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Federal Reserve Districts

Second District--New York

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The Second District's economy has continued to expand at a moderate pace since the last report, though recent performance has been mixed across sectors. There are some indications of a pickup in cost pressures but no discernible acceleration in consumer prices. Retailers generally indicate that holiday season sales were on or slightly above plan, with much of the strength coming in the second half of the month; retail prices were again reported to be little changed, with promotional discounts roughly the same as a year ago. Tourism activity has strengthened further since the last report. Two regional consumer surveys showed confidence retreating slightly in December, but remaining at fairly high levels.

Manufacturers have grown less positive in their assessment of current business conditions in early January, though they remain optimistic about the near-term outlook, and contacts note some intensifying in price pressures. Housing markets remain mixed: New York City's rental market has shown continued strength, and Manhattan's co-op and condo market picked up in the fourth quarter, with sales rising and inventory retreating from very high levels. However, the market for single-family homes in both northern New Jersey and upstate New York remains sluggish. New York City's office market grew increasingly tight at year end with vacancies falling and rents climbing rapidly. Finally, bankers report further weakening in loan demand in the household sector, especially for home mortgages; they also indicate a moderate increase in consumer delinquency rates.

Consumer Spending
Retailers report that sales were on or slightly above plan in December, while merchandise prices were steady. A trade survey of New York State retailers indicates that holiday-season business slightly exceeded expectations, on average. In addition, one major retail chain contact reports that their sales in the District were on plan, while another indicates that sales were slightly above plan. Overall, sales are reported to have been particularly strong in New York City--both Manhattan and the outer boroughs--but more sluggish in northern New Jersey and upstate New York. In terms of merchandise lines, somewhat soft sales of winter clothing and home furnishings and equipment were reportedly offset by fairly strong spending in most other categories, particularly consumer electronics and clothing accessories. Strong gift-card sales throughout the season are reported to have helped buoy post-Christmas sales. Retailers report that both selling prices and the degree of promotional discounting were little changed from a year ago and that inventories are at favorable levels. Retail contacts report that they hired about the same number of holiday workers as in 2005.

Based on the Conference Board survey of Middle Atlantic residents, consumer confidence edged down in November and December, after reaching a 6-year high in October; similarly, Siena College's survey of New York State households shows confidence levels retreating modestly in December from a 5 1/2-year high in November.

Tourism activity in New York City continued to strengthen since the last report. Broadway theaters report a stronger than usual pickup in business during the holiday season: attendance was up more than 10 percent from a year earlier, while total revenue was up nearly 20 percent. Similarly, Manhattan hotels report continued strong revenue growth in November and December, with many hotels at or near full occupancy and average room rates up well over 10 percent from a year earlier.

Construction and Real Estate
New York City's office market tightened further in the final months of 2006, while housing markets and residential construction activity were mixed. Lower Manhattan's office vacancy rate fell by more than a full point to 7.1 percent from November to December, while Midtown's rate edged down to 5.6 percent; both are at their lowest levels in more than five years. Moreover, rents have continued to climb rapidly since the last report, reaching new record levels; the average asking rent for Class A office space across Manhattan is reported to have risen 2.5 percent in December alone, and ended 2006 up 35 percent from a year earlier. A contact at a leading Manhattan commercial real estate firm notes that there is relatively little new office space currently under construction.

Single family construction activity in New York and New Jersey, as measured by housing permits, continued to weaken in November, slipping by roughly 30 percent from a year earlier, but multi-family permits were roughly on par with a year earlier. More recently, New Jersey homebuilders report that the market stabilized somewhat in December but remains weak. Discretionary sellers in the resale market are reported to be withdrawing from the market, which has reduced the inventory of existing homes on the market, but has also reduced the pool of new home buyers. Builders indicate that they have substantially cut back plans for new development in New Jersey (especially in active-adult communities) and this is seen as slowing construction activity in 2007. New York State Realtors report that both sales and prices for single-family homes were running lower than a year earlier in the fourth quarter. However, Manhattan's co-op and condo market showed resilience in the fourth quarter; though prices were little changed, sales activity picked up noticeably, after a sluggish third quarter, and the number of listings (inventory), though still quite high, declined. Manhattan's apartment rental market has continued to strengthen since the last report; a contact at a major real estate firm characterizes conditions as extremely tight at year end. Compared with a year ago, rents are up an estimated 5 percent, with larger increases on smaller, entry-level units in recent months. While the rental supply is constrained by a limited number of new rental buildings under development, a significant proportion of new condos are being bought by investors, who have then leased them.

Other Business Activity
A major New York City employment agency specializing in office jobs reports strong hiring activity at the start of 2007, again led by the financial and legal service industries. This contact also notes a recent pickup in demand for supervisory and clerical workers in the construction industry. In many occupations, qualified workers are reported to be in short supply. On the other hand, regional business surveys suggest some slowing in hiring in the manufacturing and distribution sectors. Purchasing managers in the Rochester, Buffalo, and New York City areas report some softening in business conditions more generally in December, and manufacturing sector contacts across New York State also report slowing in early January. Manufacturers generally indicate some increase in input price pressures.

Financial Developments
Small to medium-sized banks in the District report decreased demand for all types of loans, on balance--most notably in the residential mortgage category, for which 63 percent of bankers report a decrease in demand and no bankers report an increase. Respondents also indicate continued declines in refinancing activity. Bankers report some tightening in credit standards on commercial and consumer loans but no change in standards for residential mortgages. Bankers indicate a decrease in loan rates for residential and commercial mortgages, but rates remained unchanged in all other loan categories. Average deposit rates were up slightly, on balance. Finally, bankers report a noticeable increase in delinquency rates on consumer loans but little or no change in other categories.

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Last update: January 17, 2007