October 27, 2004 Federal Reserve Districts Second District--New York

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Economic growth in the Second District has shown further signs of cooling off since the last report. Retailers report that sales were below plan in September, though a few chains registered some improvement in early October. Recent business surveys suggest moderate deceleration in manufacturing-sector activity and further increases in input costs but little change in selling prices. New York City hotels and theaters report that tourism, though still relatively strong, has softened noticeably in recent weeks. Bankers report weakening in commercial loan demand, some tightening of credit standards and steady to lower delinquency rates. On the positive side, the labor market has improved modestly--hiring of office workers is reported to be steady and there seem to be fewer applicants for open positions. The housing sector remains fairly robust, as reflected in a persistently strong market for existing homes and brisk construction activity. Finally, office markets in and around New York City showed mixed results at the end of the third quarter. Consumer Spending Retail sales continued to run below plan in September but moved closer to plan in early October. On a year-over-year basis, same-store sales over this period ranged from a 4 percent decline to a 4 percent gain. A number of contacts express concern about rising energy costs constraining consumers' discretionary income. Although a couple of contacts indicate excess stocks of certain merchandise, most say that inventories are at favorable levels. While retailers report that labor costs, merchandise costs and selling prices are all relatively flat, a few indicate declining merchandise costs on orders for next year. Virtually all retailers report continued steep escalation of energy and health insurance costs but note that other insurance costs have receded. Consumer confidence improved in September, according to two separate surveys. Based on Siena College's survey of New York State residents, confidence rebounded sharply in the New York City area, reversing a decline in August, while confidence in upstate New York was little changed. Similarly, the Conference Board's survey of Middle Atlantic state (NY, NJ, PA) residents shows confidence rebounding to a two-year high in September, after slipping in August. Construction and Real Estate The housing sector has shown further signs of strength since the last report. New Jersey homebuilders report that the market for new homes has been robust, with traffic persistently brisk since Labor Day, and selling prices continue to run well ahead of comparable 2003 levels. Heavy rainfall has not significantly disrupted building activity, though production continues to be restrained by a dearth of developable land. Contacts report somewhat tight supplies of plywood and gypsum, reportedly due to diversions to the Southeast for rebuilding, but this has not caused any significant disruptions. The market for existing homes in New York State continued to show strength in the third quarter--Realtors report that selling prices remained more than 15 percent ahead of a year ago, and the number of homes sold was up roughly 6 percent. Similarly, in Manhattan's co-op and condo market, selling prices per square foot were up 4 percent to 5 percent from the second quarter and up 15 percent from a year earlier; the volume of transactions was up marginally, though contacts report that this is partly a function of a low inventory of homes on the market. Manhattan's rental market has been generally stable since the last report: one contact reports that, following a dip in the second half of September, leasing activity has picked up again in October--particularly at the high end--though rents remain flat. Office markets in the New York City area were again mixed in the third quarter. Manhattan's office market was little changed overall, as continued gradual improvement in Midtown Manhattan offset an upturn in vacancies in Lower Manhattan. Outside New York City, conditions were also mixed: Long Island's vacancy rate declined for the fourth consecutive quarter, falling to a three-year low, but northern New Jersey's vacancy rate climbed to 18 percent, the highest level in nearly a decade. Rates were virtually unchanged in New York City's northern suburbs--Fairfield and Westchester Counties. Other Business Activity A major New York City employment agency reports the market for office workers was improving gradually in September and early October; there are fewer people seeking positions, and hiring remains steady, led by the financial and legal industries. A contact in the financial sector reports that Wall Street bonuses, mostly paid out during the winter months, are expected to be up 8 percent this year, following a 17 percent increase last year. Associated with this cooling off, securities firms are being adversely affected by declining trading volume, declining margins, reduced market volatility, and reduced corporate bond issuance--all of which are expected to have a negative effect on industry employment over the next year. Our latest monthly survey of New York State manufacturers, conducted in early October, indicates some deceleration in manufacturing sector activity but continued optimism about the six-month outlook; respondents also reported ongoing widespread cost pressures, but little change in selling prices. This is consistent with comments from a variety of businesses that note an inability to pass along rising costs to their customers. Purchasing managers in the Buffalo area also report deceleration in both new orders and production activity, but those in the New York area indicate steady improvement in business conditions. In both areas, respondents note that upward price pressures remain fairly widespread. Separately, a contact at a major shipping terminal reports that in-bound container volume has continued to strengthen, due to a combination of growing imports and ongoing diversion of shipments from West Coast to East Coast ports. Tourism, though still fairly robust, has softened noticeably since the last report. Manhattan hotels report that occupancy rates retreated significantly in August--after adjusting for seasonal variation--and rose only marginally in September. Total revenues were up 15 percent to 20 percent from a year ago in the last two months, but this compares to increases of well over 20 percent in the spring and early summer. Similarly, Broadway theaters report that, after running moderately above a year earlier in the first half of September, both attendance and revenues weakened sharply in the following four weeks: attendance fell 7 percent from comparable 2003 levels, and revenues were down 9 percent. Financial Developments Small- to medium-sized banks in the district report reduced demand for loans in the latest survey, conducted in mid-October. Bankers report little change in demand for consumer loans but moderate declines in demand for commercial loans and mortgages and a continued decline in home mortgages--again reflecting a widespread decline in refinancing activity. Bankers report some tightening of credit standards, particularly on commercial and industrial loans. Interest rates on both loans and deposits increased across the board. Finally, bankers indicate declining delinquencies in several loan categories, most notably for residential mortgages. Return to top Boston Philadelphia