August 5, 1998 Federal Reserve Districts Second District - New York

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The Second District's economy continued to grow briskly since the last report. Retail sales slowed a bit in June and early July but, on balance, remain close to plan. Both retail selling prices and merchandise costs were little changed, though sizable price reductions are anticipated in early 1999. Retailers report labor shortages but not significant wage pressures. Housing markets remain firm in the New York City area and have picked up in much of upstate New York; remodeling continues to boom in northern New Jersey. Office rents continued to surge in Manhattan but have paused in most of New York City's suburbs; vacancy rates held steady at low levels in most areas. Regional purchasing managers report that manufacturing activity continued to grow at a steady pace in June, while input prices continued to edge down. As of July 27, more than 10,000 workers in the District (mostly in western New York) were affected by the UAW-GM strike. Finally, local banks report further declines in consumer delinquency rates and continued moderate growth in loan demand. Consumer Spending Major retailers generally report that sales in the region were close to plan in June and the first three weeks of July; year-over-year comparable-store sales gains ranged from 0-9 percent for the full period. Most contacts note continued firm demand for home durables. Apparel sales are still said to be fairly brisk but less so than in April and May�a number of retailers note that warm spring weather translated into an earlier buying season for summer clothing. All contacts say that inventories were at desired levels at mid-year. One large retailer notes that shipping bottlenecks from West coast ports prompted them to stock up on imported merchandise for the year-end holiday season earlier than usual. Retail selling prices and merchandise costs were reported to be steady, on balance, with cheaper Asian imports offset by higher prices for toiletries and certain other items. Most retailers say that the Asian crisis has had only a modest impact on the costs and prices of merchandise currently on the shelf�mainly apparel, electronics and appliances�as well as merchandise for the upcoming Christmas season. However, a number say that they have negotiated "surprisingly" good deals for next spring's merchandise and expect sizable price reductions in early 1999. While there were no reports of increased wage pressures, most retailers say it is increasingly difficult to staff their stores; one contact says that labor shortages have forced sharp increases in overtime costs for existing employees. Construction and Real Estate Housing markets in New York and New Jersey gained momentum across the board in the second quarter. Permits to build single-family homes continued to trend up in May and June, with second-quarter levels running 14 percent ahead of a year earlier. More currently, builders in northern New Jersey report that moderate to mid-priced homes have continued to draw strong traffic and sales in recent weeks, but that the high end of the market has "definitely slowed." Separately, persistently robust demand for remodeling New Jersey's aging housing stock has created labor shortages, drawing large numbers of "amateur remodelers" into the field, according to an industry expert. New York State realtors report brisk sales of existing single-family homes in the second quarter, and especially in June. For the quarter overall, average selling prices rose 6 percent from a year earlier, led by double-digit gains in New York City's northern suburbs. Unit sales rose 12 percent from a year ago statewide. Upstate New York's chronically sluggish housing markets picked up noticeably in the second quarter, with unit home sales surging 14 percent from a year ago and prices up 4 percent. The multi-family sector has also picked up in recent months. Permits to build apartments rebounded in the second quarter and are running slightly ahead of 1997 levels. Prices of prime Manhattan co-ops and condos also rebounded in May and June, following a dip in March and April. Office vacancy rates across most of the New York City area held steady at low levels in the second quarter. The only areas to register further declines were lower Manhattan (from 14.6 to 13.9 percent) and Fairfield, CT (from 10.5 to 9.6 percent). Asking rents on Class A properties continued to surge at a roughly 25 percent annual rate in Lower and Midtown Manhattan, and at a 15 percent pace in Westchester. However, rents were little changed in northern NJ, Long Island and Fairfield, CT. Still, rents in Long Island and Fairfield are up roughly 10 percent from a year ago. Other Business Activity Local purchasing managers surveys indicate that the District's manufacturing sector continued to expand at a moderate pace in June. Buffalo purchasing managers note that growth in new orders slowed in June but that both production and employment continued to expand at a steady pace. New York purchasing managers report that overall business activity grew at about the same pace as in May. Both surveys indicate that prices of material inputs were down moderately in June, though New York purchasers continue to report strong upward cost pressures for contracted services. As of July 27, the UAW strike against General Motors was affecting an estimated 10,600 workers in the District, mostly in western New York State. In the Buffalo area, approximately 6,650 workers at GM and its major suppliers have been idled by the strike. In addition, roughly 2,350 employees at GM's Linden, New Jersey assembly plant, 1,400 at a Rochester engine plant, and 200 at a castings plant in Massena, NY have been affected. Financial Developments According to a survey of senior loan officers at small and medium-sized banks in the District, overall demand for loans increased at about the same pace as in the last report. Consumer loan demand accelerated, while demand for mortgages and commercial and industrial loans leveled off. Refinancing activity was also stable. Bankers also appear increasingly willing to lend: 34 percent report increased willingness, while only 3 percent report less. Virtually all respondents indicate no change in credit standards over the last two months. Interest rates on loans declined over the last two months� particularly for commercial and industrial loans�while deposit rates remained steady. Delinquency rates fell slightly, led by the consumer segment, indicating continued improvement in credit quality. 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