Beige Book Report: New York
August 6, 1985
Introduction
The economic expansion in the Second District continues to be
uneven. Consumer spending remains sluggish, but there is some
evidence of improvement in July. Levels of business activity vary
across the District, with signs of strength in Rochester and
weakness in Buffalo. Two large automotive projects will bolster the
otherwise difficult conditions in regional manufacturing sectors.
Office markets are generally quiet as is usual at this time of year,
but extensive inventories are prompting landlord concessions and
contacts are uncertain about the fall outlook. The District's
housing market continues to boom, however, and real estate
portfolios of regional banks reflect this strength.
Retail Sales
The prolonged softness of District retail sales has continued in
recent weeks, with average spending only 2 percent above last year.
The weakness persists despite intensive promotions and heavy price
markdowns at many stores. Sales fell short of expectations by as
such as 8 percent in June even though some merchants lowered their
forecasts as recently as May. New York City sales are especially
weak, and one store reports a decline to 4 percent below 1984 sales
levels. Suburban outlets report modest gains, but still smaller than
anticipated. While most merchants are satisfied with inventory
levels, one store reports stocks 10 percent above plan and little
success in moving its merchandise.
Explanations for this spending slump include uncertainties concerning tax proposals, increased travel (and shopping) abroad, and reduced foreign tourism here. Additionally, some retailers think that consumers are waiting for further price cuts. Many report that early July figures suggest substantial improvement, but the data are too sketchy for them to call it a turning point.
Business Activity
As was the case last month, the pace of the business expansion
varies widely across the region. Rochester's economy continues to
pick up, with growing numbers of purchasing managers reporting sales
gains and very few reporting declines. In contrast, fewer Buffalo
firms report improvement in June, and more indicate a drop in
business. Syracuse's gain from Empire Airlines' recent decision to
consolidate operations there may be, to some extent, Utica's loss.
Some suburban areas such as Long Island and Fairfield County,
Connecticut report scarcity of low-skilled labor. In fact, McDonalds
restaurants in Stamford are busing 150 workers daily from The Bronx.
Overall, the District's unemployment rate remains below the national
average.
Two major projects announced by General Motors were welcome news to regional manufacturing sectors. General Motors will spend nearly $500 million to modernize and retool its Linden, New Jersey facility and to rebuild a plant in Tarrytown, New York. Meanwhile, ground was broken in Rochester for a complex of offices, small businesses, and a hotel: about 1,000 jobs will eventually be located there.
Construction and Real Estate
Vacancy rates in the District's office markets remain high. Across
the District, a buyers' market has developed, and landlord
concessions such as a period of free rent and leasehold improvements
are common. In northern New Jersey demand has been flat for the last
six months, and vacancy rates are as high as one third. Around the
District, observers are unsure whether the autumn's normal seasonal
upturn in demand will materialize, due to questions about the
economy, tax reform, and the value of the dollar.
Investment banks have been important in real estate recently. Dean Witter will rent one million square feet in the World Trade Center that the New York State government will be vacating. Prompt leasing of such a large block has relieved some realtor concern over the generally weak demand for space in new buildings. Morgan Stanley plans to lease 220,000 square feet in Brooklyn, pending special State subsidies. The Midtown Manhattan core of office space has been widening in recent years but this is the first major office project across the East River.
The District's housing markets continue to boom. Homebuilding in Rochester has been especially active, and the Syracuse builder's association canceled its annual home show as unnecessary. Prices continue to rise in many areas, and land, skilled labor, and some materials remain in short supply. Delayed completions have resulted, prolonging the period of heavy demand. Many builders expect this strong pace to continue at least through year-end.
Financial Developments
The region's stronger-than-average housing market is also benefiting
area banks. Our contacts in the District observe none of the real
estate problems reported in the national press. Delinquencies on
their real estate loans are not rising nor is the value of their
mortgage collateral falling. Area banks expect the solvency of
borrowers to improve as variable rate mortgages adjust downward and
high-cost fixed rate loans are refinanced at lower rates.