September 16, 1998 Federal Reserve Districts Second District - New York

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Significant segments of the Second District's economy have shown signs of slowing since the last report, with the notable exception of construction and real estate. Retail sales were on or somewhat below plan in August, with some weakness attributed to lean inventories; both selling prices and merchandise costs were steady to down slightly and most retailers do not report increased wage pressures. Following a robust second quarter, District housing markets strengthened further in July, particularly in the multi-family sector in and around New York City; anecdotally, any effects of the recent stock market slump on the metropolitan area's housing market appear to be limited, as yet. Manhattan office vacancy rates resumed their decline in July, while rents continued to rise rapidly. Despite the end of the GM strike, regional surveys of purchasing managers suggest some underlying weakness in regional manufacturing activity in August, along with flat to declining commodity prices. Finally, local banks report that loan demand growth paused while delinquency rates leveled off after falling steadily through most of 1998. Consumer Spending Major retailers generally report that sales in the region were on or slightly below plan in August, with year-over-year comparable-store sales ranging from a 2 percent decline to a 7 percent rise. Some of the weakness in sales was attributed to unusually low inventories of clearance merchandise and unseasonably warm weather; also, a late Labor Day is expected to pull some sales from August into September, though this was anticipated in sales plans. Apparel sales are still said to be fairly brisk, but a few contacts note that demand for home goods, while still brisk, has tapered off. All contacts say that inventories were at very favorable levels at the end of August. Two large retailers note that shipping bottlenecks from West coast ports prompted them to take on holiday-season imports earlier than usual, thus temporarily boosting inventories. However, most contacts report no shipping troubles. Retail selling prices and merchandise costs were steady to lower; most respondents describe the current pricing environment as "very competitive". A number of retailers anticipate sizable price reductions in early 1999, reflecting falling import prices. While most retailers report no increase in wage pressures, all note difficulties in finding enough staff and expect this problem to worsen as the holiday season approaches. Construction & Real Estate Housing markets across the District continue to gain momentum. New York State realtors report that sales of existing single-family homes strengthened further in July. Compared with a year earlier, unit sales surged 21 percent while selling prices rose 10 percent. While the strongest gains in both sales and prices were still concentrated in the New York City area, trends in upstate New York have improved considerably. Similarly, homebuilders in northern New Jersey report that the market for single-family homes remained strong in July and August, following a brisk second quarter, though some softening was reported in the high-end of the market. Permits to build single-family homes in New York and New Jersey continued to trend up in July and, year-to-date, are running nearly 10 percent ahead of last year; 1998 is on track to register the highest level of single-family permits since 1989. The multi-family sector appears to be even stronger, due to a dearth of construction in recent years. A leading Manhattan real estate firm reports that co-op and condo prices rose briskly in July and were up more than 30 percent from a year earlier. While the impact of the recent downturn in the stock market remains to be seen, the same firm notes that some prospective buyers pulled out of deals following the late-August stock market drop. Separately, northern New Jersey property developers note extraordinary strength in demand for new luxury rental units and expect a sustained pickup in multi-family construction over the next year. So far this year, however, multi-family building permits in both downstate New York and northern New Jersey have been running below 1997 levels. Manhattan's office vacancy rates resumed a steep downward trend in July, with Midtown's rate falling from 8.7 to 8.0 percent and Downtown's tumbling from 13.9 to 12.3 percent. Rents continued to surge in July for Class A properties, they are up roughly 20 percent over the past 12 months. Other Business Activity Local purchasing managers surveys indicate some fundamental weakening in the District's manufacturing sector in August. Buffalo purchasing managers report a surprisingly feeble rebound in the local manufacturing sector in August, following a sharp drop in July due to the GM strike. While new orders expanded at roughly the same pace as in the second quarter, production activity rose only marginally, and employment continued to decline. Commodity prices remained steady. New York purchasing managers report some slippage in manufacturing business conditions in August, along with a moderation in hiring intentions. Prices paid by local manufacturers fell sharply in August, while prices paid in other sectors were essentially flat. However, prices for contracted services continued to rise, especially for computer consultants, engineers, and architects. Financial Developments According to a survey of senior loan officers at small and medium sized banks in the second district, the overall demand for loans decreased over the past two months. Several bankers, however, note that much of this slowing was seasonal. Refinancing activity also fell over the past two months. A smaller proportion of bankers than in the past few surveys report increased willingness to lend. However, credit standards remained virtually unchanged in all categories of loans. Interest rates on all categories of loans declined over the last two months. Residential loan rates were lowered most frequently, with 50 percent of banks reporting lower rates and only 4 percent reporting higher rates. Average deposit interest rates also decreased, on balance. Delinquency rates, after declining steadily in 1998, were stable to slightly lower for all types of loans in August. Return to top Boston Philadelphia