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Federal Reserve Districts

Second District--New York

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The Second District's economy has seen further broad-based improvement since the last report. The labor market has continued to pick up. Retail sales improved noticeably in late June and early July, and were generally ahead of plan, with contacts attributing only part of the improvement to warmer weather. Surveys of consumer confidence showed little change in June. Manufacturing activity was mixed but generally stronger in June, and the financial sector has strengthened substantially.

Housing markets have shown further signs of strengthening in recent weeks. Office markets showed noticeable improvement in Lower Manhattan and Westchester but remained generally soft across most of the rest of the New York City metro area. Finally, bankers in the district report increased demand for home-mortgage loans, but weaker demand for consumer and commercial loans, as well as tighter credit standards and a modest increase in delinquency rates on commercial loans and mortgages.

Consumer Spending
Major retail chains report that sales in the District have improved noticeably over the past few weeks and were generally ahead of plan in late June and early July. On a comparable-store basis, sales ranged from a decline of 1 percent from a year earlier to gains of roughly 5 percent. Sales of seasonal merchandise-such as summer apparel, lawn and garden, cooling appliances-have been particularly robust, but most contacts maintain that warmer weather does not account for all of the improvement. A number of retail chains note a marked pickup in sales of women's apparel. One large discount chain attributes some of the improvement to the recent reduction in tax withholding schedules, but most contacts do not believe this is a major factor.

Most retailers indicate continued downward pressure on selling prices and merchandise costs-primarily for apparel. Inventories are said to be mixed: while most contacts indicate that they are at satisfactory levels, one large chain expresses concern about running out of clearance merchandise, whereas another notes some overhang of soft goods.

Two separate surveys indicate little change in consumer confidence in June. The Conference Board reports that confidence in the Middle Atlantic states-New York, New Jersey, and Pennsylvania-edged down, following gains in April and May. Siena College's monthly survey of New York State residents showed confidence leveling off in June, after three consecutive gains, as continued improvement upstate offset a pullback in the New York City area.

Construction and Real Estate
The housing market has shown signs of strengthening since the last report. A contact in New Jersey's homebuilding industry reports that housing demand continues to outstrip supply. New Jersey's resale market is also reported to be picking up. One contact reports that the market has rebounded in June and early July, after a sluggish Spring, while another contact describes the market as persistently tight. A contact in the Rochester area reports brisk activity and a large volume of pending sales in the pipeline.

Manhattan's co-op and condo market has shown further signs of gaining momentum since the last report. A major realtor reports that sales have been brisk across the board in recent weeks, and that the high end of the market appears to be picking up. In contrast, the rental market remains relatively soft, in Manhattan and, especially, across the river along New Jersey's Hudson waterfront. In both areas, vacancy rates have continued to climb as a good deal of new supply has come on the market over the past year.

Office markets across metropolitan New York City, though still fairly slack, showed scattered signs of improvement in the second quarter. Office vacancy rates declined moderately in Westchester and substantially in Lower Manhattan. However, Long Island's vacancy rate edged up to a cyclical high of 15 percent, and rates in Fairfield County, Connecticut and central New Jersey continued to hover above 20 percent. One industry contact reports brisk leasing activity, but also a good deal of "shadow space"-unleased space that is either under construction or not yet listed. Effective rents are estimated to be down 25 percent from their pre-recession peaks, but are said to be leveling off.

Other Business Activity
New York City's labor market has shown further signs of a pickup. A leading employment agency reports continued improvement in hiring activity since the last report: while the market for advertising and information technology workers remains slack, hiring activity has been persistently brisk in the legal industry, and has picked up in most other sectors, including financial services (largely from hedge funds and other small financial firms). While major Wall Street firms are still not recruiting in large numbers, they are reported to be hiring more actively than in quite some time.

A financial-industry contact indicates strong improvement in the second quarter, particularly in June-the fixed income segment continued to generate strong revenues, while gains were noted in other business lines across the board, and retail investor activity turned up for the first time in three years. This contact expects the securities industry to generate strong growth in compensation but little in the way of job gains this year.

The manufacturing sector has also shown further signs of improvement since the last report. In June, surveys of purchasing managers indicate improved conditions in the manufacturing sector in the New York and Rochester areas but some pullback in Buffalo. More recently, our early-July survey of New York State manufacturers indicates continued widespread improvement in current conditions, while an overwhelming majority of respondents remain optimistic about the six-month outlook. In general, input prices are reported to be relatively steady.

Financial Developments
Bankers at small to medium-sized Second District banks report mixed loan demand in the latest survey. Bankers report weaker demand for both consumer and commercial and industrial loans, but widespread strengthening in demand for residential mortgages; demand for commercial mortgages remained steady. Refinancing activity continued to rise, with nearly half of the bankers surveyed indicating increased activity.

On the supply side, tighter credit standards are reported for all types of loans. Interest rates fell for all categories of loans. Deposit rates also declined, with nearly nine in ten bankers reporting lower rates. Delinquency rates are reported to be up moderately for commercial loans and mortgages but little changed for consumer loans and residential mortgages.

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Last update: July 30, 2003