June 14, 2006 Federal Reserve Districts Second District--New York

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The Second District's economy has continued to expand at a moderate pace since the last report. Businesses report increasingly widespread cost pressures, but thus far there has been no broad-based acceleration in consumer prices. The labor market has shown further signs of strength since the last report, except in the construction industry, where some slackening is reported. On balance, retailers report that sales remained close to plan since the last report, while tourism activity has strengthened. Firms involved in goods production and distribution report increasingly favorable business conditions in May. More generally, however, business and household surveys suggest increased concern about the outlook for the second half of the year. Housing markets showed further signs of softening in April and May, though Manhattan's rental market is reported to have tightened. However, office markets across the New York City metro area were steady to stronger in April and May, with scattered signs of acceleration in rents. Finally, bankers report across-the-board weakening in loan demand, particularly for consumer loans, as well as easing in credit standards and lower delinquency rates. Consumer Spending Retailers report mixed results for May, with department stores indicating that sales were on or above plan but discounters reporting sales below plan. Retail contacts continue to note fairly brisk demand for higher-end merchandise, but weakness in lower-end lines. Sales of home furnishings continue to be one of the more sluggish categories. Overall, inventories are reported to be at favorable levels, and selling prices remain relatively steady. Tourism activity in New York City has picked up since the last report: Manhattan hotels report strong business in April, with occupancy rates rising by more than the seasonal norm and room rates up nearly 11 percent from a year earlier. Similarly, Broadway theaters report strong attendance for both April and May, following a brief slump in March--attendance rose 4% from a year earlier, while total revenues were up by well over 10 percent in both months. Consumer confidence in the region, which reached a nearly 4-year high in March, declined moderately in both April and May, based on the Conference Board's survey of Middle Atlantic state (NY, NJ, Pa) residents. There was a pronounced drop in consumers' expectations, but their assessment of current conditions remained fairly positive. Construction and Real Estate The region's housing market has shown mixed but generally softer signs since the last report. New Jersey homebuilders report that they continue to adjust down their expectations for the local housing market; some builders in the midst of the authorization process are reported to be withdrawing and allowing their options to build to expire. One industry expert is now advising appraisers to assume a flat to downward trend in prices, as opposed to an upward trend. Cumulative widespread increases in fuel and materials costs are reported to be pinching homebuilders' profits; however, builders report some slackening in labor demand and little or no upward pressure on wages. The market for existing homes has also shown further signs of softening since the last report, but observers differ on the nature and extent of a slowdown. In New Jersey, the inventory of unsold homes continues to be much higher than a year ago, with the increase reported to be concentrated at high end of the market (over $500,000). The New York State Association of Realtors reports some weakening in sales activity in March and April, and notes a sharp deceleration in prices in the suburbs around New York City. A major Manhattan appraisal firm reports a fairly large supply of apartments on the market and less of a spring pickup in co-op and condo sales than usual this year. However, a major Manhattan real estate firm notes that apartment prices have held steady and attributes the growing inventory of homes on the market largely to a surge in newly constructed units coming onto the market, rather than weakening demand. Manhattan's rental market has reportedly strengthened since the last report, reflecting a lack of new rental construction, a dwindling number of listings and continued strong demand. Office markets across the New York City area were steady to stronger since the last report, with vacancy rates easing off and rents accelerating in some areas. In April and May, office vacancy rates were little changed in northern New Jersey, southwestern Connecticut and Westchester County, and down moderately in Long Island and Midtown Manhattan. Lower Manhattan's vacancy rate rose, due to an increase of 1.7 million square feet of available space with the opening of 7 World Trade Center in May. Other Business Activity A major NYC employment agency, specializing in office jobs, reports steady and strong job market conditions since the last report. This contact also notes that salary offers continue to run more than 10 percent ahead of a year ago while the qualifications of available job applicants are noticeably weaker than a year ago. Purchasing managers in the Buffalo and Rochester areas report some strengthening in general business conditions and a pickup in hiring activity. More broadly, New York State manufacturers continue to report generally favorable business conditions in May, though they express somewhat less optimism about the six-month outlook than they have for some time. Firms outside the manufacturing sector also report strong growth in business activity but a number of companies in shipping and financial services express increased concern about prospects for the second half of 2006. Both manufacturing and non-manufacturing firms report increasingly widespread price pressures and expect further boosts in the months ahead. A trucking-industry expert notes that business remains fairly strong and that firms have been able to add fuel surcharges with relatively little resistance from customers. Financial Developments Small to medium-sized banks in the Second District report decreased demand for all types of loans since the last report--most notably for consumer loans. Bankers also report increasingly widespread softening in refinancing activity. Credit standards eased, particularly for consumer loans, with no banker reporting tightened standards, and 24 percent reporting eased standards; this is the most widespread easing reported on consumer loans since we began asking this question in 1997. Bankers again report broad increases in both loan rates and deposit rates. Finally, banks report lower delinquency rates across all loan categories: in each category, more than 20 percent of firms report declines in delinquencies, while fewer than 4 percent report increases. Return to top Boston Philadelphia