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Federal Reserve Districts

Second District - New York

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Most reports in recent weeks show the Second District economy maintaining a steady pace of growth. Major retailers report that sales were mixed but, on balance, below plan in late October and early November, though some note a modest pickup by the middle of the month; retail selling prices, merchandise costs and wages remain flat. The housing market maintained a positive tone across most of region. The New York City area's increasingly tight commercial real estate market has pushed up office rents, while a shortage of hotel space in Manhattan has caused a sharp rise in room rates. Regional purchasing managers' reports indicate steady growth in manufacturing activity but little in the way of price pressures. Finally, local banks report some softening in loan demand�especially for home mortgages�and falling delinquency rates in all categories.

Consumer Spending
Major retailers offer a mixed assessment of sales performance during late October and early November. At major discounters, same-store sales were up 6-8 percent from a year earlier, and above plan. However, traditional department stores report that comparable-store sales were little changed from a year ago and generally below plan, though most contacts note some improvement in mid-November. They also emphasize that sales have improved from the dismal levels recorded in September and early October. All contacts say that inventories are in good shape�even those with sluggish sales. Retail selling prices, merchandise costs and wages are all reported to be flat. Most contacts indicate that finding and retaining holiday-season workers has been more difficult than a year ago; one contact notes that rising wages have been fully offset by productivity gains; the rest have not seen any measurable rise in wages. However, some smaller retailers in New Jersey are offering larger in-store discounts and bonuses as incentives.

Recent surveys conducted by the Conference Board suggest a mixed outlook for holiday spending. Consumer confidence in the Middle Atlantic states (New York, New Jersey, and Pennsylvania) rose to a cyclical high in October; it retreated modestly in November but is still sharply higher than a year ago. However, in response to a supplementary question posed every November, consumers in the region say they are budgeting less for holiday spending, on average, than last year.

Construction and Real Estate
The region's housing market remains fairly strong. New Jersey homebuilders report that new home construction remains at a low level, due largely to supply constraints. Due to the high cost of land, new construction is increasingly restricted to the high end of the price range, pushing up the median price of a new home. Contacts report that the resale market continues to gain momentum, with prices appreciating at a 6-7 percent annual rate, led by the high end. New York State realtors report that existing-home sales picked up slightly in September, running 5-6 percent ahead of a year ago; home prices continued to run 4-5 percent ahead of a year ago, with modest declines upstate offsetting rapid appreciation in the New York City area.

Office markets in New York City and northern New Jersey continue to tighten, as a shortage of available space appears to be boosting rents. Midtown Manhattan's office availability rate (space coming available within the next six months) declined to 10.3 percent at the end of October, from 10.7 percent a month earlier. Downtown's rate tumbled to 17.7 percent from 18.9 percent�strong leasing activity, largely from the financial sector, combined with commercial-to-residential conversions has pulled a substantial amount of office space off the market in recent months. Builders in New Jersey report that the market for Class A commercial space is "tight as a drum", with virtually no large space available; moreover, this strength is spilling over into the Class B market and boosting rents in both segments. One contact notes that landlords now have pricing power for the first time in eight years.

In the Buffalo area, a number of large public sector-driven construction projects are reported to be in the pipeline, including a convention center and a zoo downtown, as well as a few large renovation and redevelopment projects; altogether, an estimated $580 million in public funds will be used.

Other Business Activity
Regional purchasing managers report continued strength in the manufacturing sector, along with subdued price pressures in October. New York purchasing managers report strong growth in both the manufacturing and non-manufacturing sectors in October, along with a moderate increase in price pressures. Buffalo purchasing managers report steady growth in new orders and production activity, but little change in employment and prices. Rochester purchasers report steady improvement in general business conditions, along with a slight increase in price pressures. Rochester-based Eastman Kodak confirmed expectations that it will cut 10,000 jobs over the next two years and take a $1 billion charge in the fourth quarter; it is estimated that roughly half the job cuts will be in the Rochester area.

In New York city, tourism and business travel continue to boom. Hotel occupancy rates remained close to 85 percent in the third quarter. Meanwhile, room rates surged 13 percent in September (seasonally adjusted), and were up 14 percent from a year earlier.

Financial Developments
Bankers at small and medium-sized banks in the District report weaker demand for loans since the last report. In particular, demand for residential mortgages, nonresidential mortgages and consumer loans declined, while commercial and industrial loan demand remained stable.

Bankers' credit standards across all categories remained the same. Interest rates on all types of loans declined�especially mortgage rates: 45 percent of banks report a decline in residential mortgage rates and 53 percent report lower nonresidential rates. Deposit rates, however, continued to increase, on net. The quality of credit improved, as reflected in falling delinquency rates across all categories.

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Last update: December 3, 1997