October 23, 2002 Federal Reserve Districts Second District - New York

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The Second District's economy has shown further signs of slowing since the last report, while prices of goods and services were reported to be flat to down slightly. The job market remains weak, reflecting cutbacks in the financial sector, and scant hiring activity in most industries, except for legal services. Retail sales were reported to be well below plan in September and early October, and inventories were generally said to be higher than desired, but still lower than a year ago. Retailers report more discounting than in the last report. Surveys of manufacturers indicate that business conditions remained favorable in September but deteriorated in early October; still, most respondents remain optimistic about the near-term outlook. Housing markets have softened in recent weeks, particularly at the high end, though selling prices overall continue to run ahead of a year ago. Lower Manhattan's office market appears to have stabilized, but commercial real estate markets in most of the metropolitan area have weakened moderately. Finally, bankers report stable loan demand, ongoing tightening in lending standards and stable delinquency rates. Consumer Spending Retailers report that sales were well below plan in September and early October. Major chains report that same-store sales ranged from a 7 percent decline to a 5 percent gain, though the year-earlier figures were depressed by the terrorist attack--particularly for stores in New York City. As has been the case for a number of months, apparel sales were especially sluggish, and warm weather was seen as only a minor factor. In contrast, small-ticket goods for the home--towels, linens, pots and pans--sold well, while sales of major appliances and electronics were mixed. Inventories were mostly reported to be lower than a year ago but higher than desired. In addition to the unexpectedly weak sales, some contacts report that they accumulated extra inventories in anticipation of the West Coast dock strike. Retailers indicate that they were not significantly affected by the dock strike, but contacts express concern that a resumption of the strike or a prolonged work slowdown would cause problems in getting merchandise. Most chains say that selling prices and merchandise costs are steady to down slightly and also report increased discounting. Regional consumer confidence surveys indicate increased optimism in September. According to the Conference Board, confidence in the Middle Atlantic region rebounded strongly in September, after falling to a cyclical low in August. Similarly, the latest monthly survey of New York State residents, conducted by Siena College, indicates that confidence rose moderately in September for the second month in a row. Construction and Real Estate Residential construction and real estate markets have shown signs of softening since the last report--particularly at the upper end of the market. In the New York-New Jersey region, permits to build both single- and multifamily homes fell in August. Multifamily permits were still up 7 percent from a year earlier, despite a decline in New York City; however, single-family permits were down 11 percent. Homebuilders in northern New Jersey report that, while demand remains fairly robust, homebuyers are opting for less expensive homes, though many continue to spend a good deal on add-ons and amenities. The resale market has also shown signs of softening, most notably at the high end. New York City realtors report that the market for co-ops and condos has weakened substantially since the last report, particularly for the highest-priced apartments. One contact notes that, compared to the market peak this past spring, the inventory of unsold homes has risen by roughly 60 percent and that prices are off about 10 percent. Similarly, a northern New Jersey realtor reports a sizable increase in the number of homes on the market, and has found that nearly two-thirds of homes selling for over $1 million have been on the market for over two months--an unusually large proportion. Commercial real estate markets have been mixed. In lower Manhattan, the office market has stabilized in the third quarter: availability rates held steady and asking rents, though down 11 percent from a year earlier, have rebounded slightly since midyear. However, markets across most of the metropolitan area have weakened moderately. Vacancy rates rose in midtown Manhattan, Westchester and Fairfield Counties, Long Island and northern New Jersey. Asking rents in most of these areas are little changed from a year ago, with the exception of Fairfield County, where they are down 12 percent. Other Business Activity A leading employment agency indicates that the job market remains sluggish overall, though there continues to be brisk hiring from the legal industry. Financial services firms are reported to be hiring only sporadically, and most are reducing staff levels overall. A contact from New York City's securities industry expects that industry-wide layoffs will intensify in the fourth quarter, and that bonuses will be down at least 25 percent from last year, reflecting continued weakness in profits. While trading volume has reportedly picked up in recent weeks, fees and commissions have been compressed, and higher-margin activities--such as mergers, acquisitions, and initial public offerings--are doing poorly. Recent surveys of purchasing managers and manufacturers indicate continued favorable business conditions in September but some weakening in early October, with mixed signals on input prices. Buffalo-area purchasers report increases in both production activity and new orders in September, as well as a moderate increase in commodity price pressures. Purchasing managers in the New York City area report a leveling off in the local manufacturing sector in September, after months of widespread gains, and no change in input prices; those outside the manufacturing sector report continued weakness and declines in input prices. Separately, our latest monthly survey of New York State manufacturers indicates some deterioration in business activity in early October--both new orders and shipments are reported to have turned down moderately, while unfilled orders continued to recede. Still, respondents continue to express widespread optimism about the near-term business outlook. Input price pressures increased in October, but selling prices were steady to lower. Financial Developments Bankers at small to medium-sized Second District banks report increased demand for mortgage loans, but stable demand for consumer loans and commercial and industrial loans. Over half of the bankers surveyed indicate higher demand for residential mortgages, while only 9 percent indicate lower demand. For nonresidential mortgages, 40 percent report higher demand, while 20 percent report lower demand. Widespread increases were also reported in refinancing activity. On the supply side, credit standards continued to tighten--most notably on nonresidential mortgages and commercial and industrial lending. Loan rates continued to decrease for all types of loans, particularly for residential mortgages and consumer loans. A large majority of bankers also report declines in deposit rates. Lenders report stable delinquency rates for most types of lending, with the exception of nonresidential mortgages, where delinquencies fell. Return to top Boston Philadelphia