November 4, 1998 Federal Reserve Districts Second District - New York

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Economic growth in the District has slowed further since the last report, with softening in a number of sectors. Retail sales were generally below plan in September but on or close to plan in October, with discounters out-performing department store chains. While housing markets remain firm in much of the District, pockets of weakness have emerged in and near New York City. The office rental market remains tight; however, sales and prices of commercial properties have fallen in recent weeks, with one industry expert citing a "severe credit crunch" in commercial real estate. While the region's labor market remains firm, prospects for job and income losses on Wall Street appear to have dampened consumer confidence. Regional surveys of purchasing managers suggest continued weakness in manufacturing activity in September, but fairly sturdy growth in non-manufacturing sectors. Finally, local banks report a pickup in loan demand�largely for home mortgages�and steady to declining delinquency rates. Consumer Spending Retailers report that sales in the region were below plan in September but on or close to plan in the first three weeks of October. Department store chains report that same-store sales were little changed from a year ago, while discounters report gains of 5-9 percent. Much of the weakness was in apparel, with some retailers citing mild weather. New York State's one-week tax abatement on clothing and shoes (Sept. 1-7) reportedly had no discernible impact on sales in the region. Most contacts note that home goods continued to perform well. Major retailers report they are unaffected by shipping bottlenecks. Contacts say that inventories are generally "in good shape"; two major chains note some overhang in fall apparel but expect it to move as cold weather arrives. Retail selling prices and merchandise costs were generally steady, and are expected to remain so through the upcoming holiday season. However, price reductions are widely anticipated on Spring 1999 merchandise�mainly imported apparel and electronics. Retailers report steady wage pressures, but express concern about adequate staffing for the upcoming holiday season. Construction & Real Estate Some pockets of weakness have emerged in the District's generally strong housing market in recent weeks. New York State realtors report that sales of existing single-family homes remained sturdy in September, with sales rising 11 percent ahead of a year earlier and prices rising 8.3 percent. Homebuilders in northern New Jersey report generally firm market conditions in September and early October, but a clear softening in demand in areas adjacent to New York City, with some buyers pulling out of contracts. Similarly, a major Manhattan brokerage notes a marked decline in buyer traffic, sales volume, and prices of co-ops and condos in September�especially at the high end of the market; activity has picked up in October, while prices held steady. On both sides of the Hudson, weakness is attributed primarily to concern about Wall Street. In terms of financing, builders report that they have largely shifted from REITs to more traditional lenders (banks and insurers) but have not seen any decline in credit availability. They also report that buyers are not having problems getting mortgages. The commercial real estate rental market remains exceptionally tight, though the sales market has cooled, largely due to financing problems. One industry expert in northern New Jersey notes a "severe credit crunch" in commercial real estate, affecting the sales market for office, industrial and retail properties, and possibly hindering future construction activity. In Manhattan, the sales market for office properties softened considerably in September; however, office rents continued to rise at a more than 25 percent annual rate and vacancy rates held fairly steady at low levels in August and September. Office markets in NYC's suburbs were mixed; in Long Island and northern New Jersey, vacancy rates declined in the third quarter, while rents rose modestly. In the northern suburbs (Westchester and Fairfield), vacancy rates edged up, while rents were little changed. In western New York State, contacts report that commercial construction was quite strong in 1998, but some firms anticipate some weakening in 1999. Still, one major supplier of construction equipment attributed its strong sales to the "highway bill" and expects business to stay strong in 1999. Other Business Activity Reports on job market conditions and consumer confidence are mixed. A large New York City employment agency reports that, aside from a hiring slump at international banks, the metro area's labor market remains tight. Merrill Lynch announced that it will cut 2,000 jobs in the New York City area, including 500 consultants; further layoffs and reductions in bonuses are expected at most major Wall Street firms. The three major television networks also announced jobs cuts and/or salary freezes. On the other hand, a major computer software firm recently announced plans to add 1,000 jobs at its Long Island headquarters over the next year. Consumer confidence in the Middle Atlantic region�New York, New Jersey, Pennsylvania�fell to its lowest level of the year in October. However, confidence in the Albany area (tracked by a local academic institute) rose to a cyclical high in the third quarter. Local purchasing managers surveys suggest that manufacturing activity has softened relative to other sectors in September. Buffalo manufacturers report some acceleration in production activity in September, but a downturn in both new orders and employment. Rochester purchasers note continued weakness in the local manufacturing sector, but a pickup in activity in nonmanufacturing sectors. New York purchasing managers report a modest pickup in manufacturing and continued sturdy growth in other sectors. In general, prices paid for commodities continued to decline, while prices for contracted services continued to rise. New York City's hotel occupancy rate, after seasonal adjustment, fell to a three-year low in the third quarter, though it is still at a high level. There have been no reports of real disappointment about revenue lost as a result of the Yankees' sweep in the World Series. Financial Developments According to the latest survey of senior loan officers at small and medium sized banks in the District�conducted in mid-October�the overall demand for loans increased over the past two months, driven by strong demand for residential mortgages. Refinancing activity also increased, which most bankers attribute to the recent cut in interest rates. While reports of financing problems have mainly come from commercial and industrial borrowers, bankers report that they tightened their credit standards on all categories of loans and grew less inclined to lend on net: only 6 percent reported a higher willingness to lend�the lowest percentage in at least four years. Interest rates on all types of loans declined over the last two months. Residential loan rates were lowered almost universally�by 93 percent of the banks surveyed. Average deposit interest rates decreased over the past two months, with 71 percent of the bankers surveyed reporting lower rates. Delinquency rates on consumer loans and mortgages fell, suggesting continued improvement in the quality of credit; delinquency rates on commercial and industrial loans held steady. Return to top Boston Philadelphia