May 3, 2000 Federal Reserve Districts Second District - New York

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Growth in the Second District's economy has shown few signs of slowing since the last report. While wage pressures persist, inflation remains subdued, except in real estate. Retailers report that cool weather and increased competition contributed to disappointing growth in same-store sales in March and early April. While both selling prices and merchandise costs are said to be stable, transportation costs are expected to nudge up prices later this year, if fuel costs remain high. Housing markets remain subdued in upstate New York but are extremely tight in the New York City area, with stock-market turbulence reportedly having little effect as of mid-April; home prices continue to rise at a double-digit rate and construction workers are in short supply. Office markets have tightened further. Regional purchasing managers' surveys indicate mixed but generally positive conditions in the region's manufacturing sector in March, along with some moderation in input price pressures. Finally, bankers report a pickup in consumer loan demand, further tightening in credit standards and improvement in delinquency rates. Consumer Spending After a strong January and February, retail sales were generally reported to be on or below plan in March and early April--even after accounting for the unusually late Easter. A number of contacts cite cool weather and increased competition as factors. A major discount chain opened eleven new stores in New Jersey in March, intensifying the competitive environment and possibly pulling some sales away from existing retailers. Most major chains project that same-store sales for March and April combined (which washes out Easter-timing effects) to be little changed from a year ago. Demand for home goods has remained fairly brisk, but sales of seasonal apparel have been sluggish. Most contacts report that inventories are generally at satisfactory levels; however, a few say that if sales of seasonal apparel do not pick up soon, they will need to begin discounting heavily. Selling prices and merchandise costs remain flat. Rising transportation costs are having little impact thus far, because most current contracts with suppliers were locked in last year; however, if fuel prices stay high, retailers expect suppliers to begin passing these costs along later in the year. Most retailers say that labor shortages are increasingly troublesome, but they are boosting wages only moderately. One contact, however, notes that health insurance costs, after declining for years, have turned up sharply in 2000. Construction and Real Estate The exceptionally tight housing market in and around New York City continues to spur construction and drive up prices, though activity and prices have retreated in upstate New York. Multi-family permits in New York and New Jersey remained at an extraordinarily high level in February, reflecting continued brisk activity in the New York City area. Year-to-date, multi-family permits in the two states are running 55 percent ahead of comparable 1999 levels. Single-family permits edged up in February but were still slightly below the strong levels seen in early 1999. New York City realtors report continued excess demand. A leading Manhattan real estate appraisal firm reports that prices paid for co-ops and condos were up more than 20 percent in the first quarter, compared to a year earlier. Separately, a major Manhattan broker reports comparable price appreciation, and indicates that mid-April turbulence in financial markets has not spurred any discernible declines in traffic, sales, selling prices, or bidding wars thus far. One contact reports that some units have sold for over $1,000 per square foot this year. Homebuilders in northern New Jersey also indicate continued frenzied demand, despite the mid-April stock market swoon; however, one New Jersey realtor reports a drop-off in sales over the April 15 weekend, despite strong traffic. On the supply side, builders report that shortages of insulation materials have been alleviated by a pickup in supply from manufacturers, but that labor markets remain "extraordinarily tight," forcing up labor costs. New York City's office markets continued to tighten in early 2000, largely due to heavy leasing from the high-tech, finance and government sectors. Midtown's availability rate held steady at an historically low level of close to 6 percent, while Downtown's rate fell to 7.6 percent--from 9.1 percent at the end of 1999 and nearly 12 percent a year ago. Manhattan office rents continued to rise at a double-digit rate in the past three months and are up 8% from a year ago. Other Business Activity Labor shortages appear to have intensified further. A leading employment agency reports that corporate clients are "so desperate for good people" that some are voluntarily offering higher fees, in addition to increased wages; they report a particular shortage of paralegal and legal support workers. Separately, Wall Street firms report that people are being recruited away by internet firms. Regional purchasing managers indicate mixed but generally positive business conditions in March, along with some moderation in input price pressures. Buffalo purchasers report continued strong growth in new orders, a pickup in hiring and an acceleration in production activity; commodity price increases remain widespread but stable. Purchasers in the New York City area indicate that growth slowed in the manufacturing sector in March, but accelerated in non-manufacturing industries; price pressures were less intense than in February but were still fairly widespread among manufacturers. Financial Developments In the latest survey of small- to medium-sized banks, demand picked up for consumer loans and nonresidential mortgages but declined for residential mortgages. Refinancing at Second District banks continued to slow, as has been the trend in the past few surveys. On the supply side, bankers indicate further tightening in credit standards--almost a quarter of respondents reported tightening overall credit standards, while none said their bank had eased standards. Bankers continued to report higher interest rates across the board. Finally, delinquency rates decreased in all loan sectors compared with two months ago, with nearly a third of bankers noting improvement. Return to top Boston Philadelphia