June 13, 2001 Federal Reserve Districts Second District - New York

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The overall level of economic activity in the District remains high, led by persistent strength in housing, but soft spots in other key sectors -- retailing, manufacturing, commercial real estate, and financial services -- suggest a pause in growth. Cost pressures have generally eased, and inflation at the consumer level appears to have moderated. Labor markets remain fairly strong, despite reduced hiring activity from certain industries, most notably financial services. Retailers indicate that sales were generally below plan in May, with particular weakness in hot-weather merchandise; however, steep markdowns have helped to keep inventories at satisfactory levels. Demand for both industrial and retail space remains well-maintained, but Manhattan's office and hotel markets have slackened noticeably. Housing markets across the District remain buoyant, with stable and strong conditions in and around New York City, and a pickup throughout upstate New York. Purchasing managers report some deterioration in business conditions in May, but little change in price pressures. Finally, bankers report an increase in loan demand, a modest rise in delinquency rates, and ongoing tightening in credit standards. Consumer Spending Most general merchandise stores report that sales were well below plan in May. Compared with a year ago, same-store sales were little changed, on balance, with as many chains indicating decreases as increases. Cool weather was cited for some but not all of the weakness. A major home-improvement retailer reports some pickup in business in May, following a sluggish March and April; however, the firm views this as a later-than-usual seasonal surge, related to weather, and is concerned about weakening in the months ahead. Another retail chain reports that its 5 percent drop in same-store sales was largely due to a more than 50 percent drop in sales of air-conditioners. Apparel sales industry-wide are described as weak, with women's clothing continuing to sell better than men's. Most retailers report that inventories are at satisfactory levels, as heavy discounting has been effective in clearing out overstocks. A number of contacts indicate that these steep markdowns have pulled down effective sales prices below last year's levels. Some retailers note that employee turnover has declined and that wage pressures have become a bit less pronounced, but that costs of employee benefits and utilities are up sharply over the past year. Construction and Real Estate Residential real estate markets remain fairly buoyant across the District, though new construction has tapered off slightly. A leading New York City Realtor and a major appraisal firm both report that Manhattan's co-op and condo market has stabilized in recent weeks. Sales volume, which had been described as sluggish through April, picked up in May, and selling prices, though off their recent peaks, remain well ahead of a year ago. Separately, while rents on Manhattan apartments have reportedly leveled off in recent months, rents in some adjacent parts of the outer boroughs are reported to be up 10-20 percent from a year ago. In contrast, summer rental markets in the upscale Hamptons are reported to be noticeably more slack than last year -- rental rates are flat to lower, and the number of available units is up sharply. Based on a repeat-sales index, prices of existing single-family homes rose noticeably in the first quarter throughout the District. Double-digit increases (compared with a year earlier) persisted throughout New York City, Long Island, and the lower Hudson Valley, while price increases ranged from 7 to 12 percent across northern New Jersey. The average price jumped 6 percent in the Buffalo and Rochester areas, with comparable increases reported across most of upstate New York. More recently, Rochester-area Realtors report that strong market conditions persisted in April and May, with low inventories and brisk demand prompting overbids on some higher-end properties. Year-to-date, multi-family housing permits are roughly on par with 2000, which was the strongest year since the mid-1980s. Most of the increase reflects a surge in construction in New York City. Homebuilders in northern New Jersey describe the housing market as having a "vibrant tone," reflecting continued excess demand for both new and existing homes. New York City's office market continued to slacken in April. Availability rates in all three of Manhattan's major markets rose another 0.5 percentage points from March. Rates rose to 5.5 percent in Midtown and to 5.6 percent in Downtown -- both one-year highs -- and to 7.8 percent in Midtown South (which includes much of "Silicon Alley"), its highest level since 1997. However, availability rates are still low by historical standards. Asking rents have recently declined in all three areas, though they are still up more than 20 percent from a year ago. Retail rents in Manhattan rose slightly between September 2000 and March 2001, while the amount of prime space available for rent declined, according to an industry survey. Separately, industrial vacancy rates in northern New Jersey have risen in recent months, while rents have leveled off; while demand and leasing activity are still described as relatively strong, supply has increased substantially, with approximately 2.5 million square feet of warehouse space completed in the first quarter alone. Other Business Activity According to a leading on-line recruitment firm, the pharmaceutical, biotech, construction and restaurant industries are still generating strong labor demand; however, a sharp reduction is reported in job postings from financial services, advertising, telecom, and high-tech companies. Separately, a New York City employment agency specializing in mid-level office workers reports that this year's college graduates are not seeing the same kind of "feeding frenzy" as last year's, but notes that a hiring freeze across much of the financial sector is giving firms in other industries an opportunity to fill open positions. A Rochester-area contact notes that, despite ongoing layoffs at some major local multinationals, a variety of technology and related firms are looking to hire more staff. Manhattan's hotel occupancy rate averaged 78 percent in both March and April -- 10 percentage points lower than a year earlier. Moreover, the average room rate slipped 2.5 percent below year-earlier levels in April -- the steepest 12-month decline since 1993. Moreover, higher-priced hotels generally registered steeper declines in both occupancy rates and room rates than lower-budget establishments. In the manufacturing sector, purchasing managers report further weakening in business activity in May, and little change in price pressures. Buffalo-area purchasers report that conditions in the local manufacturing sector weakened slightly in May. While new orders rose slightly, production activity and employment levels edged down, and vendor deliveries were slightly faster (typically a sign of slackening demand). Moderate upward price pressures continued, but they were no more widespread than in April. Manufacturers and other purchasers in the New York City area report that business conditions weakened slightly in May. Input prices were reported to be flat, on balance, though a fair amount of dispersion of price increases and declines was noted. Financial Developments The latest survey of regional banks shows a pickup in demand for all major categories of loans over the past two months. In particular, over two-thirds of the bankers surveyed report increased demand for residential mortgages, and three out of four indicate increased refinancing activity. On the supply side, bankers report tightening standards for all types of loans -- particularly in the commercial and industrial category, where more than 20 percent report tighter credit, while only 3 percent indicate easier standards. Both loan rates and deposit rates fell according to an overwhelming majority of bankers. Delinquency rates on all types of loans edged up, on balance, since the last report. Return to top Boston Philadelphia