May 6, 1998 Federal Reserve Districts Second District - New York

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The Second District's economy has maintained sturdy growth since the last report. Major retailers indicate that sales generally continued to run above plan in March and early April, while both selling prices and merchandise costs held steady. Office rents accelerated further in the first quarter, with most parts of the New York metropolitan area registering double-digit growth rates; vacancy rates continued to fall. The housing market also continued to gain momentum in the first quarter. Regional purchasing managers report moderate growth in manufacturing activity, along with flat merchandise costs, but escalating fees for contract services. Finally, local banks note a further drop in consumer delinquency rates, and some moderation in loan demand growth. Consumer Spending Most retailers report that sales were above plan in March and the first half of April. Although the late Easter distorted sales patterns in March and early April, year-over-year same-store sales gains for the combined period ranged from 3 to 9 percent. While year-over-year gains generally continued to be strongest in the apparel category, a number of retailers note significant improvement in home-related goods since the start of this year. One large chain that had experienced chronically sluggish sales at its home stores for most of last year now reports that this category is doing "exceptionally well." Virtually all contacts report that inventories are in good shape, with only one retailer noting a modest overhang of certain consumer durables. Retail selling prices and merchandise costs were said to be flat to down slightly. Most contacts say that the Asian crisis has reduced merchandise costs only modestly and only in certain categories�mainly electronics and lower-end apparel. While most retailers anticipate some further reductions in selling prices in the second half of this year, none expects dramatic cuts. There were no reports of significant wage increases, though one contact reports a recent noticeable increase in training time for new hires and expects that the declining quality of the labor pool may place upward pressure on the firm's wage structure later this year. Construction and Real Estate Office rents throughout the New York City area rose sharply in the first quarter, as available space became increasingly scarce. In the first three months of 1998, the average asking rent rose at a 19 percent annual rate in Midtown Manhattan and at a 17 percent rate in Lower Manhattan and Midtown South. Rent increases in the major suburban markets�northern New Jersey, Long Island, Westchester and Fairfield Counties�ranged from 9 to 11 percent, at an annualized rate. Vacancy rates across the metropolitan New York area are down 3 to 6 percentage points over the past year, with many of these markets described as "tight as a drum." Housing markets in New York and New Jersey continued to strengthen in the first quarter. In New York State, single-family home sales were 9 percent above a year ago in the first quarter, while prices rose nearly 6 percent. In New Jersey, home prices are also reported to be "moving up at a pretty good pace," though sales volume has been limited by a shortage of homes on the market and a chronic dearth of speculative building. Some New Jersey builders remark that new single-family home sales and buyer traffic, which were unusually strong in January and February, slowed significantly in recent weeks; however, an industry expert attributes this pattern to mild winter weather and a secular trend toward an earlier buying season. Construction picked up in the first quarter, as single-family housing permits in New York and New Jersey jumped nearly 18 percent from a year earlier. In addition, New Jersey contractors note that remodeling activity is running above last year's exceptionally strong levels. The multi-family sector is also quite robust. One contact notes that new townhouse and apartment developments along New Jersey's "Gold Coast" (across the Hudson River from Manhattan) are being met with unexpectedly strong demand, prompting some developers to raise their asking prices. Similarly, New York City's co-op and condo market remains strong, as prices continue to post double-digit gains over a year ago. However, first-quarter multi-family permits in New York and New Jersey fell short of exceptionally high early-1997 levels by 17 percent. Other Business Activity Surveys of regional purchasing managers indicate continued strength in manufacturing and stable prices in March. Buffalo purchasers report that new orders, which had surged in February, rose at a more normal pace in March, while production and employment continued to expand moderately. Rochester's survey indicates a sharp improvement in local business conditions in March, compared with February�purchasing managers note a marked pickup in employment, later deliveries and increased optimism about the near-term outlook (despite recent major local layoff announcements). New York purchasing managers report that manufacturing-sector conditions were generally steady in March, following sharp improvement in February, while non-manufacturing conditions continued to improve. Purchasers in all three areas indicate that merchandise costs were steady to down slightly in March; however, New York purchasers observe further increases in costs of contracted services�most notably, computer consultants, engineering, architectural and construction services. Financial Developments According to a survey of senior loan officers at small and medium-sized banks in the District, overall demand for loans increased over the past two months, though the pace of growth was slower than in the last report. Demand for residential mortgages continued to increase, with 45 percent of banks noting higher demand in this category. However, demand for consumer loans remained stable. Credit standards remained substantially unchanged, though a few banks report some tightening in the commercial, industrial and nonresidential mortgage categories. Interest rates on both loans and deposits continued to decline, on net. Delinquency rates dipped further since the last report�especially on consumer loans�indicating continued improvement in the quality of credit. Return to top Boston Philadelphia