March 18, 1998 Federal Reserve Districts Second District - New York

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The Second District's economy continued to grow briskly in the first two months of 1998. Retailers report that sales were above plan in February, while both selling prices and merchandise costs held steady. The housing market retained momentum in early 1998, following a strong fourth quarter. Commercial rents across most of the metropolitan area have risen rapidly in recent months, as office vacancy rates continued to fall. Regional purchasing managers report a pickup in activity, reduced price pressures for manufacturing inputs, but an acceleration in some labor costs. Finally, local banks report a pickup in loan demand, and a continued modest decline in consumer delinquency rates. Consumer Spending Retailers report that sales were generally on plan in January but above plan in February. Same-store sales for the two months, compared to a year earlier, varied widely�from no gain to a 10 percent increase. In general, those retailers with weak sales attributed the softness to unusually mild winter weather. Those with strong February sales noted that virtually all categories performed well, especially furnishings, appliances and women's apparel. Most retailers report that inventories are in good shape. Overall, it appears that discounters continue to fare slightly better than traditional department stores. Retail selling prices and merchandise costs were said to be mostly flat, and no increases in wage pressures were reported. Most contacts expect only a modest reduction in merchandise costs as a result of the Asian currency crisis, though one major retailer anticipates "significant savings." All expect to pass along any cost savings to customers in the form of price reductions; these lower-cost products may start to show up on the shelves as early as July, but mostly after Labor Day. Construction and Real Estate The region's housing market continued to strengthen in early 1998. New Jersey homebuilders report that new home sales were brisk in February�especially at the high end of the market, where nearly all of the buyers are in the securities industry, as opposed to the usual broad mix of high-level executives. Aside from large Wall Street bonuses, strong market conditions in early 1998 are attributed to mild winter weather, low but rising mortgage rates, and increased consumer confidence. One contact notes that with the supply overhang from the early 1990s now mostly gone, a tight market for single-family homes is "finally" spilling over into the new home market. Home remodeling also remains brisk. New York State realtors report that existing-home sales were steady in January, running 4-5 percent ahead of a year ago. Prices retreated a bit from lofty December levels, but were still ahead of a year ago by about 4 percent. In general, upstate New York has registered increased volume and steady prices, while downstate has had the reverse. Following a fourth-quarter surge, prices of prime Manhattan co-ops and condos held steady at exceptionally high levels in January, according to a major broker. The average price per room continues to run more than 20 percent higher than a year ago. Office markets across the New York City area continued to tighten in late 1997 and early 1998. Midtown Manhattan's office availability rate (space coming available in the next six months) edged down from 9.1 percent at year end to 8.9 percent at the end of January; similarly, Downtown's rate slipped from 15.5 to 15.2 percent. Midtown rents continued to rise rapidly in January, running 8 percent above year-ago levels; Downtown rents have risen a more moderate 4 percent. Markets also continued to tighten in the rest of the NYC area, where figures are tallied quarterly. Long Island's vacancy rate tumbled nearly 3 percentage points during the fourth quarter, ending 1997 at an all-time low of 10.6 percent. Vacancy rates fell by roughly a full point in northern New Jersey, Westchester, and Fairfield. In the final quarter of 1997, office rents continued to rise at their trend pace of 6 percent in New Jersey but surged at a double-digit rate in Long Island, Westchester, and Fairfield. Other Business Activity Regional purchasing managers report a pickup in activity in February. Buffalo purchasing managers report that production activity grew at a slower pace in February than January, while commodity prices were steady. However, new orders rose sharply in February, as did hiring activity. New York purchasing managers report that manufacturing activity rebounded sharply in February, while non-manufacturing experienced a more moderate pickup. Prices paid by manufacturers dipped in February but non-manufacturing costs rose sharply, led mainly by labor costs�specifically, computer consultants, temps and construction services. Separately, contacts in various sectors note tight labor market conditions, especially for computer experts, as well as for office support with modest technical abilities. One contact at a leading NYC-area employment agency remarked that "the region's labor market has never been hotter," adding that increased flexibility and efficiency in the labor market are helping to keep a lid on wage inflation. In New York City, tourism remained fairly robust during the usually slow month of January� hotel occupancy rates (seasonally adjusted) held steady at close to 85 percent, while room rates eased slightly. The local industry expects to get a slight boost from a 23 percent hike in travel stipends for Federal employees traveling to NYC effective January 1. In western New York, Buffalo convention bookings set a new record in 1997 and look to be even stronger this year, while Niagara Falls reports a sharp increase in conventions booked for 1998 versus 1997. Financial Developments Bankers at small to medium-sized banks in the District report stronger demand for loans during the past two months. Demand for residential mortgages strengthened most notably, with 75 percent of bankers reporting increased demand. Refinancing activity for all types of loans increased. Willingness to lend increased slightly, while credit standards remained stable across all loan categories. Deposit rates fell moderately, while lending rates fell sharply across all categories. Delinquency rates declined for consumer loans, but remained stable for mortgages and commercial and industrial loans. Return to top Boston Philadelphia