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Beige Book Report: New York

August 2, 1988

The expansion in the Second District economy seems to have slowed somewhat in recent weeks. The latest purchasing managers surveys showed slightly fewer firms reporting stable to improved business conditions and retailers experienced lackluster sales. The pace of residential construction continues below the year-earlier level and demand for luxury housing is down. Office leasing activity has picked up, however. Most small- and medium-sized banks have not raised interest rates on consumer loans since the prime rate increase.

Consumer Spending
Sales at District department stores have continued sluggish since the last report. May was especially weak with over-the-year sales changes ranging from -5 percent to +2 percent. Although June brought some improvement, year-to-year sales results of -1.4 percent to .8 percent were all below respondents' targets.

Various kinds of apparel were cited as problem areas in recent weeks. Sales of women's apparel remained poor and sales of young men's sportswear were soft as well. In addition, furniture sales were down from a year earlier. Accessories, cosmetics and housewares moved fairly well, however. Inventories are comfortable for the most part, due to heavy promotional activity. Retailers do not anticipate much improvement for the rest of the summer but are cautiously optimistic about the fall season and the new fashion lineup.

Business Activity
Some slowing of the District's economic expansion occurred in recent weeks. In both Buffalo and Rochester the percentage of purchasing managers reporting improved business conditions declined and the percentage reporting a worsening increased. Nonetheless, by far the majority of firms-95 percent in Rochester and 79 percent in Buffalo- report stable to improved conditions. Inventories were generally satisfactory following a paring of stocks by some Rochester firms with unintended accumulation.

Foreign corporations figured prominently in recent District developments. Groundbreaking ceremonies were held in New Jersey for the U.S. headquarters of Jaguar Cars, Inc. and, in its second major expansion project in New York in two years, Swiss Bank Corp. bought a 27-story building in lower Manhattan to house a training center as well as headquarters and offices for some of its U.S. operations. In addition, a Japanese firm announced that its new U.S. subsidiary will begin producing printer ribbons on Long Island, and a subsidiary of a Swedish company plans a $10 million capital expansion in Utica.

Residential Construction and Real Estate Activity
The pace of homebuilding activity in the Second District generally remains somewhat slower than a year ago. Most pent-up demand has already been met and buyer resistance to the high level of new home prices has been noted in several areas. A few upstate communities report strong buying and high levels of residential construction, however. While demand for luxury housing has slowed somewhat, a number of projects to provide more affordable housing in the New York metropolitan area have recently been started or announced. Work was begun this spring on a new, 1,200-unit, middle-income townhouse complex in the Bronx, the largest low-rise development ever undertaken in that borough of New York City. On Long Island in an area where 430 moderate-income units are already being built, plans are being finalized for 600 more moderately-priced single and two- family homes on the site of a former, large state hospital complex. Finally, in Brooklyn some 300 low-income, low-rise units are being built under a new New York City tax abatement program for private developers of such housing.

A pickup occurred in commercial real estate activity. Westchester County witnessed one of its largest transactions in the past two years when a communications company purchased a large office building in order to expand operations there. Elsewhere in that county, brisk leasing was reported at an office park which is under construction. The signing of several large transactions boosted office leasing activity in midtown Manhattan recently, and some signs of stabilization were noted in downtown Manhattan as well. Finally, what is reportedly the largest office lease ever taken by a Japanese firm in the U.S. was signed at the $10 billion Newport City mixed-use project under construction in Jersey City.

Financial Developments
A survey of small- and medium-sized banks in the Second District indicated that most have not raised interest rates on loans to consumers since the July 14 increase in the prima rate. Though some officers anticipate that their bank may raise mortgage rates, few expect an increase in rates on consumer installment loans. One banker consented that interest rates on consumer loans generally fluctuate much less than those on home mortgages. Nearly all respondents anticipate rising market interest rates in the second half of 1988, though some predicted only minor increases. Most bankers said the current market for auto and other consumer installment loans is rather weak, with demand either flat or down compared with last year. Those with an increase in applications noted that their banks had recently mounted aggressive marketing campaigns. Several bankers mentioned that home equity loans have eroded the popularity of conventional consumer financing due to the Tax Reform Act of 1986 and the demand for them continues very strong. Delinquency rates on consumer loans have remained steady or declined from this time last year, and many respondents were pleased with the low delinquency rates on their loan portfolios. Demand for bank credit cards was described as good and comparable to last year. Some bankers believe future demand will not be as strong due to tax law changes reducing interest deductions.