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Federal Reserve Districts

Second District--New York

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The Second District's economy has shown further signs of softening in recent weeks. Manufacturers report that business activity has been steady to slower since the last report, and that increases in both input costs and selling prices remain widespread. Contacts at non-manufacturing firms generally report further weakening in business conditions. The labor market has slackened since the last report. Consumer confidence slipped to new lows in June; however, retailers report that sales were mixed but, on balance, close to plan. Tourism activity in New York City has held relatively steady, but at a high level, since the last report. Housing markets have shown further signs of deteriorating, with sales activity down and prices flat to lower; Manhattan's rental market has also shown signs of softening. Office markets in and around New York City were mostly softer in the second quarter. Finally, bankers report weakening demand for loans (especially consumer loans), further tightening in credit standards, and increasing delinquency rates in the household sector.

Consumer Spending
Retailers report that sales were mixed but, on balance, close to plan in July, led by continued brisk business in New York City. Sales were up modestly from a year earlier, overall, led by a pickup in sales of seasonal apparel. Inventories are reported to be satisfactory levels. Retail selling prices are reported to have remained steady since the last report; one major chain notes that costs for merchandise already contracted for the upcoming holiday season are not up substantially, but reports some significant escalation in costs for spring 2009 merchandise. Consumer surveys indicate further deterioration in confidence. The Conference Board's survey of Middle Atlantic state residents (NY, NJ, PA) shows consumer confidence declining for the ninth straight month, to a 15-year low, in June. Similarly, Siena College's survey of New York State residents shows confidence slipping to its lowest level in that survey's 9� year history in June.

Tourism activity in New York City has remained fairly stable at a high level since the last report. Broadway theaters report that business picked up somewhat in recent weeks, after a sluggish spring season. After slipping roughly 5 percent below year-earlier levels in May and early June, attendance and revenues were up 3-4 percent from comparable 2007 levels since mid-June. Average ticket prices are running slightly lower than a year ago. Manhattan's hotel occupancy rate held steady just below 90 percent in June, while room rates continued to run about 6 percent above comparable 2007 levels--about the same as in May but somewhat below the 8-10 percent gains recorded in the first few months of 2008.

Construction and Real Estate
Housing markets in the District showed further signs of softening in the second quarter. Manhattan's rental market showed signs of slackening: a major rental brokerage reports that rents at mid-year were flat to down slightly from a year ago, while the vacancy rate reportedly climbed from 0.8 percent at mid-2007 to 1.2 percent. Separately, a leading appraisal firm reports that selling prices of Manhattan co-ops and condos declined moderately on a quarterly basis but were still up about 11 percent from a year earlier (on a per square foot basis), reflecting a shift toward more sales of luxury apartments. At the same time, the number of transactions tumbled more than 20 percent, and the listing inventory was up more than 30 percent. Brooklyn's market showed even more weakness, with prices little changed from a year ago and the number of sales down more than 40 percent; most of the weakening was in the market for 1-3 family homes, with the condo and co-op market showing some resilience.

A contact in New Jersey's housing industry indicates that the market continued to deteriorate in recent months but not dramatically. Prices have declined by an estimated 15 percent from peak levels in 2005-06, with most of the decline coming in the past year. Sales activity is still described as weak; while buyer traffic is said to be holding up at the lower end of the market (under $300K), it is described as very weak at high end. Builders note that it has grown increasingly hard for prospective homebuyers to qualify for a mortgage. Single-family construction has reportedly dropped off sharply over the past year, but multi-family re-development in urban areas has remained fairly stable.

Office markets in the region showed further signs of slackening in the second quarter. Vacancy rates rose noticeably in both Midtown and Downtown Manhattan--particularly for sub-lease space; moreover, one industry contact notes an increase in "shadow space" (space that is unused but not officially available), which suggests further slack in the market. Vacancy rates were little changed at high levels in northern and central New Jersey, edged up in Fairfield County, but edged down in Westchester. Asking rents fell in northern and central New Jersey but continued to rise across most of the metro area. However, asking rents are conjectured to be overstating the underlying strength of the market somewhat, due to increased concessions. In contrast with the general weakening in the office market, New York City's retail rental market is still characterized as fairly resilient. Finally, an industry contact notes that new hotel development has virtually ground to a halt but that the pipeline of existing development is larger than ever (close to 15,000 rooms), though a number of these projects are having trouble getting adequate financing.

Other Business Activity
A major New York City employment agency, specializing in office jobs, reports that hiring activity slowed further in June and early July. Large Wall Street firms are holding off on hiring, while hedge firms are hiring only sporadically. Firms in other industries are more cautious about hiring due to ongoing turmoil in financial industry. The number of people looking for jobs has increased but not as much as anticipated. In general, non-manufacturing firms in the District report fairly widespread weakening in business activity and anticipate steady to declining employment.

New York State manufacturers report that business activity continued to weaken somewhat in June and early July, and a growing number report declining employment at their establishments. Contacts continue to note increasingly widespread escalation in both prices paid and prices received. A trucking-industry expert reports that the industry is having a very difficult year and that a sizable number of firms have gone out of business--especially small to medium-sized firms. Demand has reportedly weakened substantially, and fuel surcharges are considered inadequate to defray all of the escalating costs of gasoline. This contact notes that fuel has now surpassed labor as the number one cost for trucking firms.

Financial Developments
Bankers report weakening loan demand--particularly in the consumer loan category, where 50 percent of bankers indicate a drop in demand and only 12 percent report a rise; respondents also indicate weaker demand for home mortgage and commercial and industrial loans, but little change in demand for commercial mortgages. Bankers also report declining refinancing activity, on balance. Respondents indicate a tightening of credit standards across all loan categories: the proportion of bankers reporting higher standards ranged from 26 percent in the commercial and industrial category to 35 percent on consumer loans. No respondents indicate eased standards for any type of loan. Bankers report narrowing spreads of loan rates over cost of funds in the consumer sector, but little change in other loan categories. Finally, bankers indicate increased delinquencies on consumer loans and residential mortgages but little change in delinquency rates for commercial mortgages and commercial and industrial loans.

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Last update: July 23, 2008