September 22, 1999 Federal Reserve Districts Second District - New York

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The District's economy continues to expand at a moderate pace, with an acceleration in manufacturing activity largely offset by some slowing in retail sales. While there has been some acceleration in input prices, there has been no broad-based increase in consumer price inflation. Retailers report that sales were slightly below plan, on balance, in August, but picked up again in early September; most report less discounting than usual thus far in the third quarter. Housing demand remains strong, especially in the New York City area, but activity appears to be limited by supply constraints--low inventories of both new and existing homes and a shortage of usable land appear to be constraining unit sales while boosting prices. Manhattan's office market appears to have stabilized. Regional purchasing managers report that manufacturing activity accelerated in August, while price pressures intensified. Banks report steady loan demand, further tightening in credit standards, and continued improvement in delinquency rates. Consumer Spending Major retail chains report that sales were mixed but, on balance, slightly below plan in August; however, most report some pickup in early September. Sales performance varied substantially, with year-over-year same store sales changes ranging from -2 percent to +10 percent. While some retailers attribute August's weakness to sluggish sales of hard lines, others indicate that apparel sales were particularly soft. Most note that hot dry weather hurt sales of lawn and garden merchandise. However, an industry contact in New Jersey describes the general sales environment as "gangbusters." Overall, New York State's tax-free week (on moderately-priced apparel and footwear) has had no discernible effect on sales--particularly since a similar tax reprieve was offered during the same week last year. Inventories were said to be in good shape at the end of August--even among those with disappointing sales. One major discount chain, where sales have been persistently strong, reports that inventories are a bit lean, especially if the current sales pace continues. While selling (ticket) prices and merchandise costs have been stable, most contacts report substantially less discounting than usual during the third quarter. Most retail contacts continue to report widespread labor shortages, but no significant acceleration in wages. However, one large chain reports that it is giving significant increases to workers at the low end of the pay scale. Also, in response to labor shortages, a number of New Jersey retailers are said to be involved in welfare-to-work programs to recruit and train entry-level workers. Construction and Real Estate While housing markets generally remain quite strong, there are some signs that activity is increasingly hampered by supply constraints--mainly low inventories of existing homes and a shortage of usable land. On a seasonally-adjusted basis, single-family permits in New York and New Jersey continued to climb in July, rising 11 percent above year-earlier levels. However, multi-family permits retreated sharply, following a surge in June--they were down 30 percent from a year ago in July but still up by a hefty 33 percent year-to-date. Separately, homebuilders in New Jersey indicate that unit sales are running 15-20 percent ahead of a year ago and that prices are up roughly 10 percent. Nevertheless, an industry expert anticipates a drop-off in building activity in 2000, because builders are running out of approved land. Currently, due to a dearth of inventory, the waiting time for new homes--as measured by guaranteed delivery dates--has risen to an unprecedented 11 months. The market for existing homes is also tight. A large New York City realtor describes current market conditions as "unbelievably strong" and indicates that both unit sales and prices of prime-area co-ops and condos are running 10-15 percent ahead of a year ago. The sharpest price increases are for high-end properties, and there are continued reports of bidding wars. Also, homes remain on the market for an unusually short time. Statewide, single-family existing home sales slowed in July--they were virtually unchanged from a year earlier, while prices rose by 5 percent, in line with recent trends. In the New York City area, prices continue to rise briskly, but unit sales are below year-ago levels. This is widely attributed to a dearth of single-family homes on the market. Manhattan's commercial real estate market appears to have stabilized, as office availability rates were little changed in July, after falling to cyclical lows at the end of June. Midtown's rate edged up from 7.2 percent to 7.3 percent, while Downtown's rate decreased from 11.6 percent to 11.4 percent. Office rents, which had surged more than 20 percent in 1998, have risen only modestly so far this year. Other Business Activity Regional purchasing managers' surveys suggest some acceleration in manufacturing-sector growth in August, along with increasingly widespread increases in input prices. Buffalo purchasers indicate a strong pickup in production and new orders in August, along with an upturn in employment levels and further increases in commodity prices. Those in the New York City area report a further acceleration in manufacturing activity in August--following relatively brisk growth in both June and July--along with a sharp acceleration in input prices. Hotel room rates remained little changed in July--after posting double-digit gains in each of the preceding four years, they are running just 2.5 percent ahead of a year ago in 1999. In contrast, a major newspaper raised its local daily newsstand price by 25 percent in early September. Financial Developments Small and medium sized banks in the District report that overall loan demand was steady over the past two months. Bankers reported stronger demand for commercial and industrial loans, but weaker demand for residential mortgages. Refinancing activity also slowed sharply, with almost two-thirds of the bankers surveyed reporting declines in activity. On the supply side, bankers report some further tightening in their credit standards. Bankers reported raising rates on all types of loans. Four of five lenders reported higher rates on residential mortgages, and three of four indicated higher commercial loan rates. Deposit rates also rose, with 60 percent of bankers reporting increases. Delinquency rates continued to fall in all sectors, most notably in commercial and industrial financing. Return to top Boston Philadelphia