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Federal Reserve Districts

Second District--New York

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Full report

The Second District has shown signs of strengthening since the last report, with few signs of increased price pressures. Labor markets have been steady to stronger, according to firms in manufacturing and most service industries. Manufacturers report steady growth in activity since the last report, along with less widespread increases in input prices. Retailers indicate that sales picked up in September, while prices remained flat. Tourism activity remained robust in New York City, with both hotels and Broadway theaters reporting double-digit increases in prices over the past year. Consumer confidence in the region rose to a five-month high in September.

Housing markets have been mixed since the last report: New York City's co-op and condo market has remained fairly strong, and the rental market has tightened further; however, housing markets in New Jersey and upstate New York show continued weakness. Commercial real estate markets across the New York City metro area generally strengthened in the third quarter, for both office and industrial space. Finally, bankers again report weakening in loan demand--particularly for home mortgages--somewhat tighter credit standards in the commercial sector, and little change in delinquency rates.

Consumer Spending
Retailers report that sales were on or above plan in September, and noticeably stronger than in August. Same-store sales gains ranged from 2 percent to more than 10 percent compared with a year ago. Retail contacts note that premium merchandise lines have continued to sell relatively well. Furniture and other home goods continued to lag, while sales of apparel, accessories and jewelry have been robust. Retailers report that selling prices remain steady and that inventories are at favorable levels. Looking ahead to the upcoming holiday season, retailers generally expect same-store sales to be up in the range of 2 to 5 percent from comparable 2005 levels. Contacts report that they plan to hire about the same number of holiday-season workers as in 2005, though most of the increased staffing capacity is again expected to come from extending hours of current part-time workers.

Tourism activity has been fairly steady at a high level since the last report. The occupancy rate at Manhattan hotels edged up to 87 percent in August, slightly higher than a year earlier, while room rates climbed more than 10 percent from comparable 2005 levels. Broadway theaters report mixed results for September: attendance was down roughly 3 percent from a year earlier, but total revenue jumped 11 percent, reflecting sharply higher admission prices. Based on the Conference Board's survey of Middle Atlantic (New York, New Jersey and Pennsylvania) residents, consumer confidence, which had drifted down in July and August, jumped to a 5-month high in September.

Construction and Real Estate
The region's housing market has shown mixed results since the last report, with further weakening noted in northern New Jersey and upstate New York, but signs of underlying strength reported in New York City. New Jersey homebuilders report that the housing market has continued to slacken since the last report: both buyer traffic and sales activity have declined substantially, the inventory of homes on the market has risen substantially, and prices have continued to slip. One New Jersey contact also notes pronounced weakening in the sub-contracting business, attributing much of the recent weakening in home remodeling to reduced home equity. Similarly, real estate firms in western New York State report that both sales and prices were down moderately in August, compared with a year earlier.

In contrast, Manhattan's co-op and condo market showed signs of resilience in the third quarter. Based on quarterly data from a leading appraisal firm, both the number of apartments sold and the price per square foot were up roughly 6 percent from a year earlier, despite a sharply higher inventory of available units. Manhattan's rental market has tightened further since the last report, particularly at the high end, reflecting a dearth of large rental units on the market at the end of the third quarter; a major real estate firm estimates that rents on studio and one bedroom apartments are up 5 to 10 percent from a year earlier, while rents on larger units are up 10 to 15 percent.

Commercial real estate markets across the New York City area showed further signs of tightening in the third quarter. In Manhattan, office vacancy rates continued to edge down, reaching their lowest levels since early 2001, while asking rents accelerated, rising more than 10 percent from a year earlier. One industry contact notes that large blocks of space have become nearly impossible to find in Midtown Manhattan. In the nearby suburban markets, vacancy rates were also down from a year earlier and at or near cyclical lows, though rents increased more moderately. The industrial market has been mixed but, on balance, stronger in the third quarter: vacancy rates declined to cyclical lows in Long Island, Westchester and Fairfield Counties, but continued to rise in northern New Jersey.

Other Business Activity
Manufacturing contacts report steady improvement in business conditions since the last report, along with further abatement in price pressures. Manufacturers also indicate increased employment, along with higher levels of capital spending in the months ahead. Surveys of purchasing managers in the Buffalo, Rochester and New York City areas also indicate some lessening in price pressures in September, but signal some slowing in manufacturing activity. Outside of manufacturing, contacts in most industries report little change in overall business conditions, along with steady or rising employment levels; however, contacts in the publishing industry note some weakening in employment.

Financial Developments
Contacts at small to medium-sized banks in the 2nd District report decreased demand for all types of loans since the last report--particularly residential mortgages, for which more than two-thirds of bankers reported decreases. Respondents also continue to report widespread declines in refinancing activity. Bankers report tightened credit standards for commercial loans and mortgages, while standards remained unchanged for the consumer and residential mortgage categories. Bankers report little change in loan rates overall, with somewhat higher rates on consumer credit and commercial and industrial loans but somewhat lower rates on home mortgages. Delinquency rates are again reported to be little changed across all categories.

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Last update: October 12, 2006