Beige Book Report: New York
December 5, 1985
The Second District economy has maintains its improved tone in recent weeks. A higher percentage of purchasing managers reports better business conditions, and consumer spending has recovered from its September slowdown. Residential building remains strong while demand in the commercial real estate market is satisfactory. Small banks in the District note an increasing use of fixed fees rather than compensating balances in the pricing of business loan commitments.
Consumer Spending
Consumer spending regained momentum in October following a September
slowdown attributed to Hurricane Gloria and unseasonably warm
weather. The average over-the-year rise of 8 percent in October was
slightly below expectations, however, and gains varied considerably
across the District. Although department stores catering to more
affluent consumers indicated that sales met or exceeded
expectations, some discount and suburban chains posted disappointing
gains. In general, apparel and other soft goods sold well but
electronics and home furnishings remained weak. Early November sales
show little change. One retailer is concerned that he will lose
business if consumers are diverted toward car purchases by low-cost
financing. Another merchant, stuck with slow-selling hard goods
since mid-summer, plans to intensify a television advertising
campaign he began in August.
Inventories that were trimmed to desired levels last summer began to climb during the September slowdown. Although several merchants managed to reduce stocks to planned levels by the end of October, others report an excess. Inventories are currently being increased to meet the Christmas demand, but stores that have had abrupt sales shortfalls are adopting a conservative posture. Since the 1985 Christmas season will be a week shorter than 1984, some retailers will push Christmas items earlier than usual.
Business Activity
Second District economic activity improved somewhat in recent weeks.
A substantial percentage of purchasing managers reported more
favorable business conditions in September. Most firms also
experienced stable or improved production and new orders in October.
Inventories generally remain satisfactory despite some increase in
the share of managers reporting higher levels.
The outlook for the District's manufacturing sector is unclear. On the negative side, several firm have recently announced plans to move from or reduce their operations in the region. One of the largest such reductions could occur over the next two years at an auto parts manufacturer. While apparently still open to discussion, this move to a lower-cost area could affect some 1,100 District workers. More positively, General Motors plans a $340 million expansion program at a car engine factory. Elsewhere in the District, ground was recently broken for a $125 million state-of-the-art chemical plant. And an Air Force contract recently awarded to a District aerospace firm should provide additional employment.
By far the biggest new project announced for the District is a $10 billion community planned for the New Jersey waterfront across from Manhattan. Work was recently begun on the first phase of this project: four high-rise apartment buildings and a shopping center. By 1995 this new community is expected to include hotels, office buildings, parks, cultural facilities, a large marina, waterfront stores and restaurants, and up to 9,000 residential units.
Construction and Real Estate
Residential construction remains in excellent condition and a boom
continues in several Parts of the District. Because of the cyclical
nature of the industry, however, some homebuilders are concerned
that this prolonged period of strong residential building activity
is due for a reversal. As yet there are no indications of an
imminent slowdown, and applications for additional residential
development are still being presented to local planning boards.
Except for the usual slackening due to winter weather conditions,
most observers anticipate no decline in activity for at least six
months.
The District's commercial real estate market appeared stable in recent weeks with only minor changes reported in rents and vacancy rates. While few large-scale transactions are taking place, overall demand generally remains satisfactory except in some parts of northern New Jersey. There is still concern, however, about the outlook in lower Manhattan and Fairfield County where older office space is being vacated by tenants moving to newly-constructed buildings.
Financial Developments
Small banks report that business borrowers now pay for at most ten
percent of unused loan commitments through compensating balances.
This is a much lower percentage than five years ago, and it is
expected to decline further. Several banks suggest that many
corporations prefer to pay an explicit, fixed commitment fee rather
than incur the fluctuating opportunity cost of compensating
balances. However, one bank notes that it has few formal
compensating balance arrangements, yet it still encourages many of
its customers to maintain demand deposit balances.