June 16, 2004 Federal Reserve Districts Second District--New York

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The Second District's economy has shown persistent strength in recent weeks. Although prices of finished consumer goods remain relatively stable, increasing cost pressures are reported in a number of industry sectors. The labor market has continued to improve, with only scattered reports of rising salaries in certain industries. Retailers report that sales were, again, ahead of plan in May, while selling prices were stable to slightly higher. Recent business surveys suggest ongoing growth in manufacturing, and the trucking industry sees increasingly strong demand and limited capacity; both sectors face widespread cost pressures. The housing market remains robust, despite some leveling off in New York City's co-op and condo market. Residential construction has strengthened further, while widespread increases are reported in construction costs. Manhattan's office market was steady to firmer in May, led by brisk demand from financial, as well as publishing, firms. New York's securities industry has seen further increases in business activity and has reportedly stepped up hiring. Tourism-related industries in New York City again turned in strong results. Finally, bankers report a pickup in commercial loan demand and further declines in delinquency rates across the board. Consumer Spending Retail sales were characterized as strong and ahead of plan in May. Year-over-year same-store sales gains mostly ranged between 5 and 11 percent; one chain reports no increase, but attributes this to a shift in the promotional calendar. All contacts indicate that inventories are in good shape. Most contacts note particular growth in apparel sales across the board, but quite a few indicate noticeable slowing in sales of home goods. Retailers generally report that selling prices have been stable to up slightly in recent months, in contrast with the declines reported last year. Retailers cite continued escalation in health insurance costs but only modest increases in merchandise and labor costs; most report little impact from rising energy costs, which generally represent a small fraction of their budget. Consumer confidence surveys were mixed in May. Siena College's survey of New York State residents shows confidence edging up in the New York City area, following a dip in April, but slipping to an 8-month low in upstate New York. The Conference Board's survey for the Middle Atlantic region (NY, NJ, PA) shows confidence retreating 5 points in May, after jumping 14 points, to a cyclical high, in April. Construction and Real Estate Home construction picked up in recent months, and housing markets continued to show strength in May, despite some leveling off in New York City. Both single-family and multifamily housing permits increased in April and, year-to-date, have been running well ahead of 2003 levels. More recently, New Jersey homebuilders report further strengthening in the housing market in May, with robust demand and a low supply of available homes driving up prices further. A local industry expert also reports significant cost pressures throughout the industry--notably on lumber, gypsum, and plumbing material, as well as land and transportation costs. While labor costs remain subdued, this contact expects upward wage pressure soon, citing emerging shortages of skilled workers. The market for existing single-family homes remains robust. Over the past 12 months, prices have reportedly risen by 3-4 percent across most of upstate and western New York but by more than 10 percent in the New York City area and the Hudson Valley. Prices of Manhattan co-ops and condos have risen even more sharply in the past year, though contacts note that the market retreated in May, following a surge in both sales and prices in March and April. Manhattan's office market has shown gradual improvement in recent months. Office vacancy rates were steady to slightly lower in April and May, after reaching a 1½-year low at the end of March, while asking rents continued to edge back up towards their 2000 peaks. An industry contact notes growing demand from financial services firms looking for more space, and, to a lesser extent, from publishers. Other Business Activity A major New York City employment agency reports a further pickup in hiring activity, most notably from the financial sector; the legal industry is also reported to be adding staff. Starting salaries are reported to be on the rise once again, but still below the peak levels seen in 2000. A securities industry contact reports that industry trends remain positive: overall activity is reported to be growing briskly in the current quarter, and year-end bonuses now appear to have risen by more than 30 percent--a larger gain than initially estimated. This contact also notes that the financial sector is seeing an upturn in costs for computer equipment and programmers. Manhattan hotels and theaters continue to report strong business. After adjusting for seasonal variation, hotel occupancy rates climbed to a nearly four-year high in April, approaching 90 percent. Moreover, room rates accelerated, rising 10 percent from a year earlier, and reaching their highest levels since summer 2001. While statistics are not yet available for May, contacts continue to report brisk business. Broadway also posted strong results: in May, box-office revenues were up 9 percent from a year ago, while attendance was up more than 7 percent; this follows even stronger gains in April. The district's manufacturers report continued strength. May surveys of purchasing managers in both the New York City and Buffalo areas did indicate moderation in the pace of improvement of business conditions, following widespread gains in the first four months of the year. However, manufacturing contacts in early June suggest robust growth. More generally, manufacturers continue to report intensifying cost pressures. Similarly, a trucking industry authority notes increasingly strong demand and limited capacity, which has enabled truckers to pass along fuel cost increases to their customers; surcharges and price increases are said to be fairly widespread. He further notes that a strike-related closure of a major regional trucking firm in late May could lead to some added disruptions to the industry. Financial Developments Small to medium-sized banks in the Second District report increased demand for commercial credit, steady demand for consumer loans, and reduced demand, again, for residential mortgages. Widespread declines are once again reported in refinancing activity. A large majority of respondents report no change in credit standards across all loan categories. Loan rates increased across all loan categories, most notably, for residential mortgages. Average deposit rates rose, on balance, though increases were somewhat less widespread. Finally, bankers report decreased delinquency rates across all loan categories. Return to top Boston Philadelphia