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Federal Reserve Districts

Second District - New York

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Full report

Economic growth in the Second District has slowed from the brisk pace noted in the last report, while prices continue to be stable. Consumer spending appears to have slowed considerably since the last report, with retailers reporting that sales were generally below plan in March and April; some of this weakness was attributed to unseasonably cold weather. Commercial real estate markets continued to tighten throughout the New York City area in the first quarter, though rental rates have risen only modestly. Existing home sales slowed in February and March; however, new construction activity continued to edge up, and contacts in New Jersey report a boom in home remodeling activity. Regional purchasing managers' reports suggest some weakening in the manufacturing sector and generally stable prices in March. Finally, local banks report a pickup in loan demand and some improvement in delinquency rates.

Consumer Spending
Major retailers in the region report that business has slowed since the last report, with a number of contacts indicating that sales were below plan in March and especially April. Compared to a year ago, same-store sales ranged from a 1 percent decline to a 5 percent gain for the two months combined. (Monthly sales patterns were distorted because Easter Sunday fell in late March rather than April.) Moreover, most of the retailers surveyed mentioned that sales slowed noticeably in mid- to late-April; some of the recent softness was attributed to unseasonably cool weather. Apparel generally continued to out-perform other categories. Most contacts note ongoing weakness in home appliances and electronics. However, a large retailer of building materials cites robust sales.

While most retailers continue to report that inventories are on plan, a few now say stocks are on the high side. Both retail selling prices and merchandise costs remain steady. There has been no evident increase in retail wage pressures, although one contact noted increased difficulty in finding qualified managers.

Construction and Real Estate
New York State's existing home market slowed in the first quarter, with unit sales up just 1 percent from a year earlier and prices up 3 percent. Builders report that single-family construction activity is still at a low level but improving in New Jersey and down-state New York. Moreover, remodeling activity (major additions and alterations to existing homes) is reportedly booming in New Jersey; one housing industry specialist estimates that total spending on remodeling is on the verge of surpassing new construction spending in the state. This trend, as well as New York City's wave of commercial-to-residential conversions, is attributed to an old housing stock, a dearth of available land, and regulatory constraints on construction. As a result, traditional measures, such as housing starts and permits, may be understating residential construction activity in the District.

Commercial real estate markets strengthened further in the first quarter. Office vacancy rates continued to fall across most of the New York City area. Midtown Manhattan's rate fell from 13.2 percent in late January to 12.3 percent (a 10-year low) at the end of March, with leasing activity described as "torrid". Downtown's rate fell from 22.4 percent to 21.1 percent. Similarly, vacancy rates in Westchester and Fairfield counties and northern New Jersey fell to new cyclical lows in the first quarter, while Long Island's rate held steady at a 9-year low. Over the past year, rental rates on Class A properties have increased by 5 percent or less throughout the New York City metropolitan area.

Other Business Activity
Regional purchasing managers reports suggest some slowing in the region's manufacturing sector. Only Rochester purchasers report improved business conditions in March. Manufacturing firms in upstate New York report an increase in labor turnover and upward pressure on wages. However, across the District, purchasing managers report that prices were generally stable.

The region's labor markets generally tightened in early 1997, despite recent announced cutbacks by large employers, such as Bausch and Lomb and AT&T. In the first quarter, unemployment insurance claims were down about 10 percent from a year ago in both New Jersey and New York State. New Jersey's unemployment rate fell to a cyclical low of 5.5 percent in March, after hovering above 6 percent throughout 1996. However, New York's rate held steady at 6.3 percent, the same as last year's average. Despite fairly strong job growth, New York City's unemployment rate climbed to a three-year high of 9.7 percent in March, due to a flood of new labor force entrants (the city's labor force has expanded at a 3 percent annual pace since mid-1995).

Financial Developments
According to a survey of senior loan officers at small and medium sized banks in the Second District, loan demand picked up in March and April. Increases were concentrated in the residential mortgage segment, with demand up at nearly 43 percent of the banks surveyed. Demand for consumer loans and nonresidential mortgages also increased at a substantial share of banks. On the supply side, most banks report no change in credit standards, while a smaller proportion than in the last survey report increased willingness to lend.

Interest rates increased on all categories of loans´┐Żespecially for residential mortgages, where over 80 percent of banks surveyed reported higher rates. Average deposit rates also rose. Delinquency rates on consumer loans and residential mortgages, which had been on the rise, declined slightly in the latest survey; delinquency rates continued to abate for commercial and industrial loans and held steady for nonresidential mortgages.

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Last update: May 7, 1997