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Federal Reserve Districts

Second District--New York

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The Second District's economy has weakened somewhat more since the last report, though some sectors appear to have stabilized to varying degrees. The labor market has shown further signs of deteriorating, particularly in New York City. Retailers generally report that holiday-season sales were somewhat lower than in 2007 and a bit weaker than anticipated; retail prices were flat to down modestly, while retail inventories were at or near desired levels. Tourism activity in New York City slowed further in November and December. Both residential and commercial real estate markets were mixed since the last report, with New York City weakening more than other areas. The financial sector has weakened further, and sizable declines in both employment and compensation are anticipated in 2009. Finally, bankers report declining loan demand across all categories, continued widespread tightening in credit standards, and higher delinquency rates--especially on loans to the household sector.

Consumer Spending
Retail sales for the holiday season are described as sluggish but not disastrous. Same-store sales are reported to have been down moderately in December, compared with a year earlier, and somewhat below plan--especially in New York City. At least some of the weakness was attributed to severe weather in the days leading up to Christmas. However, one major chain reports a noticeable pickup in sales in the final days and maintains that weather was not much of a factor. Post-holiday sales are reported to be up somewhat from a year ago and ahead of plan. In general, sales of cold-weather apparel are characterized as relatively strong, while sales of luxury items are reported to have been somewhat sluggish. Contacts report somewhat heavier discounting than during last year's holiday season, though selling prices, on average, were reportedly flat to down modestly from a year earlier. Major retail chains report that year-end inventories were at or near desired levels.

Consumer confidence was generally at or near record lows in November and December: After hitting a record low in November, Siena College's monthly survey of New York State residents showed consumer confidence edging up in December, while the Conference Board reports that consumer confidence among residents of the Middle Atlantic states (NY, NJ Pa) dropped to its lowest level on record in December.

Tourism activity in New York City has shown further signs of weakening since the last report. Both occupancy rates and room rates at Manhattan hotels tumbled in November and remained weak in December, pushing overall revenues down nearly 20 percent from a year earlier. Broadway theaters also report further weakening in business: attendance in December was down roughly 7 percent from a year earlier, while revenues fell 2 percent; moreover declines were increasingly steep toward the end of the month. Further declines are anticipated, as nine Broadway shows closed just this past weekend and another four plan to wind up their runs by the end of January--an unusually weak start to a new year.

Construction and Real Estate
Housing markets in the District have been mixed but generally weak since the last report. A New Jersey industry contact reports that the market for new homes continues to weaken, reflecting an ongoing overhang of inventory, but notes some leveling off in the resale market--both in terms of volume and prices. However, the more high-priced areas nearest to New York City are still characterized as especially weak. In particular, one contact specializing in the higher end of the market reports that sales activity has slowed considerably--with buyers increasingly reluctant, many sellers are taking their homes off the market. Home prices at are estimated to be down roughly 20 percent from their peak levels of a couple years ago.

New York State Realtors report that home sales continued to weaken in November, falling nearly 24 percent from a year earlier and that median selling prices posted double-digit percentage declines in and around New York City but were mixed across upstate New York. There appears to have been substantial deterioration in Manhattan's housing market, based on reports from both a major appraisal firm and a large real estate brokerage. Co-op and condo sales fell roughly 9 percent from a year earlier in the fourth quarter, led by a 25 percent drop in sales of existing apartments (re-sales). In contrast, closings of newly-constructed units surged 35 percent from a year earlier, but these largely comprised contracts negotiated in late 2007 and early 2008. Based on current contracts, overall apartment prices fell by 20 percent or more from the third to the fourth quarter and the number of transactions fell sharply. Manhattan's apartment rental market has also weakened substantially, with asking rents reported to be down across the board in November, and 2 to 6 percent lower than in June; moreover, an industry report maintains that the reported decline in asking rents likely understates the true weakness in the market, with a growing number of landlords offering concessions. The inventory of available rental units reportedly increased 17 percent between September and November, with a particularly large rise in the number of high-end listings.

Office markets in the District were mixed in the fourth quarter. Manhattan's office vacancy rate climbed to its highest level in two years, while asking rents fell 8 percent from the third quarter and were down 5 percent from a year earlier. An industry contact notes marked weakening in December, in particular. However, office markets in the outlying areas were steady: Vacancy rates in northern New Jersey, Westchester and Fairfield County (CT) were little changed at high levels, while Long Island's rate fell to a two-year low; asking rents were little changed from a year ago in all these areas. Office markets in upstate New York metro areas were steady to somewhat stronger in the fourth quarter, with vacancy rates down slightly and rents up modestly overall.

Other Business Activity
A contact monitoring the financial sector maintains that the industry is still far from hitting bottom. At the larger institutions, a substantial number of job reductions in the pipeline have yet to show up in the payroll statistics, due to ongoing severance payouts. Moreover, year-end bonuses are seen falling 20-30 percent from last year at some of the smaller, healthier firms but more substantially at the larger establishments.

More generally, labor market conditions remain very weak. Both manufacturing and non-manufacturing firms in the District report that they expect employment to decline over the course of 2009, by an average of roughly 2 percent. The overall number of layoffs is expected to be significantly greater in 2009 than in 2008, particularly among non-manufacturing firms. While fewer workers are expected to quit this year than last, somewhat more are expected to retire. Separately, a major New York City employment agency, specializing in office jobs, reports that activity has been very quiet in recent weeks, though the environment is difficult to gauge during this typically slow hiring season; however, a further large increase is noted in the number of people looking for jobs--in particular, people recently let go from financial firms, notably hedge funds.

Financial Developments
Bankers report continued weakening demand for loans in all categories, though to a lesser extent than in November. The one segment in which declines in loan demand are increasingly widespread is in non-residential mortgages. For the first time since last Spring, more bankers indicate increases than decreases in home refinancing activity: 33 percent report an increase while 14 percent report a decrease. Banks continue to report widespread tightening in credit standards across all loan categories. Respondents, on net, note some decline in the spreads of loan rates over cost of funds for the residential mortgage loan category. For all other loan categories, however, bankers report little or no change in spreads. Banks also report widespread declines in average deposit rates. Finally, bankers report increased delinquency rates for all loan categories--most notably in the consumer loan and residential mortgage categories, where the proportions of bankers reporting increased delinquencies reached record highs of 57 percent and 49 percent respectively.

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Last update: January 14, 2009