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Economic growth in the Second District has remained sluggish since the last report. While it is too early to assess the full effects of Hurricane Irene, initial reports suggest widespread disruptions and local pockets of more extreme stress from flooding and power outages. Transportation and other infrastructure apparently sustained limited damage. Prior to the hurricane, business contacts in the manufacturing sector noted steady to weakening activity. Retail sales were reported to be up modestly from a year ago in recent weeks, while tourism activity has remained strong. Commercial real estate markets have shown some signs of improvement since the last report: both office and industrial markets have been steady to slightly stronger. The residential purchase market has been stable, while the rental market has continued to strengthen; new home construction remains very sluggish. Finally, bankers report reduced demand for consumer and commercial & industrial loans, widespread increases in household delinquency rates, and some tightening in credit standards for commercial & industrial loans and commercial mortgages.
Consumer Spending
Non-auto retail sales continued to run close to or slightly ahead of plan in July, with same-store sales on par with or slightly ahead of a year earlier. Most retailers indicate modest slowing in the first three weeks of August, although one major mall in western New York State notes some firming in sales activity in August, following a sluggish July. Widespread disruptions from Hurricane Irene across much of the District are likely to adversely affect sales tallies for the full month, but replacement of consumers' water-damaged property is expected to boost sales in September. Retail prices are reported to be mostly stable, though some retailers are implementing moderate increases on prices of cotton-based merchandise to counter sharply rising costs. Inventories are generally reported to be in good shape.
Auto dealers in upstate New York report that sales weakened in July and were mixed in early August. Rochester-area dealers note continued weakness in new vehicle sales in recent weeks, which have been running somewhat below 2010 levels, reflecting continued Japan-related supply disruptions and a lack of incentives. However, dealers in the Buffalo area report some firming in sales activity in early August, following a sluggish July. Auto dealers in both areas indicate that used car sales remain strong and that used car prices continue to be buoyed by strong demand and lean inventories. Auto-industry contacts note that both retail and wholesale credit conditions are good.
Consumer confidence remains mired at low levels. Siena College reports that consumer confidence among New York State residents slipped to a 10-month low in July, with declines in both upstate and the New York City area. The Conference Board indicates that consumer confidence among residents of the Middle Atlantic states (NY, NJ, PA) was little changed in July and was near the middle of its range over the past year. Tourism activity in New York City remained robust in July and early August. Manhattan hotels report that total revenue per room was running 7 to 8 percent ahead of a year ago in July and appeared to be up roughly 10 percent in August (prior to the hurricane). Most of the increase has come from rising room rates, as occupancy rates have been holding relatively steady at high levels. Broadway theaters also report sturdy gains in both attendance and revenues since the last report, despite a mid-July lull. Theaters closed for most of the final weekend in August because of Hurricane Irene, but were due to reopen the following Monday. Businesses in the popular vacation areas along the Long Island and New Jersey shores were widely affected by hurricane-related evacuations.
Construction and Real Estate
Residential construction and home sales have remained sluggish but generally steady since the last report, while there has been further improvement in the rental market. Overall, prices of existing homes have edged up in recent months in many areas but are still down slightly from a year ago across most of the region. Buffalo-area Realtors report that market conditions remained weak in July and early August, with the median selling price little changed from a year earlier, but that a recent increase in pending sales suggests some recent firming in market conditions. An authority on New Jersey's housing industry reports that a large overhang of distressed properties continues to weigh down the market but that the processing of foreclosures is now resuming; this is expected to lower reported transaction prices, on average, but increase sales activity and gradually reduce the inventory. New construction activity is very low and largely concentrated in the multi-family (rental) segment. A major appraisal firm reports a more-than-typical seasonal drop-off in activity in New York City's co-op and condo market in August; some of the recent softness is deemed to reflect concern about the city's financial sector. Still, the markets in Manhattan and nearby Brooklyn are reported to be holding up relatively well, buoyed, in part, by foreign buyers paying cash. New York City's rental market has shown continued strength: the inventory of available units is down moderately, and rents on new leases continue to climb and are up 5 to 8 percent over the past year.
Commercial real estate markets have improved modestly since the last report. Office markets were steady to somewhat stronger in July and the first half of August, as vacancy rates declined noticeably in the Buffalo and Rochester metro areas and modestly in Manhattan and on Long Island. However, vacancies continued to edge up in northern New Jersey, and Westchester and Fairfield counties. Industrial vacancy rates edged down in most areas, while asking rents were little changed. Northern New Jersey's industrial vacancy rate reached its lowest level in two years; small declines were reported on Long Island and in Westchester and Fairfield counties.
Other Business Activity
Reports from business contacts point to some weakening in general business activity and steady to weakening conditions in the labor market. A major New York City employment agency reports that hiring activity has been unusually slow in August but remains cautiously optimistic that recruitment will pick up after Labor Day; financial firms, in particular, have become more hesitant and even hiring for compliance jobs has slowed. Separately, a contact in the securities industry reports that widespread layoffs are planned across the industry (though not entirely in New York City) and not all the weakness is related to the current market turmoil. There continues to be some hiring in compliance and technology, but layoffs now exceed hiring, on net.
More broadly, non-manufacturing business contacts across the District report that business conditions have deteriorated in recent weeks and indicate waning optimism about the near-term business outlook. They continue to report steady to rising employment levels, with a majority expecting employment to level off in the months ahead. Non-manufacturing firms report that cost pressures remain fairly widespread, though somewhat less so than in recent months; further increases in input costs are expected in the months ahead. Selling prices, however, remain steady.
Manufacturing firms in the District report that business activity weakened moderately in July and early August and that price pressures have continued to recede, based on the latest Empire State Manufacturing Survey. Contacts report steady employment levels, and expect this to continue over the next six months. Overall, though, manufacturers are now less optimistic about the near term outlook than they have been in quite some time.
Financial Developments
Bankers indicate weakening demand for consumer loans and commercial & industrial loans, but an increase in the demand for residential mortgages, as well as for refinancing. Bankers report tightening their standards for commercial mortgages and commercial & industrial loans but no change in credit standards for consumer loans and residential mortgages. Respondents report a decrease in spreads of loan rates over costs of funds for all loan categories--most notably commercial mortgages. Respondents also indicated a decrease in the average deposit rate. Finally, bankers report increased delinquency rates on all categories of loans except commercial & industrial loans. The increase in delinquency was most widespread for consumer loans where 41 percent of respondents indicated increases in delinquency rates and only 7 percent indicated decreases.
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