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Federal Reserve Districts

Second District--New York

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Economic growth in the Second District has moderated since the last report. Consumer confidence in the region declined moderately in September, and consumer spending has been weaker, in part due to unseasonably warm weather. The housing market has shown signs of softening, especially at the high end, though the rental market has continued to strengthen. On a more positive note, labor markets and commercial real estate markets have continued to firm, and tourism has continued to show exceptional strength. Freight traffic at the Port of New York and New Jersey has been robust and reportedly little affected by the recent Gulf hurricanes. Generally, manufacturers indicate little or no disruption from the storm and report ongoing improvement in business conditions. Finally, bankers report weaker loan demand from the household sector but little change in delinquency rates or credit standards.

Consumer Spending
Retailers report that sales were below plan in September, with weakness again attributed to unseasonably warm weather and high energy prices. Overall, comparable-store sales were little changed from a year earlier, though a number of major Manhattan stores report brisk gains, attributed to strong tourism. Despite the sluggish sales, retail inventories were said to be at or near desired levels. There was little change in retail selling prices, aside from gasoline. Consumer confidence fell moderately in September, based on both Siena College's survey of New York State residents and the Conference Board's survey covering the Middle Atlantic region.

Tourism remained exceptionally strong in September. Preliminary reports from Manhattan hotels point to a record month for overall revenues: occupancy rates continued to hover near 90 percent while room rates soared nearly 20 percent above a year earlier, pushing revenues above the peak levels of 1999 and 2000. Moreover, an industry contact indicates increased plans for new hotel development. Broadway theaters report that business strengthened sharply in September, following somewhat of a lull in July and August. Both revenues and attendance were up more than 10 percent from the same time last year.

Construction and Real Estate
The region's housing market has shown further signs of softening since the last report. New Jersey homebuilders indicate that they have not lowered prices thus far, but they are no longer raising prices, despite sharp increases in the costs of lumber and other building materials, which are expected to rise further once post-hurricane rebuilding gets underway. One industry contact in New Jersey notes that existing homes are taking longer to sell and that the inventory of homes on the market has increased noticeably. This contact also expresses concern about increased use of bridge loans, which are typically taken out by home buyers that have not yet sold their old home.

Manhattan's co-op and condo market was mixed in the third quarter. While selling prices continued to increase, the number of transactions declined and the inventory of apartments has increased--particularly at the high end of the market. However, a contact at one of Manhattan's leading real estate firms reports continued gradual strengthening in the rental market: while the supply of available apartments has been boosted by more individuals renting out investment property, new inventory is being absorbed without concessions. In contrast with the sales market, the high end of the rental market is said to be doing particularly well.

Commercial real estate markets across the New York City metropolitan area generally strengthened during the third quarter. Office vacancy rates fell to a four-year low throughout Manhattan, as well as in Brooklyn, while rates were virtually unchanged in Long Island and Northern New Jersey. However vacancy rates edged up in Westchester and Fairfield Counties. Industrial markets were also steady to stronger: vacancy rates were steady at a relatively low 5 percent in New York City and Long Island, and at just below 8 percent in northern New Jersey. In Westchester and Fairfield Counties, industrial vacancy rates were down modestly but still fairly high at 13 percent.

Other Business Activity
A major NYC employment agency, specializing in office jobs, reports that the pickup in hiring activity noted in August has gained further momentum in recent weeks, led by the financial sector. September was characterized as a very busy month and much stronger than a year earlier, and this contact reports that there are substantially fewer people looking for work than a year ago.

A contact at the Port of New York and New Jersey reports robust shipping activity in recent months, following a second-quarter lull, and indicates little effect from the Gulf Coast hurricanes. A number of manufacturing contacts in New York State report that the hurricanes caused some disruptions in business during September, but most of these disruptions were characterized as minor. More generally, manufacturers report ongoing improvement in general business conditions but have become slightly less optimistic about future conditions, noting widespread escalation in input prices, which is expected to continue. Separately, purchasing managers in the region report mixed results for September: those in the New York City area indicate continued favorable conditions, but those in the Buffalo and Rochester areas note some slowing in activity.

Financial Developments
Small to medium-sized banks in the district report decreased demand for consumer credit and residential mortgages but steady demand for commercial loans and mortgages. One in four bankers indicate weakening demand for consumer loans, while fewer than 10 percent report increased demand. Refinancing activity remained weak: 42 percent of bankers report decreases, while only 6 percent report increases. Credit standards were mostly unchanged since the last report, except on commercial mortgages, where some tightening in standards was noted. Higher loan rates were reported for all loan categories--particularly for commercial borrowers. As in the prior survey, almost all of the banks surveyed report increases in average deposit rates. Delinquency rates remain unchanged across all loan categories except commercial and industrial, where there was a modest decrease.

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Last update: October 19, 2005