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Beige Book Report: New York

August 3, 1987

Developments in the Second District economy varied somewhat among sectors during recent weeks. General business conditions continued to be stable or improved and office leasing remained good in most areas. Some slowing in residential construction activity occurred, however, and consumer spending was not uniformly on or above plan. Small and mid-sized banks reported a decline in primary mortgage rates during June and July.

Consumer Spending
The pattern of sales at District department stores was mixed during June, but for the most part respondents reported results that were on or above plan. One retailer with lower-than-targeted June sales noted that its stores ran a special promotional in May with very strong sales, and this detracted from some of their usual Father's Day business in June. Consequently, the chain is viewing the two months as a single unit this year, the combined results for which were slightly above plan. Overall, June sales among respondents ranged from 4 percent to 12 percent above year-earlier levels.

Items for which there was good demand in June were apparel of all types, not just for Father's Day, and housewares, furniture and rugs. Inventories continue to be monitored closely and generally are on or slightly above target. One retailer whose chain has had higher-than-desired stocks in recent months plans an additional promotional In the near future to try to pare inventories.

Business Activity
The improved tone in the District's economic activity continued in recent weeks. The Buffalo survey of purchasing managers registered a sizable increase in the percentage reporting better conditions while in Rochester, for the second consecutive month, no respondents experienced a worsening. Both area surveys, however, found an increase during June in the percentage of firms reporting higher commodity costs following a decline in May.

Several recent developments point to a positive impact on the District's economy. The New York Times announced plans to spend $400 million, its largest capital investment ever, on a new printing plant in New Jersey. Estimated to be the size of 20 football fields, the plant will ease production constraints at existing sites and permit growth of the Sunday edition. Also in New Jersey, Governor Kean has just presented plans for a $200 million state center for the performing arts to be erected in Newark, plus expenditures of about $50 million on other performance facilities in the District. In another development, ground was recently broken in Manhattan for Shearson Lehman's new office tower which, upon completion, will house 1500 new employees together with 5000 workers currently employed by the firm.

Construction and Real Estate
A slackening in the pace of District residential construction occurred in recent weeks which was described in terms ranging from "negligible" to "definitely slower". The main reasons cited for the slowdown were a two percentage point rise in mortgage rates in some areas and the high level to which land and home prices have risen in others. Responses were also mixed as to the near-term outlook. Some homebuilders reported a pickup had already begun while others anticipated that the slower pace would continue. For the most part, however, District builders still expect this year's activity to run at or close to the rate in 1986, which for many was a record.

Leasing activity in the District's commercial and industrial markets generally remains good. Among new undertakings, construction has begun on a large mixed-use office, residential and commercial complex at a four-acre site in mid-Manhattan which for many years had served as a parking lot. A major tenant has already been announced for the office skyscraper to be built there. While conditions have generally been good, some concern has been voiced recently regarding developments in Westchester County and northern New Jersey where office vacancy rates remain at 20% or above. Leasing activity in much of Westchester has been slow in recent months, and while northern New Jersey continues to attract new tenants, a spate of newly announced large office projects has raised the possibility of increasing vacancy rates.

Financial Developments
Small and mid-sized banks in the Second District report that primary mortgage rates have mirrored the national pattern, rising during April and May and declining by a smaller amount since then. The banks attributed the recent decline to consumer resistance to higher rates and competitive pressures from other banks. Most banks expected that the reduced demand for primary mortgages would put additional downward pressure on rates in the near future. However, a few respondents thought that rates had stabilized. As interest rates rose earlier in the year, the demand for adjustable rate mortgages relative to fixed rate loans increased dramatically. This trend has reversed itself since interest rates turned down, and the portfolio mix now is very close to that at the beginning of the year. Despite the lower demand for primary mortgages, banks do not expect that home equity loans will be negatively affected because of the low rates and tax advantages associated with them.