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Federal Reserve Districts

Second District - New York

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Full report

Economic growth in the District has shown signs of slowing since the last report, with some softening in consumer demand accompanied by ongoing labor shortages. Consumer price inflation remains subdued, despite indications of increased cost pressures--prices of manufacturing inputs continue to rise, and a large employment agency reports an acceleration in wages. Retailers indicate that sales were on the weak side in September and the first three weeks of October. Homebuilders and realtors in the New York City area report that markets are still strong but have cooled a bit since the summer. New York City area office markets remain tight, while rents have risen modestly.

Regional purchasing managers report that manufacturing activity was mixed to weaker in September while cost pressures intensified further. Banks report a decline in loan demand and a noticeable tightening in credit standards, accompanied by continued improvement in delinquency rates.

Consumer Spending
Retail sales have been mixed but, on balance, slightly below plan in recent weeks. A majority of retail contacts report that sales growth slowed in September and picked up only modestly over the first three weeks of October; on the other hand, two large chains report that business has been fairly brisk. Some retailers with sluggish sales blamed part of September's weakness on mid-month flooding from Hurricane Floyd, though that was not viewed as the major factor. In general, sales of consumer durables--home improvement, electronics, appliances, etc.--were said to be on the strong side, while apparel sales tended to lag. Despite the modest slowing in sales, inventories are generally said to be at satisfactory levels. One large chain reports that its greatest concern is having adequate inventories on hand by Thanksgiving weekend; while shipping delays appear to be much less of a problem than last year, there are reports of minor bottlenecks at West Coast ports.

Selling prices and merchandise costs are reported to be little changed, on balance, in recent weeks. However, a number of retailers say that the pricing environment for the upcoming holiday season is shaping up to be more competitive than last year; one retailer indicates that some competitors have already begun discounting merchandise. Wage pressures remain steady thus far, though a number of contacts are concerned that they may intensify as seasonal hiring picks up in November.

Construction and Real Estate
There are signs that the region's housing market has cooled somewhat from this summer's torrid pace. In New York State, sales of existing single-family homes slipped in September, and were up just 1 percent from a year earlier; however, prices were up by a brisk 6 percent from a year earlier, led by double-digit gains across most of the New York City area. Based on anecdotal reports, part of the weakness in unit sales may reflect a dearth of homes on the market. In Manhattan's co-op and condominium market, a major realtor reports that demand remains exceptionally strong, and that there has been a recent increase in new listings--more people putting their homes on the market.

New Jersey homebuilders report continued strong demand for both new and existing homes. There continues to be an unusually long delivery time for new homes, reflecting shortages of both materials and workers. An industry expert indicates that homebuyer traffic was affected by severe weather in September, but otherwise has remained brisk; however, he notes that there now seems to be less of a sense of urgency to buy than a few months ago.

Office markets across most of the New York City area remain tight as a drum. Office vacancy rates across Manhattan continue to hover at cyclical lows. Office rents in Midtown and Downtown have risen only modestly this year, but rents in the Midtown South area (including Silicon Alley) continue to rise at a double-digit rate. Office vacancy rates in Westchester and Northern New Jersey edged down in the third quarter, while Long Island's vacancy rate fell sharply, to a cyclical low of 7.1 percent.

Other Business Activity
Regional purchasing managers' surveys for September indicate a mixed but generally weaker picture of the manufacturing sector, along with heightened cost pressures. Buffalo purchasers indicate steady growth in new orders and a further acceleration in production activity in September, along with persistent but steady increases in commodity prices. Purchasing managers in both the New York City and Rochester areas report a downturn in manufacturing activity, along with increasingly broad-based inflation in input prices.

There is some anecdotal evidence that the slowing in regional payroll employment growth in the third quarter may reflect labor shortages. A large employment agency reports that demand for temporary workers remains strong but that "effectively, there are no more temps." The contact describes the labor market as very tight and notes that the current lack of contingent workers is now "driving up salaries and fees in full-time job placement." There has been a pause in demand for computer specialists, as Y2K needs are slackening, but strong demand is expected to resume next year. Separately, a recent survey of the securities industry indicates that technology spending is expected to increase by 7 percent annually over the next three years--largely to support on-line investing.

Financial Developments
Demand for loans weakened since the last report, according to bankers at small and medium-sized banks in the District. Approximately two in five bankers report lower demand while only one in five indicate higher demand. The weakness in demand was most pronounced in the consumer and residential mortgage segments. Refinancing activity continued to slow, with half of the bankers surveyed reporting declines.

On the supply side, bankers report tighter credit standards for all categories of loans--particularly on nonresidential mortgages and commercial and industrial loans. A large majority of bankers raised rates on both loans and deposits since the last report. Finally, delinquency rates continued to drop in all loan sectors, led by residential and nonresidential mortgages.

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Last update: November 3, 1999