October 15, 2003 Federal Reserve Districts Second District--New York

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The Second District's economy has shown further signs of strengthening in recent weeks. The labor market, in particular, has shown signs of firming, while price pressures have diminished. Retailers report that sales were mixed but generally ahead of plan in September; selling prices are said to be modestly lower than a year ago, on average, and retail inventories at desired levels. Recent business surveys point to some acceleration in manufacturing activity since the last report, as well as a noticeable pickup in employment and steady to declining input prices. Both residential construction and the market for existing homes have strengthened. Office vacancy rates in and around New York City were generally stable in the third quarter, though Manhattan's market is said to have taken on a firmer tone. Conditions in New York City's financial industry have reportedly improved further since the last report, with brisk growth in revenue, profits and compensation, as well as an upturn in industry employment. On a less positive note, consumer confidence declined in September, to its lowest level since the spring. Also, bankers report weakening demand for consumer loans and especially residential mortgages, a modest upturn in delinquency rates in these same segments, and little change in lending standards. Consumer Spending Retailers report that sales were generally on or above plan in September, with year-over-year same-store sales gains ranging from 2 to 6 percent. A number of contacts indicate that the general firming in sales in recent months largely reflects a pickup in apparel sales, which had been weak in the first half of the year. Demand has remained strong for household furnishings and equipment, as well as jewelry. All of the retailers contacted indicate that inventories are in good shape, and that selling prices are steady to down moderately compared with a year ago. In looking ahead to the upcoming holiday season, retailers are generally planning for sales to be flat to up modestly over comparable 2002 levels. Consumer confidence weakened in September, according to two separate surveys. The Conference Board's survey of residents of the Middle Atlantic states (NY, NJ, PA) shows confidence falling to a 6-month low, while Siena College's measure, based on New York State residents, fell to a 5-month low. Construction and Real Estate Residential real estate markets showed persistent strength in the third quarter, while commercial markets showed some signs of firming. New York State realtors report that unit sales were lower than a year earlier but that selling prices continued to post double-digit gains from a year ago. Particular strength was reported in the New York City and Albany areas. A large Manhattan real-estate firm and a leading appraisal firm both report brisk co-op and condo sales activity, across all segments of the market, in the third quarter--particularly in September. They also note that the inventory of apartments on the market has fallen steadily since April and observe some upward pressure on selling prices, particularly for smaller units. Housing permits in the district rose in August, led by a sharp rebound in the multi-family segment in New York City. More recently, homebuilders in northern New Jersey report continued strong demand in September but one contact expresses concern that recent increases in property taxes and mortgage rates have crimped affordability. An industry contact notes a steep rise in the cost of plywood and OSB (oriented supply board), but indicates that labor and other material costs remain in check. Office vacancy rates in and around New York City were generally stable in the third quarter. In Manhattan, contacts report some firming: although vacancy rates were little changed, the amount of sublease space on the market reportedly declined and a number of large leases are said to be pending. Suburban markets were mixed but, on balance, stable--vacancy rates increased modestly in Westchester County and Long Island, but edged down in Fairfield County, Connecticut. Other Business Activity A major New York City employment agency reports a significant pickup in hiring activity in September, following a summer lull, and describes this strength as more than just seasonal. Much of the hiring is said to be coming from small to medium-sized firms. Separately, a contact in New York City's securities industry reports further improvement in industry conditions, with brisk gains in revenues, profits and compensation, and a recent modest upturn in employment. Manhattan hotels report robust business in August and September, with both occupancy rates and total revenue running ahead of last year's levels. While the business travel segment is still described as sluggish, some pickup is reported in foreign leisure visitors, and more strength in this segment is expected due to the weakening dollar. The manufacturing sector has shown increased strength in recent weeks, which is apparently beginning to boost employment. Our latest survey of New York State manufacturers, conducted in early October, points to continued improvement and strong optimism about the six-month outlook. Similarly, purchasing managers in both the Buffalo and New York City areas report widespread increases in manufacturing activity in September, and those in Buffalo indicate a significant upturn in employment--the most pronounced in five years. Finally, shipping volume through the Port of New York and New Jersey expanded at a double-digit rate in the third quarter, and the volume of activity is said to be well above expectations. Financial Developments Small to medium-sized banks in the Second District report stable demand for commercial credit but decreased demand for consumer loans and especially residential mortgages, for which nearly three-quarters of bankers indicate lower demand. Also, lower overall refinancing activity is indicated by nearly two-thirds of bankers. On the supply side, credit standards are reported to be steady across all loan categories. Interest rates rose for all loan categories except consumer loans. Most notably, more than half of the bankers surveyed report higher rates for residential mortgages. Average deposit rates were little changed, on balance. Finally, bankers report some increase in delinquency rates on consumer loans and residential mortgages, but little change among commercial borrowers. 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