June 11, 2003 Federal Reserve Districts Second District--New York

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The Second District's economy has shown fairly widespread signs of a pickup since the last report, although businesses note diminished input price pressures. The labor market appears to be strengthening, mainly in and around New York City. Retail sales were mixed in May, with inclement weather hampering sales of seasonal merchandise. According to two separate surveys, consumer confidence improved again in May. Manufacturing activity also appears to have picked up in May. Both home construction and the market for existing homes have been steady and fairly strong since the last report, and there are signs of a pickup in New York City's office market. Finally, bankers in the District report increased loan demand, especially for home mortgages, slight improvement in delinquency rates, and steady to slightly tighter credit standards. Consumer Spending Major retail chains report that sales in the District were mixed in May, with unusually cool and wet weather hampering sales of seasonal merchandise. On a comparable-store basis, sales ranged from down 4 percent from a year earlier to up 5 percent. Sales were generally described as on or above plan at department stores, but below plan at discount chains. While the weather hampered sales of seasonal merchandise--lawn and garden, swimwear, and spring apparel--most contacts indicate that overall business was better in May than in March or April. Most retailers indicate that both selling prices and merchandise costs have declined, particularly for apparel, electronics, and lumber. Inventories are generally reported to be on the high side, but most contacts characterize them as manageable; overstocks of seasonal merchandise are expected to sell briskly once hot weather arrives. Separately, a western New York association of automobile dealers reports that vehicle sales weakened in May and characterized inventories as high and rising. As of June 1, New York State's sales tax was increased � percentage point, and moderately priced clothing (under $110) is no longer exempt from sales tax; a number of counties, as well as New York City, are also increasing their sales tax rates. Two separate surveys point to further improvement in consumer confidence in May. Siena College's monthly survey of New York State residents showed confidence rising in May for the third consecutive month. Similarly, the Conference Board reports that confidence in the Middle Atlantic states--New York, New Jersey, and Pennsylvania--rose for the second month in a row. Construction and Real Estate Residential real estate markets and construction activity were characterized as steady and relatively strong in May. A contact in New Jersey's homebuilding industry reports that, although adverse weather hampered housing starts in the first quarter, activity rebounded in April and May, and year-to-date construction is running on par with 2002 levels. This contact describes demand as robust, but indicates that regulatory constraints have hampered the pace of development. Separately, an Albany area homebuilder reports that May was a record-setting month for sales, reversing a slowdown in April, and also notes a lean inventory of homes on the market. The market for existing homes has also shown signs of renewed strength. Median home prices have continued to register double-digit price gains over the past year across northern New Jersey, downstate New York, and the Albany area. However, prices across much of upstate New York were up only modestly. The number of transactions, however, has been running below 2002 levels, with some contacts attributing this to a lack of inventory. Manhattan's co-op and condo market showed signs of renewed strength in May. A major real estate agent and a leading residential appraiser both report a pickup in sales in May, though volume was down from the exceptionally busy period a year ago. Selling prices have remained stable overall, with small apartments seeing modest price appreciation, but larger units seeing modest price declines. New York City's office market has shown signs of improving recently, after weakening in the first quarter. In particular, brisk leasing activity in Lower Manhattan-largely from the health sector-pushed that area's vacancy rate down sharply to its lowest level in one year, though asking rents continue to run more than 20 percent below the 2000 peak levels. Midtown Manhattan's vacancy rate was little changed. Other Business Activity A major New York City employment agency, specializing in office jobs, reports a noticeable pickup in hiring since the last report. There has been a modest pickup in activity from the financial sector but not from the large firms. More generally, much of the recent hiring is said to be coming from small companies in a variety of industries. Also, fairly strong labor demand continues to come from the legal industry. A financial-industry contact reports that New York City's securities industry showed renewed signs of improvement in May, after a poor performance in April, and expects the higher profits to soon lead to strong gains in variable pay. However, this contact notes that the industry is seeing "massive productivity gains," driven by investments in technology, and that employment is not expected to increase noticeably in the near term. Manufacturing industry contacts report fairly widespread improvement since the last report as well as diminishing input price pressures. Similarly, the May survey of New York City-area purchasing managers shows continued improvement in manufacturing sector conditions, though Buffalo-area purchasers report some weakening in activity. In both areas, purchasers indicate diminished price pressures. Financial Developments Contacts at small to medium-sized Second District banks report increased demand for all types of loans--in particular, more than 40 percent of bankers indicate higher demand for residential mortgages, compared with less than 10 percent reporting lower demand. Widespread increases in refinancing activity are also reported. Credit standards on home mortgages were unchanged, but slightly tighter credit standards were reported for other loan categories. Widespread declines in interest rates were again reported across all categories of loans and deposits. Finally, lenders report little change in delinquency rates on consumer loans but lower delinquencies on home mortgage and commercial loans. 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