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Federal Reserve Districts

Second District--New York

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Second District economic activity appears to have accelerated since the last report, while price pressures are little changed. Labor markets have apparently strengthened in a number of sectors, including manufacturing. Manufacturers more generally report increasingly brisk growth in activity and little change in price pressures since the last report. Retailers indicate that sales were on or above plan in October and early November, with prices little changed. Tourism activity showed signs of strengthening. Two regional consumer surveys showed confidence rising sharply in October.

Housing markets remain mixed: New York City's rental market has tightened further, and there has been some pickup in co-op and condo sales, stemming the rise in the inventory of unsold units. In contrast, northern New Jersey's housing sector remains sluggish. Permits to build single-family homes fell sharply in the third quarter, but multi-family construction permits remained strong. Office markets in and around New York City generally tightened in October, with Manhattan Class A rents jumping to record highs. Finally, bankers report some weakening in loan demand in the household sector but little change in the commercial sector; they also note little change in credit standards and delinquency rates.

Consumer Spending
Retailers report that sales were on or above plan in October and early November, while merchandise prices were steady. Retail contacts generally indicate sluggish sales of furniture and other home-related goods, but fairly strong sales in other categories. Retail contacts continue to characterize current inventory levels as favorable. Looking ahead to the holiday shopping season, retailers generally expect same-store sales gains to range from 2-5%. Contacts also report that they expect to hire about the same number of holiday workers as in 2005. Surveys of consumers in the region show confidence rising sharply in October: Siena College's survey of New York State residents shows consumer confidence jumping to a 7-month high, while the Conference Board's survey of Middle Atlantic (New York, New Jersey and Pennsylvania) shows confidence at a 6-year high.

Tourism activity has shown increasing strength. Broadway theaters report that both attendance and total revenues rose steadily in October and early November, following a dip in September; in recent weeks, attendance has been running roughly 4 percent higher than a year earlier, while revenue is up nearly 12 percent. Manhattan's hotel occupancy rate remained close to 90 percent in October, which is little changed from both September and a year earlier; however, rising room rates pushed total revenue nearly 15 percent above comparable 2005 levels in October--the largest 12-month gain recorded this year. Hotels in the Buffalo-Niagara Falls area report rising occupancy rates over the past year.

Construction and Real Estate
Both residential construction activity and housing markets continue to be mixed, with New York City generally out-performing the rest of the District. Permits to build single-family homes in New York and New Jersey weakened noticeably in the third quarter, falling more than 25 percent from a year earlier, whereas multi-family permits remained strong, rising 7 percent from 2005 levels, led by New York City. A contact in New Jersey's homebuilding industry reports that both demand and traffic are weak, and that steep discounts are being offered to sell completed or almost completed units; selling prices are now said to be down from a year ago. A contact also notes that home re-modelers have seen a marked slowdown in business, except at the high end.

In contrast, New York City's housing market has remained fairly robust: a major Manhattan appraisal firm reports that sales activity picked up in October and that selling prices remain moderately higher than a year ago. The inventory of unsold homes, though still fairly high, is reported to have leveled off in recent months, but there is a substantial volume of new construction in progress, much of which will flow onto the market during 2007. A major real estate firm reports that Manhattan's rental market has continued to tighten, in particular noting a shortage of large units, which has pushed up rents.

Commercial real estate markets across the New York City area showed further signs of tightening in the third quarter. In Manhattan, office vacancy rates fell to new cyclical lows at the end of October, while asking rents on Class A properties surged to their highest levels on record. Suburban markets were more mixed, but still generally strong on balance: office vacancy rates edged down to cyclical lows in Fairfield and Westchester Counties and were virtually unchanged in northern New Jersey; Long Island's vacancy rate, though still fairly low, climbed to its highest level since a year ago.

Other Business Activity
A major employment agency reports that the labor market has grown increasingly tight, and that recruiters are using referral bonuses more aggressively to find skilled workers; moreover, firms are reported to be making increasingly widespread conversions from temporary to permanent positions. Hiring is reported to be particularly strong in the legal services and banking industries; a rebound in demand is also noted for workers in public relations and advertising. A contact at a financial industry association indicates that business activity, revenues and profits have strengthened in recent months, and that hiring activity has been solid. Wall Street bonus payments (largely paid out in January) are expected to be up more than 15 percent from the prior year, following a comparable gain in 2005-06.

Various regional business surveys point to strengthening conditions in October and early November. Purchasing managers in the Rochester and Buffalo areas report increasingly widespread improvement in business conditions in October, and steady to lower price pressures; the Rochester-area survey also indicates a pickup in hiring. More recently our November Empire State Manufacturing Survey points to some acceleration in activity, a pickup in hiring activity, and some tightening in price pressures after some easing-off in recent months. Contacts in non-manufacturing industries also report expanding employment at their firms and anticipate widespread increases in wages over the next six months.

Financial Developments
Small to medium-sized banks in the 2nd District report little change in loan demand from the commercial sector but some (largely seasonal) weakening in demand for consumer loans and especially residential mortgages: more than one in two respondents report declining demand for home mortgage loans, while fewer than one in seven report increasing demand. Bankers report some tightening in credit standards on commercial mortgages but little or no change in other segments. Bankers indicate a decrease in loan rates for residential mortgages but little change in other loan categories. Fairly widespread increases are again reported for average deposit rates. Finally, delinquency rates remained steady in the household sector but were up slightly for commercial mortgages.

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Last update: November 29, 2006