May 5, 1999 Federal Reserve Districts Second District - New York

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The District's economy retains significant upward momentum, along with generally stable prices. Retailers report that sales have been on or above plan in March and April, though growth has moderated from the first two months of the year. Housing markets have tightened significantly in early 1999, especially in New York City. Following sharp improvement in 1998, office markets in and around New York City appear to have stabilized in the first quarter of 1999. Regional purchasing managers report a strong pickup in manufacturing activity in March, along with declining commodity prices but continued inflation in costs of contracted services. In general, there are increasing signs of labor shortages throughout the District. Local banks report some moderation in loan demand growth, tightening credit standards on commercial loans, and sizable declines in delinquency rates--especially on consumer loans. Consumer Spending Retailers report that sales continued to run above plan in March and April, though most report some slowing in momentum compared to the prior two months. Overall, same-store sales for March and April combined were up by roughly 5 percent on average, though individual gains ranged from 1 percent to nearly 10 percent. Discounters continued to out-perform department stores. In general, contacts report tepid sales of seasonal merchandise (attributed to cool weather), but brisk sales of home goods, electronics, appliances, and home office equipment. Most contacts report that inventories are at satisfactory levels, though there was occasional mention of stockouts in certain categories. Retailers maintain that they are well prepared for Y2K and have no plans to build extra inventories. Most retailers note little or no increase in wage pressures. One chain indicates that it is raising entry-level pay scales and accelerating salary increases to reduce turnover; however, the overall impact on salary costs is said to be modest. Retailers report modest declines in selling prices, on balance, as lower merchandise costs and increased productivity have more than offset moderate wage increases. Construction & Real Estate The Second District's housing market appears to have gained momentum in recent months. Single-family permits in New York and New Jersey continued to climb in the first quarter, rising 10 percent (seasonally-adjusted) from fourth-quarter levels. Multi-family permits were up sharply in the first quarter, rising 14 percent from fourth-quarter levels and 50 percent from a year earlier. A leading New York City realtor reports that prices of prime Manhattan co-ops and condos are "going through the roof," while year-to-date unit sales are up roughly 35 percent from 1998 levels. As a further sign of tight market conditions, spreads between asking prices and bids are said to be at record lows. The high end of the market is especially tight as dwindling supply and strong demand has priced even some families with "high six-figure incomes" out of the market. Homebuilders in New Jersey report that buyer traffic has slowed from exceptional January-February levels, but that sales have remained strong. Moreover, the average price of a comparable new home rose by 13 percent between late 1997 and late 1998, largely reflecting rising land prices--one industry expert notes that there is "almost no inventory of available land." There has been no letup in the remodelling boom, especially at the high end of the market. Commercial real estate has stabilized this year, following torrid growth in 1998. Office vacancy rates in the New York City area held steady in the first quarter--rates edged down in Lower Manhattan, Fairfield County, and Long Island, but rose sharply in Westchester County. Manhattan office rents rose at a 5-9% annual rate in the first quarter but were still up 20% from a year earlier. Other Business Activity Regional purchasing managers' surveys indicate a strong pickup in manufacturing activity in March, following a slump in January; continued strength was reported in non-manufacturing sectors. Buffalo purchasing managers report a strong pickup in production activity in March, along with steady and moderate growth in new orders and employment; commodity prices declined, though at a more subdued pace than in February. New York purchasers report a further acceleration in the manufacturing sector in March, following a strong rebound in February. In non-manufacturing sectors, growth returned to trend, following a sharp pickup in February. Prices paid by both manufacturers and others fell substantially in March; however, inflation in prices of contracted services has broadened to a wide range of sectors: architectural, computer, construction, cleaning, painting, and temp services. There are signs of increasingly tight labor market conditions. A large employment services firm reports that while demand for temps has softened in recent months, the supply of temps has all but dried up; however, demand for permanent employees remains strong except in the manufacturing sector. This contact also reports that turnover has increased in the New York City area, with people increasingly moving into better-paying positions at other firms. Even in western New York State, where economic growth has been sluggish, labor shortages appear to be hindering growth: for example, a 120-technician electronics plant slated for Niagara County will instead be built in Florida, with the firm citing staffing problems--it couldn't find enough electronics technicians even after advertising for nearly one year. Financial Developments According to a survey of senior loan officers at small- and medium-sized banks in the District, loan demand grew across all categories, though at a more subdued pace than in the last survey. However, many banks note decreases in refinancing activity. Bankers report little change in credit standards on consumer loans and residential mortgages, but some tightening in standards for commercial loans. Interest rates on loans increased, especially for residential mortgages, while average deposit interest rates continued to fall. Delinquency rates fell for all types of loans--in particular, more than half of the banks surveyed note falling delinquencies on consumer loans. Return to top Boston Philadelphia