September 8, 1987
Economic activity in the Second District continued to vary among sectors in recent weeks. General business conditions improved somewhat further, and office leasing was fairly good. Homebuilding activity displayed a mixed pattern, however, and July spending at some retailers was below plan. On the financial side, small and mid- sized banks expect only a mild increase in inflation over the near term.
Consumer Spending
District retailers reported some slowing in sales during July. Our
respondents registered over-the-year gains of 2 to 8 percent
compared with increases of 3 to 13 percent in June. As a result,
July sales generally were somewhat below plan. However, one chain
with overall sales below target reported that results in the
District were 2 percent higher than expected. Retailers were
optimistic about the fall and back to school season, noting that the
softening in July was the first in several months. One firm
attributed its July slowdown in part to a shortage of summer
merchandise that resulted from a successful promotional held at the
start of the season.
Due to the somewhat disappointing sales gain in July, retailers reported inventories at higher levels than planned. An exception was the firm with a shortage of summer merchandise. None of the respondents reported inventories at uncomfortable levels, however.
Business Activity
General business conditions in the Second District improved somewhat
further in recent weeks. The percentage of Buffalo purchasing agents
reporting improved or stable conditions rose in July while in
Rochester, for the third consecutive month, there were no reports of
worsened business conditions. Inventories were down somewhat but
remain at comfortable level.
Unemployment rates moved lower in both New York and New Jersey during July to 4.4 percent and 4.0 percent, respectively. Rates in most of the District's labor market areas are below the national average and in several instances have declined sharply since last year. In Elmira, for example, where some new plants have opened, the unemployment rate dropped from 6.1 percent to 3.6 percent over the year ended in June (latest data), while in Buffalo, the rate fell from 6.9 percent to 5.0 percent over the same period as 20,000 new jobs were added. The rebuilding of the Fort Drum military post now underway in northern New York State is providing a stimulus to Syracuse and several depressed economies in the upstate area.
Construction and Real Estate
District residential construction activity presented a mixed pattern
in recent weeks. In the downstate and New Jersey markets some
further slowing has occurred, and homebuilders report little traffic
by prospective buyers in their areas. Most pent-up demand has
already been satisfied, and high land and home prices tend to be
deterrents. Upstate, however, builders remain quite busy completing
existing contracts, and some areas report strong interest in future
contracts. Home prices in these areas have either held steady or
risen only moderately. Overall, starts in the District in 1987 are
now expected to be down somewhat from last year's level.
Office leasing activity has been fairly good in much of the District, and in New York City, where the vacancy rate is already relatively low, a pickup has recently occurred in commitments for space in some new buildings. However, vacancy rates remain at 20 percent or above in areas such as Westchester and Fairfield counties and northern New Jersey. While office construction has virtually halted in Westchester, new buildings continue to come on line in Fairfield and New Jersey.
Financial Developments
Senior officers at small and mid-sized banks in the Second District
reported expectations of only a mild increase in inflation in the
near future. Rising oil prices, due to political unrest in the
Middle East, and the falling dollar were the factors most commonly
cited as likely to lead to an acceleration of the inflation rate.
Expectations of higher inflation were tempered, however, by a
widespread belief that Chairman Greenspan would pursue a strong,
anti-inflationary, monetary policy. Reflecting their anticipation of
a modest increase in inflation, the officers believe that interest
rates will show only a slight rise, if any, by the end of the year.
Most of these bankers expressed hesitancy to raise their interest
rates any higher this year unless the money center banks initiate
such a move.