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Federal Reserve Districts

Second District--New York

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The Second District's economy has continued to expand since the last report, though at a somewhat more subdued pace than in recent months. The labor market has remained strong in October and early November. Manufacturers report ongoing expansion in activity in early November, with increased price pressures. In contrast, non-manufacturers report some weakening. But respondents in both sectors express less optimism about the future business outlook than in recent months. Retailers show mixed sales results for October and some have scaled back expectations for the holiday shopping season. Tourism activity in New York City is said to have remained strong, despite a mid-November strike shutting most Broadway theaters. Housing markets remain mixed, with Manhattan's co-op and condo market showing continued resilience but single-family housing markets across New York State increasingly soft. Manhattan's office market, though still fairly tight, eased off a bit in October. Finally, bankers report weakening loan demand in all categories but particularly for home mortgages; they also report tightened credit standards on commercial loans and mortgages, and moderate increases in delinquency rates across all categories, most notably on residential mortgages.

Consumer Spending
Retailers report mixed sales results for October, with unseasonably mild weather hampering purchases of winter clothing, though some contacts express concern that the weakness is more than just weather-related. A trade survey conducted in October indicates that New York State retailers, on balance, expect holiday season sales to be higher than in 2006. However, two major chains have scaled back their expectations for the holiday shopping season and now anticipate that sales will be flat to down. Stores in New York City generally continued to out-perform those elsewhere in the region, which some contacts attribute to tourism. Sales of home goods, though still generally described as soft, did show some signs of picking up since the last report. Retail inventories were generally described to be in good shape, though one large chain reports some overhang; selling prices were characterized as stable, though promotions have been somewhat steeper than last year; more discounting is anticipated in advance of and during the upcoming holiday season.

Tourism activity in New York City has been steady at a high level, despite a Broadway theater strike. Manhattan hotels report that occupancy rates exceeded 90 percent in October, little changed from last year, while room rates are reported to be up by 16 percent. Broadway theaters report that attendance and revenues were at high levels in October and early November but down a bit from a year ago. A strike starting November 10 shut most Broadway theaters but there is, thus far, no sign of deleterious effects on tourism overall. Consumer confidence has waned since the last report. The Conference Board's survey of Middle Atlantic residents indicates a pullback in confidence in October, reversing an increase in September. Similarly, Siena College's survey of New York State residents shows confidence falling in October, led by a particularly steep decline in upstate New York.

Construction and Real Estate
New York City's commercial real estate market continued to be fairly tight in October, though less so than in recent months. Manhattan's office vacancy rate, which had been steady near a cyclical low at the end of September, rose fairly sharply in October--from 6.8 percent to 7.6 percent--with most of the increase among non-prime, as opposed to Class A, properties. Asking rents, however, continued to rise, though at a slower pace; still rents are up roughly 30 percent from the same time last year.

Manhattan's co-op and condo market showed continued resilience in October and early November, with prices continuing to run modestly above year-ago levels and sales volume picking up moderately compared with the third quarter. The inventory of units on the market is reported to be down by roughly a third from comparable 2006 levels. Long Island's market is reported to remain somewhat sluggish, though demand remains strong in the pricier Hamptons area. Reports from Realtors across New York State indicate continued weakness in the market for single-family homes, with prices down 7 percent from a year ago and unit sales down nearly 20 percent.

Other Business Activity
A major New York City employment agency, reports that hiring activity has picked up somewhat in early November--contrary to typical seasonal slowing--following some pullback in September and October. Demand for workers remains fairly strong in the legal industry; financial-industry hiring has picked up somewhat as well, though from smaller firms, not the major institutions. Scattered layoffs on Wall Street have are said to have created only a slight increase in the supply of available workers.

New York State manufacturers report steady improvement in business conditions in early November; however, contacts express considerably less optimism about the six month outlook than in recent months. Firms report increasingly widespread escalation in both current and expected input prices in early November. Overall, a growing proportion of non-manufacturing firms in the District report some weakening in general business activity as of early November, and express a good deal less optimism about the general outlook; however, considerably more firms continue to report rising than falling employment at their firms, and the same is true with respect to expected changes in the next six months.

Financial Developments
Small- to medium-sized banks report weakening demand for all types of loans, but most widely in the residential mortgage category, where more than half of those contacted report declines in demand. Bankers also report ongoing decreases in refinancing activity. Respondents indicate tightening credit standards, most notably in the commercial mortgage category. No bankers reported eased standards in any loan category. For all types of loans, however, the majority of respondents (two-thirds or more) report no change in standards. Bankers report a decline in the spreads of loan rates over cost of funds for all types of loans--again, most noticeably in the commercial mortgage category. Reports on delinquencies were split amongst the different loan types. Bankers indicated a slight increase in delinquencies, on balance, for consumer and commercial and industrial loans, and a somewhat more pronounced rise in delinquencies in both the commercial and residential mortgage categories.

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Last update: November 28, 2007