September 16, 1998
Federal Reserve Districts
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Significant segments of the Second District's economy have shown signs of slowing since the last report, with the notable exception of construction and real estate. Retail sales were on or somewhat below plan in August, with some weakness attributed to lean inventories; both selling prices and merchandise costs were steady to down slightly and most retailers do not report increased wage pressures. Following a robust second quarter, District housing markets strengthened further in July, particularly in the multi-family sector in and around New York City; anecdotally, any effects of the recent stock market slump on the metropolitan area's housing market appear to be limited, as yet. Manhattan office vacancy rates resumed their decline in July, while rents continued to rise rapidly.
Despite the end of the GM strike, regional surveys of purchasing managers suggest some underlying weakness in regional manufacturing activity in August, along with flat to declining commodity prices. Finally, local banks report that loan demand growth paused while delinquency rates leveled off after falling steadily through most of 1998.
Retail selling prices and merchandise costs were steady to lower; most respondents describe the current pricing environment as "very competitive". A number of retailers anticipate sizable price reductions in early 1999, reflecting falling import prices. While most retailers report no increase in wage pressures, all note difficulties in finding enough staff and expect this problem to worsen as the holiday season approaches.
Construction & Real Estate
The multi-family sector appears to be even stronger, due to a dearth of construction in recent years. A leading Manhattan real estate firm reports that co-op and condo prices rose briskly in July and were up more than 30 percent from a year earlier. While the impact of the recent downturn in the stock market remains to be seen, the same firm notes that some prospective buyers pulled out of deals following the late-August stock market drop. Separately, northern New Jersey property developers note extraordinary strength in demand for new luxury rental units and expect a sustained pickup in multi-family construction over the next year. So far this year, however, multi-family building permits in both downstate New York and northern New Jersey have been running below 1997 levels.
Manhattan's office vacancy rates resumed a steep downward trend in July, with Midtown's rate falling from 8.7 to 8.0 percent and Downtown's tumbling from 13.9 to 12.3 percent. Rents continued to surge in July for Class A properties, they are up roughly 20 percent over the past 12 months.
Other Business Activity
Interest rates on all categories of loans declined over the last two months. Residential loan rates were lowered most frequently, with 50 percent of banks reporting lower rates and only 4 percent reporting higher rates. Average deposit interest rates also decreased, on balance. Delinquency rates, after declining steadily in 1998, were stable to slightly lower for all types of loans in August.