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Federal Reserve Districts

Second District - New York

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Full report

Economic conditions in the Second District have weakened since the last report. It is unclear how much of the weakening may be attributed to the material disruptions and aftermath of the September 11 terrorist attack. The disaster's impact was particularly evident in Manhattan real estate, retail trade and tourism. Many businesses in the District are facing downward price pressures from weakening demand and lower commodity prices. Labor markets have shown signs of deteriorating since the last report. Department stores report that sales fell well below plan during the week of the attack, though they have recovered modestly in each of the past few weeks.

Home sales in and around New York City have slowed drastically since the last report, and both apartment prices and rents have fallen by an estimated 10 percent. In general, contacts note that the high end of the market has been the most affected. Contrary to initial post-attack expectations, Manhattan's office market has not tightened--availability rates at the end of September were slightly higher than a month earlier. Hotels, taxi drivers, and Broadway theaters experienced a steep falloff in business in mid-September, but activity has reportedly recovered somewhat in the weeks since. Finally, bankers again report weaker loan demand, tighter credit standards, and moderately higher delinquency rates in the latest survey, taken in early October.

Consumer Spending
General merchandise retailers report that sales were well below plan in September and early October, though discount and home improvement chains describe sales as close to plan. Department store sales in the region fell sharply during the week of September 11--particularly at Manhattan stores--but have recovered steadily in subsequent weeks. Still, as of early October, sales remained lower than a year ago and well below plan. For the month as a whole, sales at Manhattan stores were said to be 20-30 percent below normal, while comparable-store declines in the rest of the region ranged from 4 to 13 percent. Broad-based weakness was reported across major merchandise categories, although some contacts note relative strength in furniture and lawn and garden supplies. Most contacts report an overhang of inventories and are responding with steep markdowns. Most major chains have scaled down Christmas-season sales expectations, to varying degrees. On average, dollar sales volume is expected to be down 1-2 percent from last year.

Discount chains, which have a very limited presence in New York City, report that sales in the region were only modestly below plan, boosted by home entertainment merchandise (DVDs, etc.) and security-related merchandise (alarms, etc). One contact notes some shift in business from weekends to weekdays and says that consumers have grown increasingly budget-conscious in recent weeks.

Major retail chains report that some stores closed for most of the day on September 11 but that all re-opened on the following day. Scattered delivery and shipping delays were reported--mostly at border crossings--but no major problems were reported. A large number of retail outlets in the World Trade Center complex were destroyed, and virtually all major stores in Lower Manhattan were closed for at least a week--a major department store and a leading electronics store remain closed indefinitely.

Construction and Real Estate
Manhattan's office market was thrown into turmoil by the destruction of the World Trade Center (3 percent of Manhattan space), as well as damage to adjacent structures (another 4 percent), most of which should be habitable within 2 to 9 months. However, market conditions have not tightened as expected--availability rates at the end of September were slightly higher than a month earlier. Leasing activity has picked up dramatically, as displaced firms secure new space--mostly in Manhattan, but also in northern New Jersey and, to a lesser extent, in the outer boroughs and eastern and northern suburbs. Still, many of the displaced firms have diminished space needs. Moreover, on the supply side, firms outside the damaged area placed excess space on the market. The net result was the slight increase in Manhattan's availability rate. By early 2002, as most of the damaged properties re-open, availability rates are expected to rise even further.

Housing markets in and around New York City have clearly weakened further since the last report. A leading Manhattan rental real estate firm reports that the market has slowed significantly in recent months but notes that it is difficult to assess the impact of the terrorist attack versus cyclical forces. After accounting for increased concessions--such as a free month--Manhattan rents (north of Canal Street) appear to be averaging about 10 percent lower than a year ago. In Lower Manhattan, demand has fallen off sharply, and it is difficult to assess current market rents.

Similarly, contacts in the apartment appraisal and brokerage industries note that co-op and condo transactions ground to a halt during the week of the attack and have edged up only moderately in recent weeks, while prices have fallen by roughly 10 percent. Even prices stipulated in a number of signed contracts have been renegotiated. As in the rental market, Lower Manhattan is said to be particularly sluggish, but market conditions appear to be holding up relatively well uptown, with a few reports of multiple offers on apartments.

Homebuilders in northern New Jersey report some softening at the high end of the market. Some buyers are said to have shelved deals on construction not yet begun (pre-contract). However, one contact still notes that there remains a shortage of housing, and people that need to move are still buying, though typically with fewer amenities. Separately, a realtor in northern New Jersey reports that there were virtually no sales transacted in the three weeks following the attack, and that it is difficult to gauge price trends.

Other Business Activity
A major New York City employment agency says that the local job market has slackened noticeably since the last report, with particular weakness in financial services; however, demand from law firms remains strong. Wages are said to have leveled off and are little changed from a year ago.

Tourism-related industries experienced a steep drop-off in activity in September, though there has been some improvement in early October. Manhattan hotels report that occupancy rates, which had already been slumping for most of this year, fell 25 percent below normal in September, and many hotels have slashed room rates. New York City taxi drivers have reportedly experienced a steep drop-off in business; income was reported to have fallen by as much as 50 percent in the weeks following the terrorist attack. Broadway theaters report some rebound in attendance in October, following a dramatic falloff in mid to late September.

On a more positive note, there are some signs of stabilization in the region's manufacturing sector. New York State manufacturers report some pickup in general business conditions and new orders in September and early October, but express increased pessimism about the six-month outlook--largely reflecting concern about the residual effects of the terrorist attack. Manufacturers continue to report downward price pressures, though to a lesser extent than in the last report.

Financial Developments
According to the latest survey of small to medium-sized Second District banks--conducted in early October--demand for most types of loans fell noticeably over the past two months, except in the residential mortgage category, where demand picked up moderately. Widespread increases were also reported in refinancing activity. On the supply side, banks again tightened credit standards for all types of loans except home mortgages, where standards remained stable. Virtually all respondents reported declines in both loan rates and deposit rates. Delinquency rates rose for consumer, residential mortgage and commercial loans, but were little changed for commercial mortgages.

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Last update: October 24, 2001