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Federal Reserve Districts

Second District--New York

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The Second District's economy has expanded at a moderate pace since the last report, while price pressures have remained steady. The labor market has generally been stable and tight. Manufacturers report ongoing expansion in activity in early October. Retailers indicate that sales were on or below plan in September, except in New York City, where sales have been relatively strong and tourism activity has held steady at high levels. Housing markets continue to be mixed: Manhattan's sales and rental markets remained relatively firm in the third quarter, while housing markets in New Jersey and other areas continue to be soft. Office markets in the New York City area have been steady to stronger, with continued steep increases reported in Manhattan asking rents. Bankers report weakening loan demand, particularly for consumer loans and home mortgages; they also report tightened credit standards in all categories except consumer loans, and rising delinquency rates on commercial loans and mortgages.

Consumer Spending
Retailers report that sales were steady to somewhat softer in September, partly reflecting unseasonably mild weather. In terms of 12-month sales growth, New York City continued to out-perform the rest of the region by a wide margin. Apparel sales were characterized as sluggish, but this is attributed largely to the warm weather. Sales of home non-durables are reported to have picked up recently, whereas spending on home durables has remained weak. Overall, selling prices are reported to be steady.

Tourism activity in New York City has been steady at a high level. Hotels remained at close to full capacity in August, with room rates accelerating to a 15 percent year-over-year growth rate, and total revenues up nearly 20 percent from a year earlier. A contact at a leading industry organization characterizes September as another strong month, though not quite as robust as August. Broadway theaters report that activity tapered off a bit in September, but remained at a strong level; both attendance and total revenues were little changed from a year ago, after running 8-12 percent ahead in August.

Construction and Real Estate
Commercial real estate markets across the New York City area were generally stable to stronger in the third quarter. Manhattan's office rental market remained tight: vacancy rates were steady near cyclical lows at the end of September, and asking rents continued to escalate, rising more than 35 percent from a year earlier. Leasing activity is reported to have slowed noticeably in Manhattan, but this is said to largely reflect the lack of available space. However, leasing activity picked up in northern New Jersey in the third quarter--particularly along the Hudson River coastline. Westchester and Fairfield Counties' office markets have strengthened moderately, while Long Island's market remains robust. An industry expert maintains that these suburban markets are being buoyed by spillover from Manhattan's tight market; overall, asking rents in the suburban markets are reported to be up moderately from a year ago.

Housing markets continue to be mixed, as in the last report. New Jersey homebuilders report that they have reduced new construction activity and have all but ceased seeking approvals for new development. Both builders and sellers of existing homes are reported to have become more negotiable on selling prices, and this has boosted sales activity somewhat. Selling prices for new homes in northern New Jersey are estimated to be down roughly 10 to 15 percent from a year earlier, on average. Based on monthly reports from New York State Realtors, sales of existing single-family homes were down 7 percent from a year earlier in August, while selling prices were down roughly 2 percent, on average--not much different than in prior months.

Manhattan's apartment sales and rental markets were steady and relatively strong in the third quarter. Sales activity for co-ops and condos rebounded more than 60 percent from the depressed levels recorded a year earlier, and the number of listings (inventory) was down by roughly a third, to levels that are characterized as more normal. Overall, selling prices of Manhattan apartments were up slightly from a year earlier, on average, though the high end of the market registered double-digit price appreciation. Similarly, rents on high-end (large) apartments are reported to have risen by more than 15 percent from a year ago, reflecting a severe dearth of available units; rents on studio and one-bedroom units are estimated to be up roughly 7 percent, on average, over the past 12 months.

Other Business Activity
New York State manufacturers report continued moderate expansion in business activity, as well as employment levels, in recent weeks. Contacts also indicate ongoing but steady upward pressure on input prices, and increasingly widespread hikes in selling prices. A contact at a major shipping terminal reports that out-bound container shipments have leveled off, after expanding earlier this year, and that in-bound volume has decelerated in recent months. Nonetheless, more broadly, contacts at non-manufacturing firms in the District indicate some pickup in activity in recent weeks, following a lull in August; they also report steady expansion in employment levels and fairly widespread but steady increases in prices and wages.

A major New York City based employment agency, specializing in office jobs, reports that large financial services firms have pulled back on hiring activity somewhat, but that labor demand remains strong in other industries, particularly legal services. Available office workers reportedly remain in short supply. Starting salaries are estimated to be up roughly 5 percent from a year ago, on average.

Financial Developments
Based on our latest survey, conducted during the first few days of October, bankers report weakening demand for loans in all categories--particularly consumer loans and residential mortgages--as well as continued widespread decreases in refinancing activity. Respondents indicate tightening credit standards in all loan categories, except consumer loans. Bankers report lower average deposit rates, on balance, and also indicate a decrease in the spreads of loan rates over cost of funds for all types of loans; in all loan categories, approximately 35 percent of bankers report lower spreads. Finally, bankers report increased delinquencies in the commercial mortgage and commercial and industrial loan categories, but no change in delinquencies for consumer loans and residential mortgages.

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Last update: October 17, 2007