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Federal Reserve Districts

Second District--New York

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The Second District's economy continued to expand at a moderate pace during the final weeks of 2005, although there were some further signs of softness in the housing sector. New York City's three-day transit strike appears to have had only limited, localized impacts in a few areas. There is no indication of a significant acceleration in consumer prices, though manufacturers report continued widespread price pressures. The labor market has shown further signs of strengthening, for both office workers and factory workers. Conditions in the financial sector remained strong in late 2005, and bonus payments are expected to be up 15-20 percent from last year. Retailers report mixed, but generally favorable sales results. The residential real estate market has shown further signs of cooling, but commercial real estate has strengthened. Finally, bankers report some further weakening in demand for consumer loans and residential mortgages and increased delinquency rates in both those categories.

Consumer Spending
Retailers report that holiday season sales were on or close to plan, with particular strength noted in the final week of December and in early January. Stores in Manhattan report notable declines in sales during New York City's three-day transit strike, but retailers in the outer boroughs generally indicate little or no effect. Weekly surveys of New York retailers indicate that, for the state as a whole, sales were up 2-5 percent from a year earlier, with a similar gain during the week of the transit strike. Major retail chains report that same-store sales in this region ranged from a 2 percent decline to a 4 percent gain. Retail inventories were said to be at favorable levels at year end. A number of retail chains indicate that selling prices for comparable products were flat to down slightly from a year earlier, but again note a shift in the demand mix toward higher quality and higher priced products.

Tourism has remained strong since the last report. Manhattan hotels report brisk business in December, with the transit strike apparently having little net effect. Occupancy rates remained close to 85 percent in December and were little changed from a year earlier, and total revenues were up roughly 15 percent--even during the week of the transit strike. Broadway theaters report that both attendance and total revenues dipped noticeably during the week of the transit strike but bounced back strongly in the final week of December. For the month as a whole, attendance was down marginally from a year earlier but revenues were still up 10 percent--down from gains of over 20 percent in October and November.

Consumer confidence in the region ended 2005 on a strong note. Based on the Conference Board monthly survey of residents of the Middle Atlantic states (NY, NJ, PA), consumer confidence posted its third consecutive monthly gain in December, rising to a five month high.

Construction and Real Estate
The region's housing market showed further signs of weakening in the final weeks of 2005. New Jersey homebuilders report that home sales activity has slipped well below year-ago levels and that the inventory of homes on the market (mostly existing homes) has increased markedly. Also, builders are reported to be offering more free upgrades and concessions to buyers. Still, there is virtually no speculative building, and there continues to be a 6 to 9 month backlog for new homebuyers. A variety of building materials--pipes, gypsum, shingles, etc.--have increased noticeably in price, though lumber prices have reportedly been restrained by some easing in tariffs and trade restrictions. Also, while the market for construction workers remains tight, no significant wage pressures are reported. In New York State, the market for existing homes showed signs of cooling in November; unit sales slipped 7 percent from a year earlier, though the median selling price was still up roughly 20 percent. Manhattan's co-op and condo market has also shown some signs of softening since the last report. A major appraisal firm and a leading real estate firm both report that while selling prices continued to run well ahead of a year earlier in the fourth quarter, sales activity declined noticeably and the inventory of apartments rose further; most of the weakness in recent months has been in the market for larger (2-3 bedroom) apartments. Looking ahead to the first half of 2006, a number of industry contacts expect that upcoming Wall Street bonuses will buoy the high end of the market.

Commercial real estate markets across the New York City metropolitan area showed broad-based strengthening in the fourth quarter of 2005. Vacancy rates in northern New Jersey, lower Manhattan and midtown Manhattan fell by at least percentage point for the quarter and were down by roughly 2 points from the end of 2004. Vacancy rates in Long Island and the lower Hudson Valley were down marginally. Asking rents were up moderately across most of the region. Industrial markets were mixed in the fourth quarter: Long Island's industrial vacancy rate fell to a five-year low, but rates in Westchester and the lower Hudson Valley rose modestly, while northern New Jersey's rate was little changed.

Other Business Activity
A major New York City employment agency, specializing in office jobs, reports increasingly tight labor market conditions, with the number of quality jobs far exceeding the number of quality candidates. This contact also notes some acceleration in wages; most of the recruiting activity continues to be in the financial and legal services industries. Conditions in the securities industry remained fairly strong in the fourth quarter, according to an industry expert, though not quite as robust as in the third quarter. Still, bonuses are expected to be up 15 to 20 percent from last year; an even larger than usual share of bonus payments will reportedly be made during 2006:Q1, rather than 2005:Q4, due to the year-end expiration of a state tax surcharge. In contrast, some consolidation is reported in the hedge fund industry, though the effect on overall finance-sector employment is seen as minimal.

Activity in goods production and distribution has also shown signs of expanding. A major shipping firm reports a steady and substantial increase in the volume of merchandise exports shipped through the northern New Jersey ports in recent months. This contact notes that 2005 was also a very strong year for incoming shipments at the port. New York State manufacturers report favorable business conditions at the end of 2005 and express fairly widespread optimism about prospects for the first half of 2006, as well as some increase in hiring plans. Manufacturers also note ongoing escalation in input prices, and a growing proportion report that they are hiking their selling prices.

Financial Developments
Small- to medium-sized banks in the district report weakening demand for consumer loans and particularly residential mortgages; in the latter category, 52 percent of bankers report decreased demand and only 7 percent report increased demand. Tighter credit standards are reported for both commercial mortgages and commercial and industrial loans, while standards for consumer loans and residential mortgages remained unchanged. Higher loan rates are indicated across all categories, but most notably on residential mortgages, where 72 percent of respondents report higher rates. Comparably widespread increases are reported on average deposit rates. Finally, delinquency rates rose moderately on consumer loans and residential mortgages but remained unchanged among commercial borrowers.

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Last update: January 18, 2006