December 9, 1998 Federal Reserve Districts Second District - New York

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Economic growth in the District has been mixed but, on balance, stronger than in the last report. Most retailers report brisk sales in the last weekend of November, though retail sales for the month were generally below plan, mainly due to warm weather; discounters continued to out-perform department store chains. The housing market strengthened across most of the region in recent weeks, though sales of high-end Manhattan co-ops and condos were soft. New York City's office market remains tight while vacancy rates have leveled off, rents continue to rise at a double-digit rate. Although the market for commercial properties in New York City continues to be somewhat hampered by credit tightening among lenders, most new projects (including three major hotels) are going forward. Despite more layoff announcements on Wall Street, the local job market remains generally firm. Regional surveys of purchasing managers indicate a general pickup in manufacturing activity in October and November, along with continued brisk growth in non-manufacturing sectors. Finally, local banks report a further pickup in loan demand, tightening credit standards, and steady delinquency rates. Consumer Spending Despite brisk post-Thanksgiving business, most retailers report that sales in the region were on or below plan in November, as exceptionally weak sales of cold-weather merchandise more than offset strength in most other categories. Department store chains report that same-store sales were little changed from a year ago, while major discounters report gains of 3-6 percent. For the important post- Thanksgiving weekend, all major chains describe business as brisk, and a separate survey of small retailers across New York State indicates that their weekend sales were up 4-6 percent from a year ago. Virtually all contacts say that unseasonably mild weather in the Northeast depressed sales of outerwear and various cold-weather accessories (antifreeze, heating devices, etc.); however, other categories, such as home goods, toys, electronics, and intimate apparel sold well in November. Inventories are said to be in good shape, with the overhang in winter-related merchandise expected to dwindle with the next cold snap. Retail selling prices and merchandise costs were steady to down slightly, with prices for apparel (largely from Asia) generally lower than a year ago. Retailers report difficulty in staffing, with one contact describing it as "brutal"; however, most contacts say it is not much different from last year's holiday season and none reports significant wage pressures. Construction and Real Estate The District's housing market has taken on a firmer tone in recent weeks. Housing permits in New York and New Jersey surged in October rising 58 percent from a year earlier led by a wave of multi-family projects in New York City and northern New Jersey. Year-to-date, multi-family permits are up 22 percent from 1997, while single-family permits are up 14 percent. Moreover, New Jersey homebuilders report fairly strong traffic and sales in recent weeks. Builders in New York State say that the single-family market has improved across almost all of the state even in the chronically sluggish central and western tiers. Builders in both states cite a severe labor shortage in skilled trades (carpenters, masons, roofers, etc.). New York State realtors report that sales of existing single-family homes were brisk in October, rising 15 percent above year-earlier levels, while prices jumped 11 percent. The biggest price rises were downstate especially in the lower Hudson Valley. Prices also rose in the Rochester area, and sales activity strengthened noticeably across most of upstate New York. A leading Manhattan brokerage reports that buyer traffic for prime Manhattan co-ops and condos rebounded from September's sharp slump; however, in October and November, actual sales were roughly 30 percent lower than a year ago, while new listings were up substantially, and selling prices stabilized well below this summer's peak levels. The weakness is attributed to concern about Wall Street layoffs and related income losses. Manhattan's office market remains exceptionally tight; although vacancy rates held steady at low levels again in October, rents continued to rise at a double-digit pace. However, with commercial lenders tightening credit, some buyers have reduced bids on office properties and a number of deals have been put on hold. Still, an industry expert notes that most commercial developers are going ahead with projects, including the construction of three large hotels, which are due to be completed in 2000. Other Business Activity While reports on the District's job market are generally positive, Wall Street layoff announcements continue. A recently announced merger between Bankers' Trust and Deutsche Bank is expected to eliminate more than 2,000 in New York City; moreover, further job cuts and bonus reductions are expected at major banks and Wall Street firms. Still, this year, New York City's private sector has registered its strongest pace job creation since at least World War II. Moreover, job growth in upstate new York, though still sluggish, has accelerated in recent months. Regional purchasing managers' surveys indicate some pickup in manufacturing activity in October and November, along with particular strength in non-manufacturing sectors. Buffalo purchasing managers report sturdy growth in manufacturing activity in both October and November. New York purchasing managers report a slowdown in the manufacturing sector in November, following brisk growth in October; growth in non-manufacturing sectors remains strong. Prices paid in the manufacturing sector continued to decline in November. Financial Developments According to a survey of senior loan officers at small- and medium-sized banks in the District, the overall demand for loans increased over the past two months. This rise was again driven by strong demand for residential and non-residential mortgages. There was also a continued strong increase in refinancing activity, which bankers attribute to the recent drop in interest rates. Bankers surveyed report a further tightening in credit standards especially on commercial and industrial loans. Interest rates for all loans declined over the last two months, led by the residential loan category, for which 79 percent of banks report lower rates. Similarly, a large majority of respondents report a decline in average deposit rates. Delinquency rates remained stable over the same period. Return to top Boston Philadelphia