September 19, 2001 Federal Reserve Districts Second District - New York

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The District's economy has shown further signs of weakening since the last report, despite some apparent stabilization in the manufacturing sector. With energy costs subsiding, overall input price pressures have eased, and increased competition has kept downward pressure on selling prices. Labor markets have been fairly stable since the last report. Most retailers say that sales remained sluggish in August, with the recent tax rebates reportedly having little effect on demand; retail inventories are said to be at satisfactory levels, while selling prices are flat to down slightly. Consumer confidence fell among residents of downstate New York in August, but rose slightly in upstate areas. While home construction and prices are still described as buoyant, there have been signs of softening in the New York City area. Office rental markets in and around New York City remain sluggish, but sales and construction of office buildings remain fairly strong. Manhattan hotel room rates slipped to a three-year low in August and were down 7 percent from a year earlier. Finally, bankers report weakening loan demand, tightening credit standards on all types of loans, and a significant upturn in delinquencies on home mortgages. Consumer Spending Retailers indicate that sales were on or below plan in August, but not as weak as in July, on balance. Same-store sales were generally little changed from a year earlier, with discounters continuing to fare somewhat better than department stores. In particular, sales of home-improvement and other household goods were described as weak, though energy-saving products continued to sell well. Apparel sales were mixed--back-to-school merchandise for juniors performed fairly well, but men's clothing sold poorly. A few contacts indicate that consumers seem to be increasingly price-conscious. Most retail contacts believe that the recent tax rebates have not had a significant effect on spending; one estimates a half a percentage point boost. Contacts generally continue to describe current inventory levels as satisfactory. Most major chains are now planning for little or no increase in Christmas season sales, from last year's levels. Selling prices and merchandise costs were said to be flat to down modestly. According to Siena College's latest monthly survey of New York State residents, consumer confidence in the New York City area fell in August to the lowest level in the survey's 2� year history. In upstate New York, however, confidence edged up in August for the second consecutive month. Construction and Real Estate Although residential construction activity has remained brisk thus far in the third quarter, housing markets in and around New York City have shown signs of softening. Both multi-family and single family housing permits rose in July, on a seasonally-adjusted basis, and were higher than a year earlier. More recently, homebuilders in New Jersey reported that they are continuing to build wherever they can find available land, due to a persistent backlog of orders. However, an industry expert notes that there has been some softening in demand at the high end of the market, in the form of buyers adding fewer and less costly upgrades and enhancements. The market for existing homes has been mixed in recent weeks, with some softening reported in and around New York City, but continued brisk activity in upstate New York. Realtors in the Albany and Rochester areas report that home sales were robust in August. In contrast, contacts in both New York City and northern New Jersey report that while home prices are still well above year-ago levels, a number of sellers have reduced their asking prices in recent weeks. Similarly, New York City's apartment market has shown signs of cooling. Manhattan residential rents, which had risen sharply in recent years, leveled off in the first half of 2001. Rents in the outer boroughs also appear to have stabilized and vacancy rates have reportedly edged up. Manhattan's co-op and condo market, which had remained fairly strong through mid-year, has taken on a softer tone in recent weeks, according to a leading real estate firm-unit sales in August were roughly on par with a year ago, but the average selling price was down moderately. Despite continued weakness in commercial real estate markets, nonresidential construction activity has been brisk. Manhattan's office market appears to have stabilized somewhat since mid-year, as both rents and availability rates were little changed in July. However, leasing activity was reported to be down an estimated 70 percent from a year earlier; while dot-coms were the dominant lessees last year, most demand this year has come from the media, financial and legal services industries. Despite the dramatic slackening in the office rental market, brokers report that selling prices for office buildings have remained strong, helped by a favorable debt market. Office construction remains fairly brisk, particularly in northern New Jersey, where the volume of new construction is reported to be up 80 percent from a year ago. In addition, overall construction activity is expected to be buoyed, for some time, by the large volume of long-term infrastructure projects currently in progress across New York State and New Jersey--particularly schools, highways, and rail projects. Other Business Activity A major New York City employment agency says that the local job market has not changed much since the last report-real estate and law firms continue to hire briskly, while banks are recruiting very selectively. This contact reports that wages and salaries are holding steady, but asserts that many workers, especially on Wall Street, will be "shocked" by the magnitude of bonus reductions at year-end. Manhattan's hotel occupancy rate (seasonally-adjusted), held steady at 80 percent in July, but was down almost 10 points from a year earlier. This falling occupancy rate, in part, reflects a 7 percent increase in the number of hotel rooms since the beginning of the year; current construction will add another 5 percent to the existing stock. Reflecting the changing market conditions, the average room rate slipped to a three-year low and is down 7 percent over the past year. New York State manufacturers continue to note that intense competition, largely from overseas, is exerting downward pressure on selling prices. However, they expressed somewhat less pessimism about the general business climate in August and early September than in July. Similarly, purchasing managers in both the Buffalo and New York City areas report little change in manufacturing activity in August, along with widespread declines in input prices--notably energy. Financial Developments The overall demand for loans fell over the past two months, according to bankers surveyed at small to medium-sized Second District banks. Demand was stable for nonresidential mortgages and commercial and industrial loans but weaker for consumer loans and residential mortgages. However, refinancing activity increased. On the supply side, tighter credit standards were reported for all major loan categories. Most notably, more than 30 percent of bankers say they tightened standards for commercial and industrial loans and nonresidential mortgages, while none reported an easing. Widespread declines were reported on all categories of loan rates, as well as deposit rates. Delinquency rates on consumer loans and nonresidential mortgages were little changed; however, increased delinquencies were reported on commercial and industrial loans and, notably, on residential mortgages. In fact, 21 percent of those surveyed report rising delinquencies on home mortgages--the highest proportion since January 1997. Return to top Boston Philadelphia