December 5, 1984
Introduction
The pace of economic activity in the Second District has been uneven
in recent weeks. Retail sales slowed significantly in October and
early November, while purchasing managers reported significant
improvement in business conditions in October after a sharp slowdown
in September. The first reports on the Christmas season were mixed.
Over the Thanksgiving weekend, department store sales were on or
above plan, but several retailers had advertised heavily and cut
prices. Homebuilders remain busy and skilled labor is increasingly
scarce. The office market, in contrast, is weakening almost
everywhere outside of midtown Manhattan. Thus far, the demand for
mortgages and consumer loans has not responded to the recent
decrease in interest rates.
Consumer Spending
Second District retailers report a weakening of consumer sales in
October and November. Unseasonably warm weather was cited as the
cause of the slow sales of winter clothing through most of the
period, yet only one merchant reported sharp increases when the
weather cooled in mid-November. As a result, most stores report
unplanned increases in their inventories. Over the Thanksgiving
weekend, sales at many stores showed some improvement, with
increases over 1983 ranging from flat to 39 percent. However, the
promotional environment has been escalating and some retailers
reported needing aggressive advertising and price cuts.
Business Activity
During recent weeks the pace of economic expansion showed some
improvement after the September slowdown. In Rochester, the
percentage of purchasing managers reporting improved business
conditions rose substantially in October; in Buffalo the percentage
reporting declining orders fell. Inventories were steady to slightly
higher and remain at satisfactory levels. Several New York firms
plan to increase production end hiring as a result of newly-awarded
government contracts and urban development grants. Additionally, a
Japanese electronics firm will build a U.S. headquarters complex in
Mahwah, New Jersey on the site of a large plant closed in 1980.
A recent report indicates that New York City's employment growth during the recovery extended to all five boroughs, in contrast to past years when most job gains were concentrated in Manhattan. Employment increases in Brooklyn and the Bronx reversed a six-year pattern of decline.
Construction and Real Estate
Residential construction activity remains intense. New contracts for
home construction are being written by some upstate builders at a
rate that exceeds even the rapid pace of last summer. In downstate
New York, however, a shortages of skilled labor in parts of the
metropolitan area are reportedly worsening and the delays have been
very costly to some homebuilders. In parts of New Jersey, planning
for multi-family housing is picking up as court-ordered down-zoning
is gradually being implemented. Additionally, for the first time in
several years, New York City is sponsoring the production of rental
housing without Federal subsidy.
Observers across the entire District, however, report slower absorption of office space in almost all areas, with parts of Westchester, Connecticut and New Jersey especially sluggish. Potential renters of office space appear to be taking a "wait and see" stance before signing leases. Observers also believe that plans for many construction projects not yet started an likely to be postponed. The one exception to this softening trend is in midtown Manhattan, where demand is still strong and inventories of rental spaces are low.
Financial Developments
Despite the drop in interest rates since August, several regional
banks said they experienced little or no increase in the demand for
mortgages and consumer loans beyond the normal seasonal variation.
One reason mentioned for the weakness is that their mortgage end
consumer loan rates have not dropped as much as open market interest
rates, and consumers are said to be delaying their borrowing in
anticipation of a further decrease in the bank rates. The banks also
reported that for new mortgages, fixed rate instruments have become
more popular in the last few months.