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Federal Reserve Districts

Second District - New York

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Full report

The District's economy has been generally sluggish since the last report, with the notable exception of housing. Overall business costs remain subdued, aside from sharp increases in utility and medical costs, and prices of final goods and services appear to have decelerated. Labor markets have eased, especially in manufacturing and financial services; however, hiring activity remains fairly brisk in a number of other service industries. Retail business remained soft in June and July, with general merchandise chains reporting year-over-year declines in comparable-store sales. A number of contacts say they are making a concerted effort to reduce inventories. Retail prices are said to be down slightly.

Housing markets throughout the District continue to show considerable strength, with second-quarter selling prices in most areas running well ahead of a year ago. In contrast, commercial real estate markets slackened substantially in the second quarter -- particularly in New York City, where availability rates have risen sharply and asking rents have fallen. Similarly, Manhattan's hotel occupancy rate fell to a six-year low in the second quarter, while room rates registered their steepest decline in nearly ten years. Finally, bankers report an increase in consumer delinquency rates, steady loan demand, and some tightening in credit standards, except on home mortgages.

Consumer Spending
General merchandise retailers indicate that sales were below plan in both June and July, and that same-store sales were generally lower than a year earlier; however, within the group, discounters tended to fare somewhat better. Apparel sales were mixed but generally weak, with women's apparel a bit stronger than other categories. One large discount chain notes that more customers seemed to be opting for private-label and lowest-priced merchandise lines. Both furniture and soft-goods for the home were described as particularly sluggish. A major home-improvement retailer notes some improvement in the tone of business in June and July -- with particular strength in sales of energy-efficient products -- though sales were still described as anemic. Another contact noted a weather-related pickup in sales of air-conditioners and lawn and garden merchandise.

One large retail chain reports a moderate but noticeable pickup in sales from customers who have received their tax rebate, based on a preliminary survey of shoppers. However, most retail contacts expect the current round of tax rebates to have only a modest effect on sales.

While a few contacts report that inventories are a little high, most describe current levels as satisfactory -- largely due to steep markdowns. A number of retailers indicate a concerted effort to reduce inventories in response to diminished sales expectations, and most major chains are scaling back orders for the upcoming back-to-school and Christmas seasons. Both prices and merchandise costs were reported to be flat to down modestly, led by declines in apparel prices. A number of retailers say they are encountering rising costs of labor (especially medical insurance) and utilities.

Construction and Real Estate
Housing markets across the District continue to show vigor, though residential construction activity slowed somewhat in the second quarter. Multi-family housing permits fell substantially in June on a seasonally adjusted basis; for the second quarter overall multi-family permits fell by about a third from first-quarter levels and were more than 20 percent lower than a year ago. Most of the decline reflects a return to more normal levels of activity in New York City, following two boom years. Single-family housing permits also declined in June, and were down 5 percent in the quarter -- compared with both the first quarter and a year earlier. A homebuilder in upstate New York indicates that business has been strong and that it is increasing production. In contrast, homebuilders in northern New Jersey also say that demand remains strong but that construction activity is being limited by high costs and a shortage of available land.

The market for existing homes has continued to be quite firm since the last report. According to separate reports from a leading New York City appraisal firm and a local real estate board, prices of prime Manhattan co-ops and condos continued to edge up in the second quarter. Compared with a year earlier, selling prices were up considerably, although the number of transactions was down sharply. The market may have strengthened as the quarter went on, as a major Manhattan real estate firm reports that they sold more apartments in May and June than a year earlier, following sluggish activity in April; they also note that prices remained well above a year ago.

Single-family home sales across New York State were mixed but generally strong in the second quarter. The Albany and Buffalo areas, New York City and Long Island showed particular strength, with both unit sales and selling prices up substantially from a year earlier. In contrast, in the Rochester area, both unit sales and average selling prices were down from a year ago. There were signs of cooling in high-priced Westchester County -- unit sales were down sharply and price appreciation slowed from last year's double-digit rate. More generally, across the District, Realtors indicate that while the high end of the housing market has shown some softening, the market for starter homes is particularly strong.

In sharp contrast with the residential sector, commercial real estate markets softened further in the second quarter. Manhattan's office market has slackened substantially: availability rates jumped by nearly two percentage points in the last three months and asking rents declined at a nearly 10 percent annual rate. The most dramatic weakening has occurred in the Midtown South area, where strong leasing demand from dot-coms had driven up prices in recent years.

Office markets in adjacent suburban areas have converged over the past year, with the slackest areas strengthening and the tightest areas weakening. For example, Westchester County's office vacancy rate fell from 15 percent in mid-2000 to 12 percent at the end of June. Over the same period, neighboring Fairfield County's rate jumped from 7 percent to 12 percent. In Long Island and northern New Jersey, vacancy rates have risen by about 2 percentage points over the past year, while asking rents were flat to up moderately. In northern New Jersey, a substantial volume of office space is expected to come onto the market in the year ahead, reflecting downsizing in the telecommunications industry.

Other Business Activity
A major New York City employment agency says that the local job market for mid-level office workers is still fairly strong; however, there is less of a sense of urgency to hire than earlier this year and salaries, which had been rising at a double-digit rate, have leveled off. This contact also reports that financial services firms have scaled back recruiting substantially, but that hiring remains fairly brisk at a variety of other service industry firms -- especially law firms.

Manhattan's hotel occupancy rate (seasonally-adjusted), fell to a six-year low of 80 percent in the second quarter, down from 84 percent in the first quarter and 89 percent a year ago. The average room rate was little changed on a quarterly basis but has fallen by about 5 percent over the past year. Although both occupancy rates and room rates are still considered to be at high levels, the declines over the past year are the steepest since 1991.

A number of New York State manufacturers indicate that weak export demand and increased import competition (mainly from Asia) are hurting overall sales. In addition, some firms are being hurt by a falloff in demand from customers in the telecommunications, high-tech, and steel industries.

Financial Developments
Loan demand was little changed since the last report, according to the latest survey of Second District banks. Demand for refinancing also leveled off, following widespread increases in the past few surveys. On the supply side, bankers continued to report tightening standards for all types of loans except residential mortgages. Both loan rates and deposit rates continued to fall across all categories since the last report. Delinquency rates increased noticeably on consumer loans and moderately on nonresidential mortgages; however, there was a moderate decline in delinquencies on home-mortgages.

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Last update: August 8, 2001