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Federal Reserve Districts

Second District--New York

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The Second District's economy has shown further signs of improvement since the last report. Hiring has continued to pick up outside of the manufacturing sector. Business contacts in most sectors report improved conditions and express widespread optimism about the near-term outlook. Cost pressures have risen but consumer prices have remained generally stable. Retail sales over the holiday season were generally strong and ahead of expectations, though post-holiday sales were adversely affected by the late-December blizzard. Tourism activity has remained brisk and consumer confidence has improved moderately since the last report. Commercial real estate has been mixed: there have been scattered signs of improvement in the office market, but the market for industrial space has weakened. Housing markets have also been mixed but generally weak. Finally, bankers report mixed loan demand overall and tightening credit standards on commercial loans and mortgages.

Consumer Spending
Virtually all non-auto retail contacts report that holiday season sales were strong and on or ahead of plan, while prices were generally stable. Two major retail chains note that sales in the region were substantially ahead of plan in the weeks leading up to Christmas. A New York State retail association notes that holiday-season sales were stronger than a year ago and stronger than most retailers had expected. While stores in the New York City area generally report brisk sales, a late-December blizzard reportedly curtailed business substantially in the days after Christmas. Two large malls in upstate New York report broad-based strength in sales, despite snowstorms on Black Friday and again in early December; traffic was brisk for most of the holiday season, helped by a steady flow of Canadian shoppers. Most retail contacts report that they hired somewhat more holiday season workers in 2010 than in 2009.

Automobile sales were mixed but generally at favorable levels, as both retail and wholesale credit conditions continued to improve. Rochester-area dealers report that sales of new autos surged 24 percent from a year ago in November and appear to be running about 10 percent ahead in December, helped by incentives. On the other hand, dealers in the Buffalo area report that sales were down slightly from a year earlier in November and remained fairly sluggish in December; the inclement weather was seen to be a factor.

Tourism activity in New York City has remained fairly brisk since the last report. Manhattan hotels report that occupancy rates remained close to 90 percent in November and December, while room rates continued to run nearly 10 percent ahead of comparable 2009 levels. The late-December snowstorm appears to have had little net effect on occupancy: while many visitors had to cancel their reservations, others who were unable to leave extended their stays. Broadway theaters report that both attendance and total revenues were running about 10 percent ahead of a year earlier in late November and most of December, despite the recent closing of a number of shows. Theaters remained open during and after the post-Christmas blizzard, though attendance is expected to be down noticeably. The Buffalo area saw a modest pickup in tourism during the final week of December, buoyed by a worldwide junior hockey tournament. Finally, the Conference Board reports that consumer confidence among residents of the Middle Atlantic states (NY, NJ, PA) climbed in both November and December, ending the year at the highest level since May.

Construction and Real Estate
Housing markets across the District have been sluggish but generally stable since the last report, while new construction activity has remained exceptionally weak. The housing market in western New York State was described as "dead" in November and December. A contact in New Jersey's housing industry reports that market conditions have stabilized but have yet to improve, weighed down by a large inventory of unsold existing homes. Single-family home construction has picked up slightly but remains at a very low level, while multi-family construction has fallen. Transaction prices in northern New Jersey are reported to be flat to declining modestly, though the underlying market is hard to gauge because a disproportionate number of recent transactions are distress sales. New York City's co-op and condo market was relatively stable in the fourth quarter, while the rental market has shown signs of picking up.

Commercial real estate markets have been mixed, with scattered signs of improvement in the office market, but some softening evident in the industrial market. In New York City, office leasing activity rose to a four-year high, though much of the new leasing reportedly involved companies moving around (often to smaller quarters). Still, there was some net absorption of office space, and vacancy rates declined moderately. Asking rents were generally stable but rose in some prime areas of Manhattan. There were also signs of modest improvement in the Buffalo and Rochester areas, where vacancy rates edged down and rents were up 4 to 5 percent from a year earlier. On the other hand, office vacancy rates climbed and rents edged down in Long Island, while markets in northern New Jersey, Westchester and Fairfield County (CT) were stable. Industrial vacancy rates were little changed, but rents declined across most of the District--particularly in the Albany and Rochester areas, and in New York City. Both residential and commercial construction activity remain at exceptionally low levels throughout the District. A commercial developer in western New York State notes that many small sub-contractors have exited the business and medium-sized firms are struggling.

Other Business Activity
A major New York City employment agency that specializes in office jobs, reports that business was relatively good in December--typically a slow time of year. Legal sector hiring has rebounded a bit from exceptionally weak levels, while financial sector hiring has continued to improve gradually. Fewer job seekers are coming in than a few months ago. More generally, non-manufacturing firms report that they are adding jobs, on balance, and many plan to increase staffing levels in the first half of 2011. Manufacturing contacts, however, indicate some recent tapering off in employment levels, based on our December survey. Nevertheless, contacts in both manufacturing and other sectors generally indicate that business picked up in December and express widespread optimism about the outlook for the first half of 2011. Contacts also report widening cost pressures but only a modest pickup in their selling prices.

Financial Developments
Small- to medium-sized banks in the District report mixed results for loan demand: they note increased demand for commercial mortgages, on balance, and steady demand for commercial and industrial loans; however, weakening demand is reported for consumer loans and residential mortgages. Bankers indicate steady demand for refinancing, though two large lenders in western New York note a drop in home mortgage refinancing. Respondents report some tightening of credit standards for commercial mortgages and commercial and industrial loans but little or no change in credit standards for consumer loans and residential mortgages. Bankers note continued narrowing in spreads of loan rates over costs of funds for all loan categories--particularly in the commercial and industrial loan category, where slightly over half of bankers indicate a decrease in spreads and only one in ten reports an increase. Respondents also indicate an ongoing decline in the average deposit rate. Finally, bankers report that delinquency rates increased for commercial mortgages, decreased for consumer loans, and were little changed for residential mortgages and commercial and industrial loans.

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Last update: January 12, 2011