March 7, 2001 Federal Reserve Districts Second District - New York

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Economic conditions in the Second District remain generally favorable, with growth continuing at a moderate pace. Cost pressures have intensified, though prices of finished goods and services continue to rise at only a modest pace. Despite weakness in the manufacturing sector and slower hiring at dot-coms, labor markets remain tight, led by hiring in the financial services sector. While some moderation is reported in wage increases, sizable increases are reported in employee health benefits. Most retailers report that same-store sales in January and February were up moderately from a year earlier, and generally on or slightly above plan, while selling prices were little changed. Commercial and residential real estate markets remain robust, aside from some further softening in Manhattan's apartment sales and rental markets. Recent declines in housing permits and starts are attributed to harsh weather in early 2001; in general, conditions in the construction industry remain tight, with activity constrained by shortages of land and licensed trade workers. Purchasing managers report mixed conditions in the manufacturing sector in January, along with intensifying cost pressures. Finally, bankers report weaker consumer loan demand, little change in delinquency rates, and further tightening in credit standards on commercial loans and nonresidential mortgages. Consumer Spending Retail sales were generally on or slightly above plan in January and February. For the two months combined, same-store sales at major chains ranged from a slight decline to a 4 percent increase, compared with last year's unusually brisk sales. While January's strength was largely attributed to strong clearance sales and a catch-up to purchases deferred by harsh turn-of-the-year weather, February's strength was largely attributed to fundamental strength in demand. However, contacts note that both January and February are relatively unimportant sales months. Spending on home furnishings and women's apparel picked up in recent weeks and was described as fairly strong, but sales of men's and children's clothing were sluggish. More broadly, retailers report that inventories are in good shape--in some cases, a bit thin--reflecting strong clearance sales and effective inventory management. Retail contacts indicate that selling prices, merchandise costs and promotional activity were little changed from a year earlier. Retail wage increases are described as moderate, but sizable increases are reported for employee health benefits and utilities. Construction and Real Estate Residential and commercial real estate markets remain fairly robust across most of the District, though Manhattan's housing market appears to be retreating from the extraordinary levels seen through most of last year. Homebuilders in northern and central New Jersey report that there has been no noticeable change in demand in early 2001, with prices of both new homes and re-sales running 10-15 percent ahead of a year ago, and that they are still struggling to keep up with demand. Contacts indicate that construction activity in early 2001 has been more hampered by cold and wet weather than in recent years. They note that the other major factors constraining activity are persistent shortages of land and licensed trade workers, most notably plumbers and electricians. In contrast, Manhattan's apartment market, which had shown persistent strength through most of last year, has shown further signs of softening in early 2001. In the co-op and condo market, while prices have not declined noticeably, sales volume has reportedly fallen, as buyers are less eager and sellers are reluctant to lower their asking price. According to one contact, the rental market has softened considerably in recent months; there has been a large increase in available rentals and some landlords are offering incentives, such as one month's free rent. However, demand for high-end rentals has remained strong, as more would-be buyers are deciding to rent. Commercial real estate markets across the New York City area remain robust. In northern New Jersey and Manhattan, new construction and a wave of available sub-lease space (largely from dot-coms) has been met with brisk demand, largely from financial and telecommunications firms. In Manhattan, vacancy rates have edged up but remain extremely low, while rents have risen roughly 20 percent over the past year. In northern New Jersey, leasing activity strengthened noticeably over the past year, largely fueled by firms relocating or expanding from Manhattan's tighter and pricier market. However, a wave of new construction has helped keep rent increases moderate--slightly over 6 million square feet of office space are currently under construction, up from 2.5 million at the end of 1999. New Jersey's industrial market has tightened dramatically over the past year, with vacancy rates falling and rents rising by more than a third. Much of the increase is attributed to a surge in demand from the telecommunications, wholesale distribution, and printing industries. Other Business Activity According to a leading New York City employment agency, there continues to be strong demand for mid- to upper-level office workers, especially those with computer and related technical skills. Demand from Internet companies has tapered off, but that is described as a small part of the market; in contrast, the financial services sector continues to hire at a brisk pace. More generally, salaries continue to rise, though at a more moderate pace than last year. Purchasing managers report mixed conditions in the region's manufacturing sector in January, along with intensifying cost pressures. Buffalo-area purchasers report that conditions in the local manufacturing sector weakened in January, led by a widespread downturn in production activity. However, new orders continued to expand at a steady pace, employment held steady, and vendor delivery times have not quickened. Input price increases grew more widespread in January than at any time in the past four years. Rochester-area purchasing managers also report weakening business conditions and declining employment in January, but also note that vendor deliveries are increasingly late and that input price pressures have intensified. Finally, New York City area purchasers report that manufacturing activity rebounded in January, after dipping in December. Purchasers outside manufacturing offered an increasingly negative view of recent trends but remained generally optimistic about the outlook for the year ahead. Overall price pressures were little changed in January, though there was a noticeable acceleration in the cost of architectural, cleaning and computer services, as well as computer software; further, declines in computer hardware prices were less widespread than in recent months. Financial Developments Loan demand was mixed over the last two months, according to the latest survey of small to medium-sized Second District banks. There was a strong pickup in demand for residential mortgages, as well as refinancings. In contrast, nearly 40 percent of bankers report that consumer loan demand weakened, while less than 20 percent report stronger demand. Demand for nonresidential mortgages and commercial credit were little changed. On the supply side, bankers report tightening standards for nonresidential mortgages and commercial and industrial loans, but little change for consumer and home mortgage loans. Lower rates on both loans and deposits were reported across the board. Delinquency rates edged up for commercial and industrial loans but were little changed for other categories of loans. Return to top Boston Philadelphia