June 16, 1999 Federal Reserve Districts Second District - New York

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The District's economy continues to expand, though at a somewhat slower pace than in the last report. While there are scattered reports of upward price pressures, they appear to remain relatively subdued. Most retailers report that sales were above plan in May, despite unseasonably cool weather which held down sales of summer merchandise. Residential real estate markets remain strong, though activity appears to have leveled off in the second quarter, largely due to supply constraints. Regional purchasing managers report a slowdown in manufacturing activity in May, along with some upturn in input prices. The breakup of Conrail and its recent merger into CSX and Norfolk Southern appears to have caused only minor operational glitches thus far. Local banks report a dip in demand for residential mortgages and consumer loans, and continued improvement in delinquency rates. Consumer Spending Retailers report that sales were on or above plan in May, and would have been stronger still, except that unseasonably cool weather held down sales of summer merchandise. Overall, same-store sales for May were up by roughly 4 percent on average, though individual gains ranged from 2 to 8 percent. However, these figures understate underlying growth since they are based on a 4-week month that included Memorial Day in 1998 but not in 1999. Virtually all contacts report very strong follow-through in sales in late May and early June. Most retailers surveyed report sluggish sales of lawn and garden, air conditioners, swimwear, and other summer merchandise, but generally brisk sales of apparel and home goods. Most contacts also cited Star Wars merchandise as a contributor to strong sales. Retail inventories are generally said to be at satisfactory levels, though one contact describes them as "a bit heavier than desired." Most retailers report that selling prices and merchandise costs were flat to slightly lower, though one major chain notes an increase in costs for autumn private-label apparel imports. Another large chain notes increasing wage pressures for entry-level workers. Construction & Real Estate Housing demand in the District remains strong early in the second quarter, though the general level of activity appears to have lost some momentum, largely due to supply constraints as well as a mild winter (which boosted first-quarter activity). In April, single-family permits in New York and New Jersey slipped roughly 6 percent below first-quarter levels (seasonally-adjusted), but were still up 10 percent from a year earlier. Multi-family permits retreated sharply, following spectacular gains in the first quarter and especially March; year-to-date, they are still up more than 65 percent from 1998 levels. Homebuilders in New Jersey report that new home sales remain strong in the second quarter, despite a drop-off in buyer traffic from torrid first-quarter levels. They also note that prices for homes sold in early 1999 rose an average of 11-12 percent from a year earlier, based on comparable sales. Most of this increase reflects sharply rising land prices due to a shortage of available land. There are increasing reports of labor shortages in construction--particularly for framers. Sales of existing single-family homes in New York State slowed somewhat in April. However, realtors contend that demand continues to be exceptionally strong (as reflected in scattered bidding wars), and that activity is being held down by a shortage of available homes for sale--particularly in the counties adjacent to New York City, where the inventory is said to be at "historic lows." Compared to a year ago, the number of homes on the market is down 35 percent in Nassau County and 25 percent in Westchester. Even in the Buffalo area, where the economy has been sluggish, there are 10 percent fewer homes on the market than a year ago, while home sales are approaching record levels. New York City's office market has shown further signs of stabilizing in April. Office vacancy rates in Manhattan were little changed: Midtown's availability rate edged down from 8.1 percent to 7.7 percent, while Downtown's edged up from 11.8 to 11.9 percent. Manhattan office rents also appear to have leveled off thus far in 1999--after rising by more than 20 percent during 1998, rents have barely changed since the beginning of this year, though they were up 14 percent from a year earlier in April. Other Business Activity The breakup of Conrail and its recent (June 2) merger into CSX and Norfolk Southern appears to have caused only minor operational glitches thus far, according to contacts in upstate New York. Substantial resources have been devoted to integrating computer systems in order to avoid the problems encountered in the 1998 merger between Union Pacific and Southern Pacific. One operator of a small railroad in western New York says the merger is already starting to bring down rail-shipping costs. The trucking industry is unlikely to be affected much by increased competition from this merger, according to an industry expert. However, the recent jump in fuel prices may have a sizable effect on industry profits, as truckers will probably not be able to pass along the full cost increase to shippers. Regional purchasing managers' surveys indicate some slowing in manufacturing activity in May, along with a rise in commodity price pressures. Buffalo purchasers report that manufacturing activity slowed in May--production activity grew at a slower pace than in March and April, new orders remained flat, and employment edged down. They also note a sharp upturn in commodity prices, which had been declining through most of 1998 and early 1999. New York City area purchasing managers also report that manufacturing activity retreated in May, following strong growth in March and April, but that growth in non-manufacturing sectors remained solid. Prices paid for commodities were little changed in May, while costs of contracted services rose at a somewhat slower pace than in April. Hotel occupancy rates in New York City have ebbed from their peaks reached in early 1998 but remain exceptionally high--April's rate was 81 percent, down from 84 percent a year earlier. Room rates continue to increase but at a much slower pace than last year; after rising more than 10 percent in 1998, rates have been running about 5 percent ahead of 1998 levels this year. On a seasonally-adjusted basis, room rates have declined modestly from their peaks reached in the final quarter of 1998. Financial Developments According to a survey of senior loan officers at small and medium sized banks in the District, overall loan demand has dipped in the past two months. Bankers report a downturn in demand for residential mortgages and consumer loans and slower growth in demand for commercial and industrial loans and nonresidential mortgages. Two-thirds of banks reported a decrease in refinancing activity. Very few respondents indicated a change in credit standards in either direction; however, more recent contacts suggest some tightening in standards for residential mortgage and home construction loans. Changes in interest rates were mixed--residential mortgage rates increased, on balance, while rates on consumer loans declined. Rates for nonresidential mortgages and commercial and industrial loans were generally stable. Average deposit interest rates rose slightly, on balance. Delinquency rates continued to fall for all categories of loans. Return to top Boston Philadelphia