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Federal Reserve Districts

Second District--New York

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The Second District's economy has deteriorated substantially since the last report. Both manufacturers and other firms report widespread declines in business activity and employment levels, and a growing number plan to curtail capital spending in the months ahead. Firms in a broad array of industries report that both their input costs and selling prices have leveled off, after rising through the third quarter. Retailers report weak sales for October and early November, though inventories are not said to be too out of line; retailers say that prices are flat to lower. An annual survey of consumers in the region suggests that holiday season spending will be considerably lower than in 2007. Tourism activity in New York City is reported to have declined sharply in recent weeks. Both residential and commercial real estate markets have softened substantially since the last report, most notably in Manhattan. Finally, bankers report widespread weakening in loan demand across all segments, substantial tightening in credit standards, and higher delinquency rates on all types of loans.

Consumer Spending
Retail sales were said to be well below plan in October and early November, with same-store sales running 5 to 10 percent lower than a year earlier. One large chain notes that its sales performance might have been weaker still, if not for unseasonably cold weather in early November spurring sales of outerwear and winter apparel. The most pronounced weakening has been in New York City, which had been out-performing the rest of the region until recently. In contrast, two retail contacts in the Buffalo-Niagara region report that sales have remained fairly brisk through October. Despite the overall weakness in sales, retail inventories are not reported to be substantially above desired levels. Retail contacts report that this season is shaping up to be more promotional than last year's, with steeper markdowns and effective prices generally lower than in 2007. Looking ahead to the upcoming holiday season, retailers anticipate year-over-year percentage declines in same-store sales ranging up to the low double digits. Based on an annual supplementary question on the Conference Board's November consumer confidence survey, consumers in the Middle Atlantic region plan to spend roughly 10 percent less on holiday-season gifts than in last November's survey.

Tourism activity in New York City has weakened sharply since the last report. Overall revenues of Manhattan hotels have plummeted in recent weeks: after running about 10 percent ahead of comparable 2007 levels in the third quarter, revenues are reported to be down more than 10 percent from a year earlier in October and are estimated to be down more than 20 percent in early November. The recent drop-off reflects declines in both occupancy rates and room rates. Also, Broadway theaters report that business slowed in mid-October and has remained weak since. Comparisons with 2007 are not relevant, due to a strike last November, but both attendance and revenues have been sluggish, running more than 10 percent lower than two years ago. Average ticket prices have been relatively steady.

Construction and Real Estate
Housing markets in the District have deteriorated further since the last report. A major residential appraisal firm reports substantial deterioration in New York City's housing market over the past two months: prices of Manhattan co-ops and condos are reported to have fallen by 15 to 20 percent since mid-summer, though it is hard to get a clear handle on prices due to thin volume--much of the recent activity is reportedly from desperate sellers. Transaction activity has dropped off noticeably, and there has been a large increase in the number of listings. Some buyers that had signed contracts for units under construction earlier this year are having trouble getting financing at the contract price now that market values have dropped. Many of those having difficulty selling their apartments are putting them up for rent, boosting the number of rental listings substantially--particularly in doorman buildings. Average asking rents are reported to be down 1 to 4 percent from a year earlier.

New Jersey's housing market has also deteriorated substantially since the last report. A building industry expert describes buyer traffic at new developments as almost non-existent and notes that larger construction firms are backing out of new developments and cutting jobs, while a number of smaller firms are contemplating either moving into the rehab segment of the market or going out of business. Multi-family development, which had been holding up somewhat through the summer, has ground to a halt more recently. A real estate contact in northern New Jersey indicates that selling prices for existing homes are down 20 to 25 percent from a year ago, but that the number of transactions has held up, as sellers are increasingly negotiable; many potential sellers have taken their homes off the market, keeping the inventory of unsold homes relatively low. The low end of northern New Jersey's housing market is said to be holding up fairly well, whereas the market for higher-priced homes (over $400K) is described as moribund. In contrast, real estate contacts in western New York State report that prices have continued to increase modestly through October, though sales volume has tapered off moderately.

Commercial real estate markets in the New York City area have weakened noticeably. Manhattan's office vacancy rate continued to climb in October, rising more than � point, led by Midtown. Leasing activity has slowed markedly, and many tenants are requesting short-term renewals, with landlords generally willing to oblige. Actual rents have continued to decline, while asking rents, which had remained slightly above 2007 levels through the third quarter, have now turned down as well. There has been a particularly sharp increase in the amount of available sub-lease space--largely from financial firms. Office markets on the outskirts of New York City are also reported to be softening, but not as dramatically as Manhattan's.

Other Business Activity
There have been widespread signs of weakening in the labor market. A major New York City employment agency, specializing in office jobs, reports that there are now very few job openings, and a large and growing supply of job applicants. Many of the recent job candidates are people let go from entry level management jobs. Hiring by large investment banks remains nearly non-existent; more recently, legal firms, hedge funds and private equity firms have cut back dramatically on hiring.

More generally, paralleling the weakness reported in our recently-released survey of New York State manufacturers, non-manufacturing firms in the District report widespread deterioration in employment, as well as in business activity. Non-manufacturing firms also anticipate further declines in both employment and business activity in the months ahead, and a growing number plan to reduce capital spending. A growing proportion of firms--both manufacturers and other firms--report tightening credit conditions over the past three months. Firms across a wide range of industries report that their selling prices have leveled off, while their prices paid have decelerated.

Financial Developments
Bankers report weakening demand for loans in all categories--most noticeably in the residential mortgage segment, where 68 percent of bankers report lower rates and 6 percent reported higher rates. For all loan categories, respondents indicate widespread tightening of credit standards. The percentage of bankers reporting higher standards ranged from 45 percent in the residential mortgage category to 54 percent in the commercial and industrial loan category; none of the bankers surveyed indicates an easing of credit standards. Respondents note an increase in the spreads of loan rates over cost of funds for both commercial loan categories but no change in spreads for consumer loans and residential mortgages. Respondents indicate no change in the average deposit rate. Finally, bankers report fairly widespread increases in delinquency rates across all loan categories.

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Last update: December 3, 2008