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Federal Reserve Districts

Second District--New York

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The Second District's economy appears to have grown increasingly robust in early 2004. Retailers generally report strong sales for January and the first half of February; most also indicate lean inventories and steady selling prices, with some moderation in insurance costs. Labor markets are said to be improving gradually but steadily. Consumer confidence in January climbed to its highest level in well over a year, based on two separate surveys. Similarly, surveys of manufacturers and purchasing managers, conducted in January and early February, point to widespread improvement in general business conditions.

Although snowy and icy weather has continued to constrain new home construction in recent weeks, contacts describe demand for both new and existing homes as strong and the inventory of homes on the market as low. Manhattan's office market improved in January, with vacancy rates edging down and asking rents continuing to rebound from low levels; also, the sales market for commercial properties is described as vigorous. Finally, bankers report some further weakening in demand for household loans but steady to improving delinquency rates.

Consumer Spending
Retailers report generally strong sales for January, as well as the first three weeks of February. Same-store sales gains at major retail chains ranged from 2 percent to 6 percent, compared with a year ago. In general, the more upscale chains continued to fare somewhat better than the discounters, and sales in discretionary categories were relatively strong. A number of contacts describe both sales of clearance merchandise and initial sales of spring apparel as robust; most characterize inventories as lean. Despite the unusually cold and snowy winter, most contacts did not consider weather to be much of a factor. Retailers indicate some stabilization in merchandise costs, which had been falling, and in property and casualty insurance costs, which had been rising sharply; they also note that medical insurance costs, though still rising noticeably, have decelerated somewhat.

Surveys of consumers in the district show confidence rising to its highest level in more than a year in January. The Conference Board's index for the Middle Atlantic states (NY, NJ, PA) climbed to a 16-month high in January, while Siena College's index, based on New York State residents, rose to a nearly two-year high.

Construction and Real Estate
Despite a weather-related drop-off in new home construction, residential real estate markets showed increasing signs of strength in early 2004. A contact in New Jersey's homebuilding industry reports that persistent snow and ice buildups this past winter have crimped new home construction, but that demand for housing remains quite strong and that prices continue to advance.

Similarly, contacts in Manhattan's real estate industry report an increasingly tight market for co-ops and condos in January and February. One major firm reports an increasing incidence of overbids and multiple offers, and indicates that prices are up 5-10 percent from a year ago, on fairly strong volume. In addition, the inventory of homes on the market has reportedly dwindled to roughly half of what it was a year ago. Another contact notes that there has been a particular pickup at the high end of the market.

Manhattan's office market improved somewhat in January: Midtown's (Class A) vacancy rate eased from 10.6 percent to 10.0 percent and Lower Manhattan's rate retreated from 14.2 percent to 13.7 percent. Asking rents continue to recover, though they remain substantially lower than a year earlier. In addition, sales transactions of office buildings have reportedly been brisk, with properties selling for record high prices.

Other Business Activity
A New York City employment agency reports gradual but steady improvement in demand for office workers. This contact notes that clients that have been "dormant" for a few years are now looking to hire. In particular, hiring has picked up further in the city's key financial sector, though activity remains far short of the late 1990s pace.

Surveys of manufacturers and purchasing managers point to continued strong improvement in business conditions. Our early-February survey of New York State manufacturers shows widespread increases in new orders, employment, and the average workweek. It also points to increased price pressures--a growing proportion of manufacturers report that input prices have risen and are expected to rise further in the months ahead. Similarly, purchasing managers in both the New York City and Buffalo areas report broad improvement in manufacturing-sector conditions; input prices are reported to have accelerated in the Buffalo area but remained stable in the New York area.

Manhattan hotels report that, while January is typically a slow month, business remained relatively strong. With occupancy rates about 4 percentage points above a year earlier, and room rates up marginally, total revenue was more than 7 percent ahead of last year--except for a year after the 9/11 terrorist attacks, this is the strongest year-over-year gain since 2000.

Financial Developments
Small to medium-sized district banks once again report little change in demand for commercial loans, but weaker demand for household loans: 40 percent of bankers report lower demand for consumer loans, while more than 60 percent note decreased demand for home mortgages (though not necessarily for new purchases). Overall, more than two-thirds of bankers report declines in refinancing activity, while virtually none reports an increase.

Credit standards were mostly unchanged: no bankers reported tightening standards and only one reported eased standards. Interest rates dropped in all loan categories, led by consumer loans. However, average deposit rates were higher overall--increases were reported by 24 percent of bankers, with only 7 percent reporting decreases. Finally, delinquency rates decreased for all categories of loans except consumer loans, which were unchanged.

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Last update: March 3, 2004