January 28, 1987
Conditions in most sectors of the Second District economy were stable to improved in recent weeks. Consumer spending during the holiday season was at or above expectations and inventories were generally low going into the new year. Residential construction remained strong, in part because of mild weather. An increased number of firms however, reported a worsening of business conditions, although the majority continues to experience stability or improvement. On the financial side, lending activity increased substantially during late 1986 at mid-sized banks in the District.
Consumer Spending
Consumer spending at Second District stores ranged from 6 to 23
percent above year-earlier levels during the 1986 Christmas season,
and several retailers reported sales above plan. After a strong
post-Thanksgiving period, sales activity slowed in early December as
buyers apparently waited for the pre-Christmas markdowns which had
been the pattern in some recent years. Most retailers had entered
this holiday season with slim inventories, however, and refrained
from offering additional promotions. As the holiday drew nearer, a
decided upturn in sales occurred and most retailers ended the season
with overall sales at or above plan. One department store chain with
somewhat disappointing sales attributed this to a special
promotional in November detracted from its December business.
Among items in strong demand were apparel, jewelry and electric appliances. In addition, a new laser toy proved so popular that stores could not keep it in stock. As the new year began, most stores reported inventories at quite comfortable levels.
Business Activity
The Second District's economic expansion slowed somewhat in recent
weeks. Most purchasing managers in Buffalo and Rochester continue to
report stable to improved new orders and production. However, the
percentage of firms with declining business conditions has been
rising, and in November such firms surpassed the number with
improved situations for the first tine in several months.
Employment remains at a record level in the District as declines in manufacturing have continued being offset by gains in other sectors. Moreover the December unemployment rates of 4.3 and 6.0 percent in New Jersey and New York, respectively, were below the national average. However, a development that could have an adverse impact on District employment is A.T.& T's recently announced plans for a 27,400 reduction in its workforce by the end of 1987. While no information was given as to where the cutbacks would occur, some 67,000 of the company's employees are in the New York-New Jersey area.
Construction and Real Estate
Residential construction continues to be strong in the Second
District. Aided by the lack of frost and unusually warm weather,
builders have remained quite active working on contracts from the
fall. A scarcity of suitable land is a growing problem in some areas
and rising home prices are widespread. Developers are increasingly
resorting to subdivisions in order to keep house prices at
affordable levels. Despite these problems, builders are generally
optimistic that 1987's activity will come close to matching the busy
pace of 1986.
Office market conditions were relatively stable in recent weeks with few major new projects undertaken. Additional leasing activity continues to help in areas of oversupply. Moreover, some observers anticipate an actual tightening of the office market on Long Island because of the unabated demand and limited construction activity there. In Manhattan, opinions are mixed concerning the likely impact of the recent collapse of rental negotiations for the last of the World Trade buildings. Some anticipate a sizable increase in the downtown vacancy rate as these 2 million square feet of new office space re-enter the market, but others believe it can be absorbed without much difficulty.
Financial Developments
Mid-sized banks in the Second District report that lending activity
increased dramatically in late 1986. The surveyed banks attributed
the increase primarily to changes in the tax code which encouraged
transactions to be completed by year end. The changes include the
future elimination of investment tax credits, a higher capital gains
tax rate, and less favorable treatment of depreciation expenses. All
of the banks surveyed stated that last minute merger and acquisition
activity was not a factor in the loan surge. In general, real estate
loans, which had been strong throughout the year, increased the
most. The banks added that they expect demand for both real estate
loans and small business loans to increase further during early
1987.