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Federal Reserve Districts

Second District--New York

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The Second District's economy has weakened noticeably since the last report.  In general, contacts in both the manufacturing and non-manufacturing sectors report broad-based deterioration in general business conditions in recent weeks and most do not anticipate improvement in the months ahead.  In particular, contacts report widespread softening in the labor market, especially in New York City.  Retail sales were sluggish in January, though not down as sharply as in December, while consumer confidence remained near record lows.  Tourism activity in New York City weakened substantially in January and in early February.  Both residential and commercial real estate markets deteriorated since the last report, though housing markets in parts of upstate New York appeared relatively stable.  Finally, bankers report that refinancing stabilized demand for home mortgages but that demand for other categories of loans declined further; they also report further tightening in credit standards and higher delinquency rates--especially on loans to the household sector.

Consumer Spending
Retail sales were sluggish in January, though year-on-year declines were less pronounced than in December.  New York State reports that sales tax revenues for the month were down modestly from a year ago, following a steep decline in December.  Retailers in western New York report that business from Canadian shoppers has weakened in recent months, partly attributed to a pullback in the Canadian dollar.  Consumer surveys show confidence remaining near record lows.  The Conference Board reports that consumer confidence among residents of the Middle Atlantic states (NY, NJ, PA) edged up from a record low in January. Similarly, Siena College's monthly survey of New York State residents showed confidence edging up for the second consecutive month, after falling to a record low in November.   

Tourism activity in New York City has slowed substantially since the last report.  Manhattan hotels report marked weakening in business thus far in 2009, following a moderate pickup in December.  Revenues per room are reported to have fallen by a record 30 percent from a year earlier in January and appear to be running nearly 40 percent lower in February.  Occupancy tumbled roughly 15 percent from a year earlier in January, while average room rates fell 15 percent.  While much of the weakness reflects softening demand, an industry contact notes that about half the decline in occupancy rates is due to new hotels opening; the total number of hotel rooms in Manhattan is expected to increase by roughly 7,000 (10 percent) in 2009, or more than triple the net increase in 2008.  Broadway theaters report substantial slowing in both revenues and attendance since the last report, in part reflecting the closing of an unusually large number of Broadway shows (13) in January.  In the first half of February, revenues were down nearly 20 percent from a year ago, while attendance fell by close to 25 percent; this compares with single-digit percentage declines in January and slight increases in December.

Construction and Real Estate
Housing markets in the District have been mixed but generally weak since the last report.  Manhattan's residential rental market continued to soften in January, with asking rents reported to be down 3 to 9 percent from a year earlier; in addition, a growing number of landlords are offering one or more months of free rent and are paying any rental fees.  Perhaps as a result, rental vacancy rates, which had been rising steadily in the second half of 2008, edged down in January.  A major appraisal firm reports that Manhattan co-op and condo prices have continued to decline since the beginning of the year and are down by an estimated 20 to 25 percent from last summer; the number of transactions thus far in 2009 has been running 60 to 65 percent lower than a year ago.  A contact reports seeing very few transactions at the high end of the market in Manhattan, and that most of them seem to be all-cash deals.  Inventories are rising seasonally from an already-high level and that backlog is said to be accompanied by a large and growing amount of "shadow" inventory in new developments.  

The market for single-family homes in and around New York City has also weakened, though market conditions were reported to be more stable in upstate New York.  Contacts in northern New Jersey report little or no discretionary activity in the resale market--almost all transactions are either foreclosed properties or distress sales by owners that need to move.  In this environment, market prices are difficult to gauge, but an industry expert estimates that they are down 15 to 20 percent from the 2007 peak, with steeper declines at the high end.  Separately, a real estate industry contact notes a rising number of "short sales," for which the mortgage holder agrees to accept less than the full principal balance upon the sale.

Commercial real estate markets in the District weakened noticeably in January.  An industry contact notes that New Jersey's office and retail markets have deteriorated substantially in recent months.  Manhattan's office market has also slackened markedly: the vacancy rate jumped nearly a full point in January, to 11.3 percent--up from 7.6 percent a year ago.  Most of the increase was concentrated in Midtown, particularly in the financial sector.  Asking rents for Class A space fell 2 percent in January and are down more than 13 percent from a year ago, though an industry contact notes that this understates the weakness because rents are increasingly negotiable and landlords are offering more concessions.  There has been virtually no activity in Manhattan's office sales market.  New York City's retail rental market has also softened, except at the low end (groceries, drug stores, etc.).  Demand for retail space has contracted substantially, particularly in the banking sector--until recently, banks had been substantial users of space.  Also, the bankruptcy of a major electronics retail chain, as well as of other retailers, has added a good deal of available space, and landlords are concerned about the outlook for other retail chains. 

Other Business Activity
Labor market conditions have deteriorated markedly.  Both manufacturing and non-manufacturing firms in the District report increasingly widespread cutbacks in their employment levels in February, and a sizable proportion expect further retrenchment in the next six months.  Separately, a major New York City employment agency reports that hiring activity has virtually ground to a halt since the beginning of the year, during what is usually a busy season.  Large financial firms, as well as legal firms, have all but stopped hiring; some demand from smaller firms has appeared sporadically, but they are skittish about filling job openings unless essential. Weakness in the labor market is said to be reminiscent of 2002, but more disconcerting, because this time it is seen to be more broad-based and more structural. 

In assessing overall business conditions, manufacturers and other firms report widespread deterioration in general business conditions in February and flat to declining selling prices.  Moreover, a large majority of respondents do not anticipate any noticeable improvement in conditions in the next six months.  New York State reports a sharp decline in personal income tax revenues in January, compared with a year earlier, evidently reflecting sharp declines in bonus income in the financial sector.

A trucking-industry contact reports that shipping volume fell sharply in December, dropping roughly 15 percent from a year earlier; this followed a modest uptick in November, when the 12-month decline was under 10 percent.  With the ongoing weakness in trucking, and given that the first quarter is typically a slow season anyway, layoffs have been widespread, and a glut of used trucks (especially tractor-trailers) for sale has developed.  Truckers have seen some relief from diesel prices, which have fallen even more precipitously than regular gas prices recently. 

Financial Developments
Small to medium-sized banks report weakening demand for loans in all categories except residential mortgages, for which demand was little changed.  The percentage of bankers reporting weakened demand ranged from 39 percent in the consumer loan category to 45 percent in the commercial and industrial loan category.  Bankers reported an increase in the refinancing rate; 42 percent of bankers reported an increase while 8 percent reported a decrease.  For all loan categories, respondents indicate tightening credit standards--most notably in the residential mortgage category.  No banker reported an easing of credit standards for any loan category.  Respondents note a decrease in the spreads of loan rates over cost of funds for the residential mortgage category but increased spreads for the commercial mortgage segment.  Spreads were generally steady for all other loan categories.  Contacts indicate a decrease in the average deposit rate.  Finally, bankers report increased delinquency rates across the board, but most notably for consumer loans.

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Last update: March 4, 2009