January 19, 2000 Federal Reserve Districts Second District - New York

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As the new year begins, economic growth in the Second District shows few signs of slowing, while price pressures remain moderate, on balance. Labor shortages are said to be increasingly severe, particularly for office workers. Retail sales were reported to be fairly strong both during and after the holiday season as brisk sales of consumer durables offset lagging apparel sales; both price levels and retail wage pressures were little changed from a year ago, and inventories were said to be on target. Home construction has retreated somewhat from the high levels that prevailed for most of 1999. Still, tight housing markets persist in the New York City area, where sluggish unit sales and surging prices are attributed to a shortage of homes on the market. Regional purchasing managers' surveys indicate mixed but generally positive conditions in the manufacturing sector, along with an easing in input price pressures. Some businesses report that Y2K concerns had a slight positive impact on fourth-quarter sales--due to consumer stockpiling--but no effect on inventories. Bankers report a normal seasonal dip in consumer and commercial loan demand but weaker demand for home mortgages; they also note a slight tightening in credit standards, and further improvement in delinquency rates. Consumer Spending This past holiday season was evidently a strong one for most retailers. Major chains report that sales in the region were roughly in line with expectations in December, with same-store gains ranging from 0 to 9 percent compared to a year earlier; sales looked to be on or above plan in early January. Home goods--bed and bath, furnishings, electronics (except computers), appliances, etc.--sold especially well, as did jewelry, cosmetics, and food. However, most contacts report that apparel sales were disappointing, partly but not entirely due to unseasonably mild weather. Similarly, smaller retailers across New York State indicate that holiday-season-sales were up by a robust 5-7 percent from the same period in 1998, despite increased competition from the Internet. They also report brisk sales after Christmas, as deep discounts and gift certificates pulled shoppers back into the stores. Apparel retailers expect to be busy from January 15-21, when the state will be running yet another "tax-free week" for clothing and footwear priced up to $500. Year-end inventories are widely reported to be at satisfactory levels. None of the retailers contacted indicated any precautionary inventory building due to Y2K concerns. The only noticeable effect was on sales of flashlights, batteries, generators, bottled water, etc. Selling prices, on balance, were said to be flat compared to a year ago; however, some contacts anticipate a moderate upturn in prices in 2000, due to rising merchandise and labor costs. While small retailers report severe labor shortages, most large chains indicate that holiday-season hiring was no more difficult than in 1998; however, one contact noted some deterioration in the quality of seasonal hires this time around. Construction and Real Estate A persistent shortage of available homes in the New York City area is buoying prices but limiting sales volume, while land and labor shortages appear to be constraining new construction. Housing permits in New York and New Jersey rebounded somewhat in November, after falling in the two prior months, but are still somewhat below the high levels that prevailed for most of 1999. New Jersey's housing market is still reported to be tight, with homebuilders indicating a "surprising amount of traffic" in the final two weeks of December. One industry contact describes new home sales as robust but observes that they would be stronger if not for land and labor supply constraints. Both the new-home and resale markets are said to be "bereft of inventory." Long lags in construction have prompted builders in northern New Jersey to do more speculative building, largely to satisfy the relocation market-incoming business executives who cannot wait nine months for a home. New York State realtors report that the market for existing homes remained firm in November, with less of a seasonal slowdown than usual--possibly due to unseasonably mild weather. Unit sales were up 3 percent from a year earlier, while prices continue to run 6-7 percent ahead of a year ago. In general, unit sales have strengthened in upstate New York, but weakened in and around New York City. Conversely, prices have been mostly flat upstate but have risen at a double-digit rate downstate, again reflecting a supply shortage in and around New York City. Separately, a major New York City realtor reports that "the real estate frenzy continues," with co-op and condo prices up 10-15 percent from a year ago, and total volume up 35-40 percent. A shortage of apartments on the market, though not as severe as a year ago, is still prompting some bidding wars in Manhattan. Other Business Activity Labor markets remain exceptionally tight. A large employment agency specializing in office staffing reports a "tremendous labor shortage" in the New York City area, which "seems to get more severe by the week." Together with strong demand from existing business clients, they are getting many cold calls from other businesses desperate for workers. In addition to continued demand from the financial sector, e-commerce firms are said to be "hiring like crazy," mainly looking for people with basic educational and interpersonal skills, rather than "techies." Regional purchasing managers' surveys indicate mixed but generally positive conditions in the manufacturing sector, along with some easing of input price pressures. Buffalo purchasing managers report little change in manufacturing activity in December--there was some slippage in both production activity and employment levels but ongoing moderate growth in new orders; commodity price pressures were reported to be somewhat less widespread than in November. New York purchasing managers in the manufacturing sector report a further acceleration in activity in December, while those in other sectors indicate steady and robust growth; price pressures were reported to be somewhat less widespread than in November. Moreover, in response to a special question, two out of five local purchasers say that they held extra inventories "for potential Y2K problems", though much of that appears to have been in anticipation of consumer stockpiling rather than supply disruptions. Separately, our manufacturing contacts report that Y2K concerns had no impact on business activity or inventories. Financial Developments Demand for loans weakened over the past two months, according to small-and-medium sized banks in the district, though much of the softness--especially in the consumer segment--was described as seasonal. However, there was a particularly widespread drop-off in demand for residential mortgages, which cannot fully be attributed to seasonal patterns. Refinancing at Second District banks continued to fall, with almost three-quarters of the bankers surveyed reporting less refinancing activity and only 3 percent reporting increased activity. On the supply side, approximately one in five bankers report a tightening of credit standards while no bankers report an easing of standards. Standards were tightened across all loan categories. A large majority of banks report increases in interest rates on all types of loans, as well as a rise in average deposit rates. Delinquency rates dropped in all loan sectors compared with two months ago. Return to top Boston Philadelphia