March 9, 2005 Federal Reserve Districts Second District--New York

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The Second District's economic expansion has been well maintained since the last report, while price pressures have been relatively subdued. Manufacturers report continued moderate growth in activity in February, and some moderation in price pressures. Retailers indicate that February sales were little changed from a year earlier but generally close to plan; however, tourism activity is reported to have been unusually strong in early 2005. Residential real-estate markets showed further signs of strength in January and February, while both office and industrial markets were stable. The securities industry reports brisk business activity, as well as a pickup in hiring and compensation. Finally, bankers report little net change in loan demand and steady to declining delinquency rates. Consumer Spending Retailers report that sales were mixed but, on balance, close to plan in February and little changed from a year earlier. A boost in apparel sales from New York's one-week holiday from sales tax on moderately-priced apparel (January 31-February 6) and a strong pickup in sales to tourists appear to have been offset by unseasonably cold and wet weather. A number of contacts indicate fairly brisk apparel sales but relatively sluggish sales of home furnishings and equipment. Inventory levels were mostly described as satisfactory. Retail chains indicate that prices were steady to down slightly, compared with a year earlier. Consumer confidence was little changed in February, as in January, based on the Conference Board's latest survey of Middle Atlantic state (NY, NJ, PA) residents. New York City tourism has been exceptionally strong in early 2005. In January, Manhattan's hotel occupancy rate was up about 3 percentage points from a year ago, and total revenues were up roughly 15 percent. More recently, an industry contact reports that most Midtown and Uptown hotels were completely booked for most of February, largely spurred by visitors to the Christo "Gates" in Central Park. In the third week of the month, hotel revenues were reported be up by roughly a third from comparable 2004 levels. Museum attendance was also said to be exceptionally high in the second half of February. Broadway theater attendance was sluggish in the first half of February but picked up moderately in the third week of the month. Finally, Buffalo-area hotels report that occupancy rates have been running roughly on par with a year earlier, as stronger underlying demand was said to be offset by the cancellation of National Hockey League games. Construction and Real Estate Housing markets were generally characterized as robust in the first two months of 2005. New Jersey homebuilders note that a modest inventory build-up last December turned out to be short-lived and that demand remains strong. Moreover, the state's major builders' association reports particularly strong registration for their upcoming annual conference. Similarly, New York City's co-op and condo market is characterized as increasingly tight in early 2005, particularly for smaller (1 bedroom and studio) apartments; overall, prices are reported to be running 10-20 percent ahead of last year, though the number of transactions is down somewhat, reflecting a dearth of units on the market. Manhattan's apartment rental market has been holding steady thus far in 2005, with rents estimated to be up 5 percent from early-2004 levels; however, the very high end of the market is described as relatively strong, reportedly buoyed by apartment-seekers shifting from the sales to the rental market. Commercial real estate markets in and around New York City were relatively stable in the first two months of 2005. Compared with year-end 2004, office vacancy rates edged down in Midtown Manhattan and northern New Jersey but edged up in Lower Manhattan and Long Island; asking rents were also little changed. For all of Manhattan, an industry contact reports that the volume of available sublease space fell to its lowest level since September 2001. Industrial vacancy rates held steady on Long Island, in January and February, but edged up in New York City and climbed to a nearly two year high in northern New Jersey, partly reflecting new supply of space. Other Business Activity Manufacturers report continued moderate growth in activity in February, along with some moderation in price pressures. Our latest survey of New York State manufacturers indicates steady growth in manufacturing activity in February; there was a pickup in shipments but a dip in unfilled orders. Increases in both current and expected selling prices were more subdued than in recent months. Purchasing managers in the Buffalo area note some deceleration in manufacturing activity, as well as some moderation in price pressures, in February. However, purchasers in the New York City area indicate a modest rebound in manufacturing activity, following some softening in December and January, along with little in the way of price pressures. A major New York City employment agency reports that hiring activity remained fairly brisk in February, but has not strengthened noticeably from late 2004. Our contact indicates that the quality of job candidates available to meet openings is lower than last year. Most of the hiring is still reported to be coming from the financial and legal sectors, but there has been a scattered pickup in other industries such as fashion, pharmaceuticals, and executive placement. The securities industry has continued to perform well in early 2005; despite some slowing in equity issuance, other business segments are reported to be strong. Moreover, employment continues to grow, despite scattered layoffs, and total wages and salaries the first quarter are estimated to be running 10 percent ahead of a year ago, led by a 15 percent increase in bonuses. Financial Developments Small to medium-sized banks in the Second District report little change in overall loan demand. Bankers report reduced demand for residential mortgages and commercial and industrial loans, but steady demand for consumer loans and increased demand for commercial mortgages. Bankers again report no change in credit standards across all loan categories. Interest rates rose across all loan categories except residential mortgages, where rates are reported to be unchanged. Average deposit rates rose, according to 80% of respondents, with no banker reporting a decline. Bankers report little change in delinquency rates for the household sector, but slight declines for nonresidential mortgages and commercial and industrial loans. 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