August 11, 1999 Federal Reserve Districts Second District - New York

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The District's economy continues to expand, though at a somewhat slower pace than in the last report. There are indications of an increase in wage and price pressures in some key sectors. Most retailers report that sales retreated to more normal levels in July, following exceptionally strong activity throughout the second quarter. Manhattan's office market tightened further in the second quarter, but commercial real estate appears to have softened in most of the outlying suburbs. Housing demand continues to strengthen--especially in the New York City area, where builders and realtors report sharp price increases and cite lack of inventory as the number one problem. Regional purchasing managers report steady growth in manufacturing in July, along with increased price pressures. The merger of Conrail into CSX and Norfolk Southern has caused persistent shipping delays, though they were said to be less severe in July than in June. Banks report a normal seasonal dip in loan demand, some tightening in credit standards, and little change in delinquency rates. Consumer Spending Retailers report that sales slowed to a more normal pace in July, following an exceptionally strong second quarter. Most chains report that sales were close to plan in July--comparable-store sales rose 6-8 percent from a year earlier at discounters but more modestly (0-5 percent) at general merchandise stores. Contacts note that July is largely a clearance month and that lean inventories limited sales. Unusually hot weather throughout the District reportedly buoyed sales of summer merchandise but held back fall clothing; on balance, weather was seen as having little or no effect on total sales. In general, the strongest sales categories were home goods and women's casual apparel. All retailers report that inventories were in very good shape at the end of June, and that there was less discounting in July than last year. Major chains report that selling prices and merchandise costs have leveled off, after declining in 1998 and early 1999. Most retailers report increased difficulty in finding and retaining workers but add that the real test will come during the peak Christmas season. Construction and Real Estate Housing markets are tight, especially in the southern tier of the District. On a seasonally-adjusted basis, housing permits in New York and New Jersey rose substantially in June, led by a surge in multi-family construction in Long Island and northern New Jersey. Single-family permits rose moderately but remained below lofty first-quarter levels. For the second quarter as a whole, single-family permits were up 7 percent from a year earlier, while multi-family permits were up 50 percent. Anecdotally, realtors and homebuilders across the New York City metropolitan area report brisk demand, double-digit price appreciation and widespread bidding wars; they cite supply shortages as the housing sector's number one problem. Contacts in the construction industry report that shortages of skilled workers (particularly carpenters and framers), rising costs of insulation materials and drywall, and sharply rising land costs have all put upward pressure on new home prices. An industry contact in northern New Jersey notes that, with demand strong and inventories lean, there is a more than 7-month wait for new homes; he also says that the recent rise in mortgage rates "has only intensified the buying frenzy." Similarly, a major Manhattan realtor describes the market as "phenomenal," with total sales volume up 40 percent from a year ago. Market conditions in upstate New York appear more subdued but still favorable, with an Albany-area builder describing supply and demand as "balanced." Commercial real estate markets were mixed in the second quarter. Manhattan's office markets tightened further, as vacancy rates fell to cyclical lows at the end of June--Midtown's rate fell from 7.7 to 7.2 percent, while Downtown's rate decreased from 12.0 to 11.6 percent. Similarly, Long Island's vacancy rate edged down to a record low of 8.9 percent in the second quarter. However, in most of New York City's suburbs--northern New Jersey, Westchester and Fairfield--vacancy rates rose. Office rents across the metropolitan area have been fairly stable so far this year, after rising sharply in 1998. Other Business Activity Regional purchasing managers' surveys indicate steady growth in manufacturing activity in June and July, along with increased upward price pressures. New York purchasing managers report that manufacturing activity expanded at a brisk pace in both June and July, following a dip in May. Buffalo-area purchasers report that production activity grew at about the same modest pace in July as in the second quarter, while new orders and employment levels were little changed. Surveys in both these areas indicate a noticeable pickup in prices for manufacturing inputs. There have been reports of significant shipping delays due to the merger of Conrail into CSX and Norfolk Southern, though contacts do not see any problems comparable to last year's merger between Union Pacific and Southern Pacific. One contact at a short-line railroad in upstate New York says that, while delays persisted in July, they were not as bad as in June; conditions are expected to be back to normal by around the end of October. Some shipping has been diverted to trucks, but not much. Hotel occupancy rates in New York City held steady throughout the second quarter at just above 80 percent--a high level but about 5 points lower than a year earlier. After registering double-digit increases through much of 1998, room rates are currently running just 2 percent higher than a year ago. Financial Developments According to the latest survey of senior loan officers, small and medium sized banks in the Second District indicate a normal seasonal decline in loan demand. Refinancing activity continued to fall over the last two months, with 35 percent of bankers indicating a decrease in activity. Bankers report some tightening in credit standards over the last two months, particularly on commercial and industrial loans. Bankers report increases in deposit and loan rates--most notably on residential mortgages. Several respondents volunteered that they had raised rates in response to higher market rates. Delinquency rates were generally steady to slightly lower over the past two months. Return to top Boston Philadelphia