September 20, 2000 Federal Reserve Districts Second District - New York

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Growth in the Second District's economy has continued at a moderately brisk pace since the last report. Cost pressures have intensified, mainly for labor and energy, but prices of finished goods and services overall remain remarkably stable. New York City's labor market continues to tighten, with salaries for office workers reported to be up more than 10 percent from a year ago. There are also signs of a pickup in hiring activity in the Buffalo area. Retailers report that sales were sluggish in August, with unusually cool and wet weather cited as a major factor; however, most note some improvement in early September. Due to steep markdowns on summer apparel, retail prices are flat to down slightly. New York City's office market remains extremely tight. Housing markets, which had eased a bit during the summer, have shown signs of picking up in early September. Declines in both new construction and home sales over the summer are partly attributed to supply constraints--a dwindling inventory of homes on the market and a shortage of land and labor. Regional purchasing managers report continued strength in manufacturing in August, along with a marked pickup in cost pressures. Finally, bankers report weakening loan demand, tightening credit standards, and falling delinquencies. Consumer Spending Although there were wide variations among the major chains, retailers generally report that sales continued to run below plan in August, but improved somewhat in early September. Most contacts indicate particular weakness in summer apparel, which was largely attributed to unseasonably cool and wet weather. Also, two contacts note that consumers seemed to be less interested in this year's summer fashions. Fall apparel, on the other hand, has reportedly been selling fairly well in early September. Sales of consumer durables--appliances, electronics, home goods, etc.--as well as home decor, cosmetics, and jewelry, were said to be fairly strong throughout the summer. Despite the sluggish apparel sales, most retail contacts are satisfied with current inventory levels. Some contacts note that excess inventories of summer apparel had to be sold off at steep markdowns, but that they have mostly been cleared out. Selling prices have been steady to down slightly, reflecting these clearance discounts. Most contacts report little or no effect from rising shipping costs yet, but say that continued high fuel costs could put upward pressure on prices in the upcoming holiday season. One major chain reports that sharp increases in utility costs recently may push up selling prices at least slightly. Construction and Real Estate Commercial real estate markets remain tight as a drum, with Manhattan's severe shortage of office space showing little sign of easing in July. Office availability rates (the percentage of space that is either vacant or available for lease over the next year) edged up from 3.2 to 3.4 percent in Midtown and from 5.4 to 5.5 percent in Downtown--both are still near historic lows. Year-to-date, office rents have risen at an annualized rate of more than 40 percent in both areas. Residential construction activity in the Second District has slowed from its brisk second-quarter pace, evidently reflecting both waning demand and a dwindling supply of land and labor. On a seasonally adjusted basis, housing permits in New York and New Jersey fell for the second consecutive month in July. Single-family permits fell to their lowest level since late 1997; compared with a year earlier, they were down 17 percent in July and off 8 percent year-to-date. Multi-family permits, in contrast, were up 60 percent from a year earlier in July and up 29 percent year-to-date. Anecdotally, builders in northern New Jersey report that land and labor supply constraints are mainly responsible for the recent decline in permits. Currently, the queue for new custom-built homes is so long that some builders are turning away customers, as they are reluctant to take orders for more than nine months out. A major New York City realtor reports that prices of Manhattan co-ops and condos have risen only modestly in recent months but are still up 15-20 percent from a year ago. They also note that, although market conditions this past summer were a good deal less frenzied than last year, there has been a "tremendous pickup in activity" in the week after Labor Day. As for single-family homes, selling prices in the New York City area continue to run more than 10 percent ahead of a year ago, whereas both the number of sales and the inventory of homes on the market are noticeably lower than a year ago. Realtors in the Buffalo and Rochester areas indicate that, while both prices and unit sales are little changed from a year ago, they are struggling to find enough listings; if recent trends continue, they expect the dwindling inventory of homes to put upward pressure on prices. Other Business Activity In New York City, a major employment agency reports that there remains a severe shortage of workers, and that in terms of labor demand, the week after Labor Day was "incredible," with the strongest hiring activity still coming from the financial services industry, followed by "dot-coms." While the most severe shortages are for computer "techies," excess demand is reported for office workers across the board; agency commissions are said to be up 15-20 percent from a year ago, mostly reflecting a 10-12 percent increase in salaries. Similarly, in the Buffalo area, a quarterly survey of local employers suggests a strong increase in hiring activity this autumn. Moreover, in downtown Buffalo, two major banks are in the process of adding substantially to their payrolls, and a leading cable TV company is planning a substantial expansion in the near future. Regional purchasing managers' surveys indicate further strength in the region's manufacturing sector in August, along with a marked pickup in price pressures. Buffalo purchasers report that manufacturing activity expanded in August, but at a slower pace than in July; while there was a typical seasonal pickup in production activity, hiring activity retreated somewhat and new orders grew at a slower pace than in July. Price pressures became increasingly widespread in August, after abating in June and July. New York City area purchasers indicate that manufacturing sector activity accelerated in August, from July's already-strong pace, while purchasers in non-manufacturing industries were also increasingly upbeat about business conditions. Here too, input prices resumed their upward trend in August, after leveling off in June and July. While soaring energy prices were a major factor, widespread price increases also persisted for a variety of contracted services, led by construction, architectural, temporary help, and computer services. After surging 40 percent above comparable 1999 levels in July, residential electricity costs in New York City and the Lower Hudson Valley retreated sharply in August and are seen leveling off in September. In these last two months, costs are estimated to be about 8 percent above last year's levels. Financial Developments According to the latest survey of local-area banks, demand for all types of loans fell since the last report, led by the residential mortgage segment. Refinancing activity continued to slow as well, with 41 percent of bankers reporting a dip in refinancing. Indicators on the supply-side were mixed. Credit standards generally tightened over this period, particularly on commercial and industrial loans, with 28 percent of lenders indicating more stringent credit standards. Loan rates rose across all loan categories, with the most widespread increase on commercial and industrial loans. Similarly, average deposit rates rose, as noted by 47 percent of surveyed bankers. Delinquency rates fell for all loan categories. Return to top Boston Philadelphia