June 14, 2000
Federal Reserve Districts
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Most sectors of the Second District's economy have continued to grow at a sturdy pace in recent weeks, led by real estate and construction. Housing markets in upstate New York appear to be strengthening; in the New York City area, home prices continue to appreciate rapidly, and builders are struggling to keep up with demand, as construction workers are in short supply. A shortage of office space in New York City appears to be driving a further acceleration in commercial rents. Regional purchasing managers report some strengthening in manufacturing activity in May.
In contrast, retailers report that sales were sluggish last month, with a pickup in early May followed by substantial weakening in the second half of the month--weather was cited as a major factor. Retail prices, merchandise costs, and wages were characterized as stable, with anticipated hikes in transportation costs expected to have little if any effect on final prices. Finally, bankers report some slackening in loan demand, along with further improvement in delinquency rates.
Almost all retail contacts noted weak sales of apparel--especially women's apparel. However, sales of home goods were mixed: some contacts indicate continued strength, but others have seen some softening. One contact reports that sales of air conditioners were up threefold in May, compared with a year earlier, despite the cool weather in the final two weeks.
For the most part, contacts report that inventories are generally at satisfactory levels; however, some report an overhang of summer apparel, and plan to offer sizable discounts. In general, selling prices and merchandise costs are little changed. Rising fuel costs have yet to affect retailers' transportation costs, because of contractual obligations. While most contacts anticipate a jump in shipping costs in the months ahead, the impact on overall costs is described as small, and is not expected to be passed through to consumer prices.
Construction and Real Estate
Construction statistics suggest that supply is struggling to keep pace with demand. On a seasonally-adjusted basis, single-family permits in New York and New Jersey retreated in April, following an uncharacteristically strong first quarter. However, multi-family permits soared again in April, led by another wave of apartment projects in New York City. Year-to-date, single-family permits are off about 6 percent from comparable 1999 levels, but multi-family permits are up 55 percent. Anecdotally, New Jersey homebuilders say the market is still "dominated by inventory shortage"; they cannot put up homes fast enough, as pre-built sales are out-running current levels of production. While builders report no problems in obtaining materials, they are hampered by a severe shortage of skilled trade workers, but note that this shortage would be far worse if not for a heavy influx of immigrant workers. Wages in these occupations are said to be running nearly 10 percent higher than a year ago.
New York City's office market tightened further during April, with leasing activity described as "frenetic." Midtown Manhattan's office availability rate--space that is vacant or coming available within 12 months--tumbled to a new low of 4.2 percent, from 4.9 percent at the end of March and 7.7 percent a year ago. Similarly, Downtown's rate ended the month at 6.3 percent, down from 6.9 percent in late March and 11.9 percent a year ago. This shortage of commercial space has driven up office rents at an increasingly rapid pace this year: they are up roughly 15 percent over the past 12 months, and have increased at an average annual rate of nearly 35 percent so far this year.
Other Business Activity
New York State and New Jersey recently reached agreement on spending plans for the bi-state Port Authority, clearing the way for a number of development projects to move forward. These include a new $200 million cargo terminal at Port Elizabeth, New Jersey, the leasing of air rights to build an office tower above Manhattan's bus terminal, and a possible extension of the PATH commuter rail line.
Most respondents report unchanged credit standards. Virtually all survey respondents continued to report higher interest rates on all categories of loans. On the deposit side, 76 percent of respondents reported a rise in their average deposit rate. Finally, delinquency rates continued to decrease for consumer loans, residential mortgages, and nonresidential mortgages, but remained steady in the commercial and industrial loan category.