January 21, 1998 Federal Reserve Districts Second District - New York

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Reports in recent weeks paint a generally positive picture of the Second District's economy. Retailers report that sales were mostly close to plan in December, as a late surge offset early-month weakness; retail selling prices and merchandise costs were flat to down slightly. The housing market showed further signs of strengthening in the fourth quarter. Commercial rents in Manhattan accelerated in the fourth quarter, as the market continued to tighten. New York City prime-area hotels continue to operate at close to full capacity, with room rates rising at a double-digit pace. Regional purchasing managers' reports indicate some slowing in the manufacturing sector, and a diminution of price pressures. Finally, local banks report further softening in consumer loan demand, and a further modest decline in delinquency rates. Consumer Spending Retailers report that sales were mixed but, on balance, close to plan in December. Major chains report regional comparable-store sales ranging from a slight decline versus a year earlier to a 7 percent gain, while smaller retailers in both New York and New Jersey averaged gains of 3-5 percent. Virtually all contacts say that sales were unexpectedly sluggish during the first two to three weeks of December. However, most report that a last minute spurt and strong post-holiday spending pushed full-month sales up to or slightly above plan. Most retailers report that inventories are in good shape, though a few cite some overhang, particularly of winter outerwear, which generally did not sell well. Overall, discounters appear to have fared slightly better than traditional department stores�most notably in the area of electronics. Retail selling prices were said to be mostly flat; two major chains report a bit more discounting than in 1996, but a third says there were fewer markdowns. One contact notes that effective prices and profit margins were reduced because the bulk of sales came toward the end of the month (when there is heavier discounting). Merchandise costs are said to be flat to down slightly; most contacts expect modest downward price pressure during 1998 due to falling prices of imports. While most retailers report difficulty recruiting seasonal help, none reports any perceptible increase in wage pressures. Construction and Real Estate Housing markets across the region appear to have gained steam during the fourth quarter. New Jersey homebuilders report that new home sales were relatively brisk in November and December, at both the lower and upper ends of the price range (though less so in the middle). Moreover, one large builder experienced unusually heavy customer traffic during the first weekend in January. Remodeling activity, which is already quite brisk, may strengthen further in 1998. A New Jersey building industry specialist notes that, on January 5, the state introduced a pilot program that eases some codes on remodeling existing units, thereby reducing costs; he expects this to spur renovation�not only of single-family homes but especially of dilapidated inner-city buildings. Realtors in New York State report that existing-home sales were down slightly in November, but that prices rose noticeably�especially down-state, where they are running more than 10 percent higher than a year ago. Upstate prices were little changed. Separately, a large Manhattan brokerage firm reports a fourth-quarter surge in co-op and condo prices, following a third-quarter lull. Permits for new construction, however, have been essentially flat�both upstate and downstate. New York City's office market appears to have tightened further in the fourth quarter. Midtown Manhattan's office availability rate (space coming available within the next six months) declined from 10.3 percent to 9.8 percent at the end of November, while Downtown's rate edged down from 17.7 percent to 17.6 percent. Asking rents in the tight Midtown Manhattan market rose at a double-digit annual rate over the past three months and are up 7 percent from a year ago. Downtown rates posted a more modest 4 percent rise over the past year but have also accelerated in recent months. Other Business Activity Regional purchasing managers report mixed but, on balance, weaker conditions in the manufacturing sector in December. Buffalo purchasing managers report that new orders fell noticeably in December, production retreated moderately, but hiring activity picked up somewhat. They also note a downturn in commodity prices. New York purchasing managers in both the manufacturing and non-manufacturing sectors report that business activity picked up slightly in December. Prices paid for goods and services edged up in December, though prices paid by manufacturers rose at a slower pace than in November. In New York city, tourism and business travel continue to boom, as hotels are operating at virtually full capacity. Manhattan hotel occupancy rates held steady at just under 90 percent in October and November, while room rates were running 12 percent higher than a year earlier. A substantial portion of upstate New York suffered a severe ice storm in early January. While its local impact was severe, the affected areas are sparsely-populated. Thus, it is not likely to have a substantial effect on the state's overall economy. Financial Developments Bankers at small to medium-sized banks in the District report softer demand for loans during the past two months. The consumer segment weakened most noticeably, with 42 percent of bankers reporting lower demand. Demand also declined for residential mortgage loans but remained stable for nonresidential mortgages and commercial & industrial loans. On net, refinancings remained level. Bankers' credit standards did not change substantially over the last two months, though fewer respondents express an increased willingness to lend. Interest rates on all types of loans declined, as did average deposit rates. Delinquency rates continued to decline, particularly for consumer loans and nonresidential mortgages. Return to top Boston Philadelphia