July 26, 2006 Federal Reserve Districts Second District--New York

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The Second District's economy has continued to grow at a moderate pace since the last report, though there are further signs of softening in housing. Businesses report that increases in input prices continue to be widespread but have not intensified, and there are no signs of any broad-based acceleration in consumer prices. Contacts indicate further tightening in the labor market since the last report. On balance, retailers report that sales were mixed but close to plan in June and early July; tourism activity has receded slightly since the last report but remains strong. Manufacturers report some deceleration in activity in recent weeks but are increasingly optimistic in their outlook for the second half of the year. The home purchase market showed continued signs of softening in June, but Manhattan's apartment rental market reportedly strengthened further. Office markets across the New York City metro area were mixed but, on balance, stronger in the second quarter. Finally, bankers report further widespread weakening in loan demand, some tightening in credit standards, and little change in delinquency rates. Consumer Spending Retailers report mixed results for June and early July, with same-store sales ranging from flat to up 3 percent from a year ago. Retail contacts continue to note relative weakness in demand for lower-end merchandise lines. While furniture sales continue to lag, one large chain notes a pickup in housewares and home textiles. There are also reports of some weakening in restaurant business. Overall, retailers report that inventories are at favorable levels and that selling prices continue to be steady. Tourism activity, though still quite strong, has shown signs of slowing slightly since the last report. Manhattan hotels report strong business for May and June: occupancy rates edged down from their near-record levels of a year earlier, as well as April, though they were still close to 90 percent; room rates were up nearly 14 percent from a year earlier. Hotel occupancy rates in the Buffalo-Niagara Falls area were reported to be up strongly from a year earlier in May, but advance bookings are reported to have weakened. A contact in upstate New York reports that attendance at State parks has been buoyed by people vacationing closer to home. Consumer confidence in the region showed signs of improving in June. The Conference Board survey of Middle Atlantic residents showed consumer confidence rebounding, after slipping in April and May; moreover, perceptions of current conditions were more positive than in almost five years. Similarly, Siena College's survey of New York State residents shows confidence rising in June, particularly upstate. Construction and Real Estate Further slackening is noted in the region's housing market since the last report, though Manhattan's rental market has continued to firm. New Jersey homebuilders report that the inventory of new and existing homes on the market increased further in the second quarter, but a bit less rapidly than in the first. A disproportionate part of the inventory accumulation is at the middle to high end of the market ($500,000 and over). Builders are also seeing that homes they have recently sold to investors looking to "flip" the properties are remaining on the market longer, exerting increased competitive pressure. Builders have recently begun to reduce selling prices on some units. A major appraisal firm reports that sales of Manhattan co-ops and condos were down more than 10 percent from a year earlier in the second quarter, while prices were up roughly 5 percent. Separately, a major real estate firm notes that sales of Manhattan's co-ops and condos slowed sharply in June, following fairly brisk business in May, while selling prices continue to run a bit higher than a year ago. Both contacts note that the inventory of unsold apartments has increased sharply and steadily over the past year, driven largely by new development. In contrast, a major Manhattan real estate agency notes further tightening in the rental market in June and early July: the inventory of available units continues to decline, and rents are up across the board, with gains of more than 10 percent in certain neighborhoods. Office markets across the New York City area were mixed to stronger in the second quarter. Throughout Manhattan and in Fairfield County (Ct.), office availability rates fell to their lowest levels in roughly five years, while asking rents showed sturdy increases of 6 percent or more from a year earlier. However, vacancy rates rose in Long Island and edged up in Westchester and northern and central New Jersey; asking rents in these areas are little changed from a year ago. Other Business Activity A securities industry contact notes exceptionally strong conditions in the second quarter, driven by strong growth in trading revenue and mergers & acquisitions; however, the outlook is more mixed, as recent levels are not seen as sustainable. A major New York City employment agency, specializing in office jobs, reports a pickup in business in June, compared with April and May, led by continued strong business from the financial sector and a recent spate of hiring from executive search firms expanding their own staffs. Fewer recent college graduates are reported to be looking for work, at this point in the season, than in recent years, reflecting the tight labor market. Salaries are said to be up 7 percent from a year ago for recent college graduates and up over 10 percent for experienced workers at middle-range positions. June surveys of purchasing managers in the Rochester and Buffalo areas indicate continued strong improvement in business conditions, along with widespread but steady price pressures. In our more recent July Empire State Manufacturing Survey, respondents report decelerating business activity, following a strong June, but firms express increased optimism about the near-term outlook. In general, manufacturers do not report significant disruptive effects of the flooding in late June, though one central New York firm notes that, due to some disruptions, it will be running overtime through the end of July. There is no indication that New Jersey's government shutdown, during the first week of July, had a significant impact on business activity in the northern (2nd District) part of the state. Financial Developments Small to medium-sized banks in the District report decreased demand for all types of loans--particularly consumer loans and commercial mortgages, where more than four times as many bankers report decreases as increases. Bankers note tightened credit standards for consumer loans and commercial mortgages, while credit standards for residential mortgages and commercial and industrial loans remained unchanged. A large majority of bankers continue to report increased rates on both loans and deposits. Finally, delinquency rates were unchanged across all loan categories except commercial and industrial loans, for which 20 percent indicate that delinquencies are down, while 6 percent say they are up. Return to top Boston Philadelphia