January 15, 2003 Federal Reserve Districts Second District--New York

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The Second District's economy has been mixed since the last report with weakness in retail sales and some easing off in the housing market but with signs of a pickup in manufacturing and some stabilization in commercial real estate. Retailers mostly indicate that holiday and post-holiday sales were below plan; both selling prices and merchandise costs were described as steady to lower than a year ago, but retail inventories were said to be at manageable levels. Manufacturers and purchasing managers indicate steady to improved activity in recent weeks and steady to lower prices. Port traffic is also described as strong. Housing markets and construction activity have shown further signs of slowing in recent weeks, especially at the upper end of the market, though the general level of activity remains robust. New York City's office market showed signs of stabilizing in the final two months of 2002, though rents were sharply lower than at the end of 2001. Finally, bankers report increased demand for commercial loans and nonresidential mortgages, tighter lending standards in those same categories, and steady to lower delinquency rates. Consumer Spending Most retailers report that holiday sales in the district were disappointing. Sales were particularly sluggish during the first half of December and, sales for the month as a whole were mostly below plan. Some contacts note that unit sales were roughly on plan but that dollar volume was reduced by steep discounting. Most major department store chains report that same-store sales were down moderately from a year earlier, though discount chains fared somewhat better. Separately, based on a trade association's annual survey of small retailers across New York State, holiday sales were little changed from comparable 2001 levels. Post-Christmas sales were hampered by a snowstorm that blanketed most of the District. Apparel sales were generally described as weak, except for outerwear, which was buoyed by unseasonably cold and wet weather. Sales of home furnishings were described as mixed. Some retail contacts say that inventories are in good shape, while others described them as a bit high but manageable. Most retailers report extensive discounting, particularly in the final two weeks of the month, and virtually all say that selling prices, as well as merchandise costs, were steady to lower than a year earlier. Regional surveys of consumers indicate steep declines in confidence in December. The Conference Board reports that confidence in the Middle Atlantic region, which had rebounded from a cyclical trough in November, gave back almost all of that gain in December, falling nearly six points. Similarly, Siena College's monthly survey of New York State residents showed confidence slipping again in December--particularly in the New York City area, where confidence fell to a cyclical low. Construction and Real Estate Residential real estate markets have shown mostly weaker signs since the last report. New York City's co-op and condo market has shown further signs of slowing in the fourth quarter. A major Manhattan realtor reports that sales volume in recent weeks was down moderately from a year earlier and estimates that selling prices on these mostly high-end properties have slipped 10 percent to 15 percent from their peak levels last spring. This contact also notes that there are more properties on the market than a year earlier, particularly at the high end, and that buyers respond to price reductions. A leading residential appraisal firm also reports some slowing in the New York City market in the fourth quarter, but notes an uptick in transactions in December, with prices flat to rising at the lower end of the market but flat to declining at the upper end. Housing permits in New York and New Jersey retreated in October and November. Both single-family and multifamily permits slipped for the second consecutive month, though both remain at a fairly strong level, especially multifamily. In New York City, more units were authorized for construction in 2001-02 than in any two-year period since 1973-74. An industry contact in New Jersey attributes part of the recent slowing to much colder and wetter weather than in recent years but maintains that demand continues to outstrip supply and that there is no evidence that prices have peaked, except at the high end of the market. Manhattan's commercial real estate market showed signs of stabilizing in November and December--Downtown Manhattan's vacancy rate declined, while Midtown's rate edged up. Asking rents continue to run more than 10 percent lower than a year ago. An industry contact notes that the low rents Downtown are drawing or keeping more firms in that neighborhood and have contributed to slackening in some of the suburban markets, such as Jersey City, Westchester, and Fairfield County, Connecticut. Other Business Activity A major freight terminal reports that shipments through the Port of New York and New Jersey have continued to run at extremely strong levels, despite the resolution of the West Coast dockworkers strike. Similarly, surveys of manufacturers and purchasing managers point to steady to improved conditions in the region's manufacturing sector at year-end. Buffalo-area purchasers report little change in business conditions in December, with an increase in production activity but declines in new orders and hiring activity. However, purchasing managers in the New York City area report fairly widespread improvement in manufacturing sector conditions in December, but significant weakening in other sectors. Separately, partial results of our latest survey of New York State manufacturers, conducted in early January, indicates continued gains in activity--both shipments and new orders continued to rise, though unfilled orders declined; the number of employees remained steady but the average workweek increased. Respondents also report some leveling off in input prices and increasingly widespread declines in selling prices, but remain overwhelmingly optimistic about the near-term business outlook. Tourism activity has held relatively steady in recent months. Hotel occupancy rates and room rates were little changed in November and both were moderately higher than a year earlier. While statistics for December are not yet available, an industry contact reports that business was reasonably good. Separately, Broadway theaters report that advance ticket sales for January and February are running 15 percent below last year, and that many theaters are offering larger discounts and promotions to attract customers. A contact in New York City's securities industry estimates that bonus payments will be down 35 percent from last year, and expects that employment will decline further in the current quarter. However, he notes that industry revenue edged up in the fourth quarter for the first time since early 2000, and indicates that most firms are not contemplating further layoffs. More generally, while the labor market is still characterized as slack, a major New York City employment agency notes brisk activity in office temp hiring in December, with demand fairly broadbased across industries. Financial Developments Bankers at small to medium-sized Second District banks reported higher demand for nonresidential mortgages and commercial and industrial loans, along with a seasonal decline in demand for consumer loans. Demand for residential mortgages was little changed, following widespread increases in the last three surveys. Bankers reported no change in overall refinancing activity over the past two months. On the supply side, bankers reported tighter credit standards for nonresidential mortgages and especially commercial and industrial loans--in particular, 35 percent of bankers reported tighter standards for the latter, with no bankers reporting an easing of standards. Credit standards for consumer loans and residential mortgages remained unchanged. Loan rates declined for all types of loans, particularly residential mortgages, for which 80 percent of bankers report lower rates. Widespread declines were also reported on deposit rates. Lenders report lower delinquency rates for consumer loans by a more than two-to-one margin, but relatively stable rates in other categories. Return to top Boston Philadelphia