January 14, 2004 Federal Reserve Districts Second District--New York

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The Second District's economy showed further signs of strengthening in late 2003. Retailers report mixed, but moderately positive sales results for December, with a late-month surge making up for weather-related weakness in the first half of the month. While retail staffing levels were reported to be little changed from last year, hiring activity in other sectors was characterized as relatively brisk. Consumer confidence retreated slightly in December, after reaching a one-year high in November. On the other hand, business contacts indicate further improvement in manufacturing activity at year end. Housing markets showed continued strength in the fourth quarter, and particularly in December, though new construction was hampered by harsh weather. Manhattan office vacancy rates held steady in December, while asking rents edged up further from low levels. Profits in New York City's financial industry remained strong in the fourth quarter, though off from the robust levels of the third quarter and a bit shy of expectations. Wall Street employment is said to be rising, albeit gradually, and bonuses are expected to be up 18 percent to 20 percent from last year. Finally, bankers report further weakening in demand for consumer and especially home-mortgage loans but further declines in household delinquency rates. Consumer Spending Retailers report mixed but moderately favorable sales results for the holiday season-late November and December. Same-store sales at major retail chains ranged from gains of 1 percent to 5 percent, compared with a year ago. For the most part, sales were above plan at the more upscale chains but somewhat below plan at discount chains. Moreover, a number of general merchandisers note a shift in the mix of sales toward higher-end merchandise. Separately, an industry survey of large and small retailers across New York State shows gains averaging 2 percent to 4 percent, which were considered a bit below plan. After a rough start--with sales in the first half of December hampered by weekend snowstorms--the month ended on a strong note; virtually all contacts indicate brisk sales both right before and right after Christmas. Most retailers indicate that inventories ended the year in good shape, though there were scattered reports of excess stocks in certain categories. Retailers note that selling prices were steady to down modestly from last year's holiday season, and most indicate little change in peak staffing levels. Separately, based on the Conference Board's survey of Middle Atlantic (NY, NJ, PA) residents, consumer confidence retreated slightly in December, after climbing to a one-year high in November. Construction and Real Estate Residential real estate markets continued to show strength in the final months of 2003, while New York City's office market held steady. A contact in New Jersey's homebuilding industry reports that there has been no discernible change in the state's persistently strong housing market but that construction activity was disrupted by weather in the first half of December. Manhattan's co-op and condo market has shown signs of strengthening: a leading appraisal firm reports that sales were brisk in the fourth quarter, particularly in December, which is typically a slow month, with a notable recovery in transactions at the very high end. Also, selling prices appear to have accelerated in December, particularly for smaller units. Manhattan's rental market has recovered modestly in recent months, though rents are still more than 15 percent below their peak levels of late-2000. There is also a large volume of newly constructed or converted rental apartments in the pipeline. Manhattan's office market was steady in December, with Midtown's (Class A) vacancy rate edging down from 10.8 percent to 10.6 percent but Lower Manhattan's rate rising from 13.7 percent to 14.2 percent. However, there is still a good deal of sub-lease space available, and a fair amount of new or rehabilitated office space is scheduled to come on line in 2004, more than offsetting conversions from office to residential use. Asking rents, though still well below a year earlier, continued to edge up. Other Business Activity A New York City employment agency, specializing in office jobs, reports that hiring activity was unusually brisk in December, which is usually a slow month. Hiring has been fairly broad-based, with encouraging strength in the financial sector, though this contact notes a persistently large number of unemployed tech workers. A contact in New York City's securities industry reports that profits retreated somewhat in the fourth quarter and, though still robust, were less than expected. Still, Wall Street bonuses are expected to be up 18 percent to 20 percent from last year; while these are typically paid out in January and February, an industry contact anticipates somewhat later payouts, on average, in 2004. Manhattan hotels report that demand for rooms remained strong in December, for the fourth month in a row. While data on occupancy rates and room rates are not yet available, most hotels report brisk bookings. An industry contact notes that business travel remains in a slump, but that leisure travelers are more than picking up the slack. The manufacturing sector ended the year on a positive note. Most contacts in the district report further improvement in business activity as the year ended, as well as some leveling off in selling prices, which had been declining. Similarly, Buffalo-area purchasing managers indicate an acceleration in new orders, production activity and employment, as well as slower deliveries and higher selling prices. Financial Developments Small to medium-sized banks in the district again report decreased demand for consumer loans and especially for home mortgages, over and beyond normal seasonal weakness. However, demand for commercial loans was little changed. Lower overall refinancing activity was reported by the vast majority of bankers. On the supply side, bankers indicate a slight tightening of credit standards in all loan categories except residential mortgages. No bankers report an easing of standards. Interest rates for commercial loans held steady while rates for household loans were mixed: residential mortgage rates increased, on balance, while rates for consumer loans generally declined. Average deposit rates were little changed. Finally, delinquency rates again decreased for all categories of loans except commercial and industrial loans. Return to top Boston Philadelphia