month expect to raise their selling prices in the months ahead. A trucking-industry contact reports little change in conditions since the last report--truckers continue to be hampered by high diesel fuel costs and weaker demand.

Financial Developments
Contacts at small to medium-sized banks in the District report weakening demand for both residential and commercial mortgages but little change in demand for consumer or commercial and industrial loans. Bankers also indicate a widespread decrease in refinancing activity: 42 percent of bankers report a decrease and just 3 percent report an increase. For all loan categories, respondents again indicate a tightening of credit standards. The percentage of bankers reporting higher standards ranged from 26 percent in the commercial and industrial loan category to 36 percent in the commercial mortgage category; no respondents indicate eased standards for any type of loan. Respondents note an upturn in the spreads of loan rates over cost of funds in the consumer loan and commercial mortgage categories, though little or no change in spreads is reported for residential mortgages and commercial and industrial loans. Contacts report an increase in the average deposit rate. Finally, bankers report an increase in the delinquency rate for residential mortgages, with one in four respondents indicating a rising delinquency rate and just 4 percent a lower rate. Little change in delinquencies is noted in other loan categories.

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Last update: September 3, 2008