August 9, 2000 Federal Reserve Districts Second District - New York

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Growth in the Second District's economy appears to have moderated since the last report. While real estate prices and energy costs have risen sharply, inflation outside these categories remains subdued. Labor shortages appear to be driving up wages of office and construction workers; however, manufacturing and retail wage increases have been moderate. Most retailers indicate that sales were below plan in July, with unseasonably cool weather accounting for some but not all of the weakness. Home construction activity, sales volume, and buyer traffic have slowed from their extraordinary first-quarter pace. In contrast, the shortage of office space in New York City has become increasingly acute, with demand described as "unprecedented"--Manhattan office rents jumped 15 percent during the second quarter. Regional purchasing managers report some pickup in manufacturing in July, along with a moderation in input price pressures. Finally, bankers report continued weakness in loan demand, increasingly tight credit standards and further improvement in delinquency rates. Consumer Spending Retailers describe consumer spending as sluggish in July, with most reporting that sales were below plan. On balance, comparable-store sales were little changed from a year ago--individual reports from the major chains range from a 3 percent decline to a 7 percent rise. Retailers attribute some, but not all, of the weakness to weather, this past July having been one of the coolest on record. Apparel sales were particularly weak, as were sales of most hot weather merchandise (swimwear, air conditioners, etc.). However, sales of home goods, as well as jewelry and cosmetics, were described as fairly strong. Most retail contacts report excess inventories of summer wear and air conditioners, which are now being marked down aggressively; in other categories, however, inventories are said to be at satisfactory levels. In general, selling prices are fairly steady, with discounting of summer clearance merchandise (mainly apparel) offsetting modest increases in other categories. While a few contacts note "surprisingly" little change in shipping costs, others report that they have risen recently, as previously negotiated contracts expire. In any event, because shipping represents a small fraction of total costs, this is expected to have little or no effect on selling prices. Construction and Real Estate Housing markets in the Second District have shown some sign of slowing since the last report, though home prices continue to rise. Based on surveys of local realtors, single-family house prices in and around New York City were up sharply from a year earlier, with gains ranging from 10 to 25 percent; similarly, according to two leading Manhattan real estate firms, apartment prices have risen by 20-30 percent. In both cases, however, unit sales were down noticeably. Anecdotally, local realtors note a distinct softening in market conditions--less traffic, homes staying on the market longer, fewer bidding wars--even after adjusting for the usual summer slowing. One contact describes Manhattan's co-op and condo market as "less frenzied" and adds that, in contrast with 1999, this summer "actually feels like summer." In upstate New York, home prices are little changed from a year ago, but unit sales are up moderately. In terms of construction activity, recent trends are mixed. On a seasonally-adjusted basis, multi-family permits in New York and New Jersey rose to a new cyclical high in the second quarter--up 31 percent from comparable 1999 levels, led by sharp gains in New York City, Westchester County, and metropolitan Buffalo. In contrast, single-family permits weakened noticeably in the second quarter, and were down 7 percent from a year earlier in New York State and 11 percent in New Jersey. Still, homebuilders in northern New Jersey indicate that plans for future construction remain strong, with the major constraints on the supply side (land and labor); they note that, despite any recent cooling in the market, they still cannot put up homes fast enough to meet demand. Manhattan's office market grew increasingly tight in the second quarter, with demand described as "unprecedented." Midtown's office availability rate fell to 3.2 percent at the end of June, down from 4.9 percent three months earlier. Similarly, Downtown's rate fell to 5.4 percent from 6.9 percent. At mid-year, Manhattan office rents were up roughly 25 percent from mid-1999 levels, having surged by roughly 15 percent during the second quarter alone. Suburban markets, though considerably less frenetic, have also continued to strengthen: vacancy rates in Long Island, northern New Jersey, Westchester County, and Fairfield County are lower than a year ago, while rents on Class A properties are up by 5-10 percent. Other Business Activity Labor shortages appear to be driving up wages in certain sectors. A major New York City employment agency reports that entry-level salaries for recent college grads--mostly office support staff with technical skills--are running close to 20 percent higher than last summer. A construction-industry contact reports that wages are running 5-10 percent higher than a year ago, and that the increases would be larger if not for a sizable pool of immigrant workers. However, contacts in the retail and manufacturing sectors indicate that wage increases remain moderate. Electricity costs for residents of New York City and the Lower Hudson Valley rose sharply in July--the average customer's bill is reported to be up 40 percent from a year earlier, despite unseasonably cool weather. Most of the increase was attributed to a surge in fuel (natural gas) costs, as well as problems in bringing a major power plant on-line. Regional purchasing managers' surveys indicate a pickup in the region's manufacturing sector in July, and some moderation in price pressures. Buffalo purchasers report that both production activity and employment continued to grow at a moderate pace in July, while new orders turned up sharply, suggesting incipient strength. Price pressures were slightly less widespread than in May and June. Purchasing managers in the New York City area's manufacturing sector indicate that activity picked up sharply in July, after pausing in June, while those in other sectors were increasingly optimistic about both current conditions and the six-month outlook. Prices paid were little changed in June and July, after rising for most of the past year. Manhattan hotel occupancy rates remained at an exceptional 88 percent in June, while average room rates have accelerated in recent months and are up nearly 12 percent from a year ago. Separately, Buffalo-area hotels report that occupancy rates have been running ahead of a year ago, while average room rates have risen 7 percent; bookings for July and August are also said to be looking strong. Financial Developments According to small to medium-sized banks in the Second District, demand for consumer loans, residential mortgages, and nonresidential mortgages fell compared with two months ago, while demand for commercial and industrial loans remained steady. Refinancing activity continued to slow, as has been the trend in the past few surveys. On the supply side, lenders continued to tighten credit standards over the last two months--10 percent report a tightening of credit standards, while none indicates an easing in standards. A large majority of bankers report higher interest rates on all categories of loans, as well as on deposits. Finally, bankers report further decreases in delinquency rates on all types of loans. Return to top Boston Philadelphia