December 6, 2000 Federal Reserve Districts Second District - New York

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The Second District's economy has continued to expand at a moderate pace since the last report. Signs of increased wage and cost pressures have emerged, but there are no signs of an acceleration in consumer prices. Hiring activity remains brisk at both internet and Wall Street firms despite recent volatility in financial markets. Labor shortages have become increasingly acute across a broad range of industries, driving up wages in some cases, with the notable exception of retailing. There are also scattered signs of an acceleration in health benefit costs. Retailers report that sales picked up sharply in late November, after running on or below plan for most of the month; retail prices are reported to be steady. Housing markets remain strong, aside from some moderation in Manhattan's apartment market, while home construction is being restrained by a shortage of available land. Finally, bankers report little change in loan demand, tighter credit standards (especially on consumer loans) and a leveling off in delinquency rates, which had been falling. Consumer Spending Retail sales started off on a weak note in November, but finished the month with an unexpectedly strong Thanksgiving-week surge. A survey of New York State retailers showed brisk sales over the Thanksgiving weekend, with gains of 4-6 percent compared with the same period last year. For the month overall, most major retail chains report that sales were on plan, with same-store sales ranging from a slight decline, compared to a year ago, to a 5 percent increase. Some contacts anticipate that having four full weekends before Christmas, as well as an unusually late Hannukah, will shift more holiday purchases from November into December. On the other hand, a survey conducted by the Conference Board every November indicates that the average U.S. household is budgeting 1 percent less than last year for holiday spending--the first year-over-year decline since 1990. Brisk spending was reported for apparel, particularly outerwear and shoes. This was largely attributed to cold weather in the second half of the month. Sales of toys and home electronics were also described as strong. In general, selling prices are said to be little changed from a year ago. Retailers report difficulty in finding adequate staff for the holiday season, but no more so than last year. Contacts indicate that they have raised wages only moderately from last year, but some are expanding recruitment incentive programs (primarily signing bonuses). Some retail contacts note that costs of health benefits have risen substantially. Construction and Real Estate The District's housing markets have remained strong since the last report, aside from some moderation in New York City's chronically tight market. Sales of existing single-family homes across New York State held steady at a high level in October, while the average selling price was little changed at a level roughly 7 percent higher than a year ago. Rochester-area realtors indicate that the number of purchase offers made--a leading indicator of sales--declined moderately in September and October; however, this may be a function of a dwindling inventory of homes on the market. Manhattan's co-op and condo market appears to have cooled off, though prices are still running 10-20 percent higher than a year ago. While realtors note that demand remains fairly strong, the market is described as less frenetic than earlier this year--bidding wars are increasingly rare, sellers are more willing to negotiate, and buyers seem to feel less urgency to make a quick purchase. For the New York-New Jersey region overall, apartment construction continues to be strong. Multi-family permits were still up more than 30 percent from a year earlier in October, and 2000 is on track to register the strongest volume of multi-family construction since 1987. Single-family home construction picked up in October, though the general trend has been down. Homebuilders in northern New Jersey say that demand remains strong, but that construction activity has slowed due to a dearth of buildable lots. There remains a fairly long backlog of orders for new custom construction. One industry expert cites, as an example of increased confidence among builders, two speculative houses currently under construction with price tags of $2 million. Homebuilders report that the cost of construction materials has been stable, but that labor costs continue to escalate, due to an ever-increasing shortage of construction workers. Builders note a particularly severe shortage of licensed plumbers and electricians, as well as skilled masons and carpenters. Other Business Activity A leading New York City employment agency indicates that labor shortages have grown increasingly acute, and hiring activity remains strong, led by Wall Street. While securities firms are reportedly seeing a sharp decline in initial public offerings (IPOs) and a modest decline in profits in the current quarter, hiring remains robust and no major staff cuts are being announced. However, some firms are reported to be planning cutbacks in bonuses and general spending on services next year. Hiring activity is also reported to be brisk at dot-coms, despite volatility in that sector. Moreover, there is no discernible reluctance among job-seekers to join internet firms. Outside of these sectors, the New York City police department is reported to have increasing trouble attracting new recruits. Regional manufacturers report generally favorable business conditions, though there are scattered reports of increased cost pressures. For example, an upstate New York tire manufacturer says that labor shortages and wage pressures are intensifying, mainly for hourly production workers. In response, the firm is increasing overall wages by 8-10 percent and entry-level wages by roughly 15 percent. Separately, the Buffalo area's two largest HMOs recently announced that they will hike premiums by well over 10 percent on January 1. Financial Developments Loan demand was mixed since the last report, according to the latest survey of small to medium-sized Second District banks. Demand for both consumer loans and residential mortgages fell, but increased demand was reported for commercial and industrial loans. Refinancing activity remained stable with over two-thirds of bankers reporting no change in activity. An increased fraction of bankers reported tightening credit standards--especially on consumer loans: 16 percent of respondents say they tightened standards and none say they eased. Commercial and industrial loan standards were also tightened further. Bankers also reported raising loan rates on all categories of loans except residential mortgages. Deposit rates also rose since the last survey. Delinquency rates, which had been falling steadily for most of this year, leveled off in November on all categories of loans. Return to top Boston Philadelphia