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Federal Reserve Districts

Second District--New York

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The Second District's economy has continued to expand at a moderate pace since the last report, while price pressures have been stable. The labor market has remained steady and strong, and both manufacturing and other firms anticipate a modest increase in their employment levels, on balance, in the second half of the year. Tourism has shown signs of strengthening. Retailers indicate that sales were on or slightly below plan in June and early July, while selling prices have been steady to up modestly; consumer confidence in the region fell moderately in June and for the quarter overall.

Manufacturers report increasingly widespread growth in activity in June and early July, while they indicate that price pressures, though still fairly pronounced, have not intensified. Housing markets have been mixed since the last report, with New York City's market showing relative strength. Office markets in the New York City area showed signs of tightening. Finally, bankers report some slippage in loan demand--particularly on residential and commercial mortgages; they also note further tightening in credit standards, and a slight increase in delinquency rates on consumer and home mortgage loans.

Consumer Spending
Retailers report that sales were on or slightly below plan in June and early July, with same-store sales little changed from the same time last year. New York City continued to out-perform the rest of the region in terms of sales growth. Contacts note that sales of home goods remain sluggish, though one major retail chain reports that this area has picked up slightly in recent weeks. Apparel sales are reported to be fairly strong overall. Inventory levels are generally characterized as satisfactory, though one large chain describes them as a bit high. Retailers indicate that selling prices are steady to up modestly.

The Conference Board's survey of Middle Atlantic residents showed confidence retreating further in June, slipping to its lowest level in almost a year. Siena College's surveys of New York State residents indicate that confidence slipped throughout the state in the second quarter, with the steepest declines in the Albany and Binghamton areas. Tourism activity in New York City has been robust since the last report. Manhattan hotels remained at close to full capacity in May and June, while room rates and total revenues continued to run roughly 15 percent higher than a year ago. Broadway theaters report that both attendance and revenues picked up noticeably in June and early July, running close to 10 percent above year-ago levels.

Construction and Real Estate
Commercial real estate markets across the New York City area strengthened in the second quarter. Manhattan's office market tightened further in June, as asking rents continued to soar, rising more than 30 percent from mid-2006 levels. Midtown's vacancy rate edged up 0.1 point to 6.4 percent in June but is still down a full point from a year ago. Lower Manhattan's rate tumbled to 8.2 percent in June--down from 9.3 percent in May and 11.7 percent a year earlier--due partly to space removed from the market for residential conversions. Long Island's office vacancy rate was little changed at just above 10 percent in the second quarter, while the average (Class A) asking rent jumped 11 percent from a year earlier. Vacancy rates in Northern New Jersey and Fairfield County (CT) fell noticeably in the second quarter, reaching their lowest levels in at least five years, while Westchester's rate retreated to its lowest level since early 2006; asking rents in all three of these areas rose moderately.

Housing markets have been mixed but generally stable since the last report, with New York City continuing to show more strength than the rest of the region. Manhattan's co-op and condo market remained brisk in the second quarter: sales activity picked up further, with the number of transactions more than doubling from a year earlier, though prices have flattened out. The listing inventory is reported to have retreated fairly sharply from the exceptionally high levels of a year ago. A major regional rental management firm reports strong rental rate increases in southwestern Connecticut, and moderate gains in the Albany area, but flat rents across the Hudson Valley and the Buffalo area. Finally, New Jersey home-builders report ongoing weakness in new home prices; they also note that residential development activity has slowed further, particularly for age-restricted communities, and along the "Gold Coast"--communities along the Hudson River across from New York City.

Other Business Activity
The District's manufacturing sector has continued to show strength since the last report. Surveys of purchasing managers in both the Rochester and Buffalo areas indicate acceleration in business activity in June. More generally, New York State manufacturers report fairly widespread increases in business activity in both June and early July; contacts continue to express broad-based optimism about the six month outlook and plan to increase employment modestly, on average, in the second half of the year. Firms indicate continued fairly widespread increases in input prices but no more so than in recent months.

Similarly, non-manufacturing contacts in the district report continued moderate expansion in general business activity, increased optimism about the general business outlook, and prevalent planned increases in capital spending. Business contacts also indicate a recent pickup in hiring activity and, on average, expect to expand employment levels a bit more in the second half of the year than in the first half. Separately, a major New York City employment agency specializing in mid-level office jobs reports that the labor market has been steady and strong since the last report; hiring activity has continued at a brisk pace and companies continue to report difficulties filling jobs.

Financial Developments
Reports from small to medium-sized District banks suggest weakening demand for credit, tightening supply (standards), and a slight increase in household delinquencies. Bankers indicate a decrease in demand in all credit categories, particularly commercial mortgages, residential mortgages, and refinance mortgages. More bankers report tightening than easing standards, particularly on residential mortgages, for which roughly one in four indicate tightening. No bankers report eased standards in any loan category. Interest rates on all loans types and deposits were reported higher, on net, with the most widespread increases on residential mortgages. Overall, delinquencies are reported to be little changed since the last report, though some modest increases were reported on consumer and home mortgage loans.

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Last update: July 25, 2007