March 8, 2000
Federal Reserve Districts
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The Second District's economy continued to run flat out in early 2000. Labor shortages intensified further and there are some signs of increased wage pressures. Retail sales continued to run on or above plan in late January and the first three weeks of February. Most retailers report that inventory levels are satisfactory and that selling prices and merchandise costs are essentially flat. Housing permits picked up noticeably in January, led by a surge in the multi-family sector. Housing markets remain exceptionally tight in the New York City area, where prices continue to advance at a double-digit rate. In contrast, home prices are flat or declining in upstate New York, though sales volume has been quite brisk in most areas.
Regional purchasing managers' surveys indicate a slight pickup in manufacturing activity in January, along with ongoing input price pressures. Trucking firms are passing along some of their rising costs of diesel fuel to shippers in the form of fuel "surcharges". Finally, bankers report softening demand for consumer and home mortgage loans but a pickup on the commercial side; they also note that credit standards have tightened further and that delinquency rates have stopped declining.
Construction and Real Estate
The market for existing homes in the New York City area continues to be exceptionally tight. Double-digit price appreciation is reported across most of the lower Hudson Valley, Long Island and northern New Jersey. However, unit sales in these areas remain lower than a year ago, suggesting a persistent shortage of homes on the market. Market conditions are mixed but generally more subdued in upstate New York. While home prices in metropolitan Rochester and Buffalo have declined over the past 12 months, unit sales are up sharply in these areas, as well as Albany and Syracuse.
In the multi-family segment, one leading New York City realtor indicates that the average price of a prime Manhattan apartment rose nearly 20 percent in 1999, while another reports an average rise of nearly 15 percent. More currently, prices in late 1999 and early 2000 continue to run more than 10 percent ahead of a year earlier. Finally, based on data from a leading Manhattan rental agency, average rents for newly-leased apartments rose roughly 10 percent in 1999, after jumping 13 percent in 1998.
New York City's office markets have tightened further, as availability rates fell sharply in the final months of 1999, led by strong demand from high-tech, "new media," and financial services firms, as well as publishing and law firms. Midtown's rate fell to a 14-year low of 5.7 percent, down from 7.1 percent at the end of the third quarter, while Downtown's rate tumbled from 10.6 to 9.1 percent. Manhattan office rents rose an estimated 8 percent last year, after soaring more than 20 percent in 1998; still, an incipient acceleration in the final quarter of 1999 may be signaling a return to sharper upward pressure. There are reports that Lower Manhattan's tightening office market has prompted some commercial-to-residential conversions to be reversed.
Other Business Activity
Regional purchasing managers report steady to stronger conditions in the manufacturing sector, along with persistent input price pressures. Rochester purchasers indicate that business activity continued to soften in January, while upward commodity price pressures were somewhat less widespread than during the fourth quarter. Buffalo purchasing managers report a modest pickup in manufacturing activity in January-both production activity and hiring activity remained generally flat, but new orders continued to advance at a brisk pace; commodity price pressures, which had abated slightly in December, picked up again in January. New York purchasing managers indicate a surge in manufacturing activity in January, but a pause in growth in other sectors; input price increases were somewhat more pervasive than in December, as a slight moderation in the manufacturing sector was more than offset by increasingly widespread increases in other sectors.
A company that monitors the financial health of U.S. trucking firms reports that a number of firms recently instituted fuel "surcharges" to offset the rising cost of diesel fuel, which is up roughly 50 percent in the past 12 months. However, competition from rail carriers, which are less sensitive to fuel costs, appears to be limiting their ability to fully pass along these costs. In addition, trucking firms continue to endure severe labor shortages and growing wage pressures, with some firms reporting nearly 100 percent turnover over the past 12 months.
On the supply side, credit standards continue to tighten: approximately 15 percent of respondents reported tightening overall credit standards while none reported an easing of standards in any loan category. Bankers reported higher interest rates across the board, on both loans and deposits. Delinquency rates, which had been declining steadily for most of 1999, leveled off in all loan sectors.