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Beige Book Report: New York

June 21, 1989

A mixed pattern of developments in the Second District economy continued during recent weeks. District retailers had over-the-year sales gains during both April and May, though the extent of the increases varied widely. Unemployment rates in District states have seesawed recently but are currently at or below the national level. While office leasing activity picked up further, homebuilders reported a slower pace of construction. Most small-and medium-sized banks reported that demand for commercial loans is generally the same or somewhat weaker than a year ago.

Consumer Spending
District retailers reported over-the-year sales gains during both April and May though the extent of the increases varied widely. April gains ranged between 2.7 percent and 13.6 percent while the May range was from 0.5 percent to 6.6 percent. several contacts described their April sales as well above plan but a few found theirs disappointing. May results were generally below or just about on target. Among items in strong demand at District department stores throughout the period were women's apparel, accessories and cosmetics. Men's apparel and home furnishings also sold well in April but demand for them slowed after that.

Inventories at the start of June were characterized by most respondents as satisfactory, though in one case only as a result of heavy markdowns during recent promotionals. This retailer remarked that profit margins at many stores are increasingly being squeezed by higher import and supply prices on the one hand and customer resistance to paying for these costs on the other.

Business Activity
District unemployment rates have seesawed in recent months but currently are at or below the national level with a May reading of 5.3 percent in New York and 3.0 percent in New Jersey. (The New York rate averaged 4.2 percent last year, however.) In New York, spokesmen for Grumman now predict that as many as 10,000 to 15,000 jobs would be lost on Long Island if the Pentagon carries out its plan to cancel several Navy aircraft contracts.

Some 40 percent of purchasing managers in Buffalo and Rochester reported improved business conditions in May, unchanged from the last surveys. However, in Buffalo, there was also an increase in the percentage of firms with worsened conditions.

Several large projects here announced in the District since the last report. An aluminum company will invest $175 million over die next three years to modernize a sheet-producing plant north of Syracuse, and General Electric will produce eight steam turbine engines at its Schenectady facility as part of a $750 million order from a foreign utility company. Elsewhere, the Yonkers City Council gave final approval to a $300 million waterfront project which will include apartments, a shopping mall and various recreational facilities, and the Islip Town Board approved a master plan for redeveloping an 800- acre former state hospital into a mixed-use complex composed of industrial, office and retail space, a hotel, housing, recreational facilities and an expansion of the New York Institute of Technology campus. Newark was the site of several recent developments: construction was begun on two shopping centers; Seton Hall University will build two office towers and expand its law school in conjunction with a development corporation and the city; plans were also announced for a $130 million office, hotel and retail complex to be linked by "skyways" to the nearby railroad station.

Residential Construction and Real Estate
District homebuilders report a slower pace of construction activity in recent weeks. In some areas where builders earlier had been quite busy, this slowing was attributed in large part to unusually rainy weather, which deterred potential buyers from looking and restricted the amount of construction which could be done. In other areas, however, where large inventories of homes for resale exist, demand for new homes continued weak in the face of buyer resistance to high prices. Some observers noted a pickup in the remodeling and expansion of existing homes by owners unwilling to reduce their asking prices. While the current lull in the housing market is viewed by many as an inevitable part of a cycle following several years of substantial strength, the recent decline in interest rates has generated hope that an upturn in buyer enthusiasm will occur.

Office leasing activity picked up further in recent weeks and both downtown and midtown Manhattan had volume well above year-earlier levels. Despite strong leasing, however, Manhattan vacancy rates showed no improvement because of the large amount of additional space recently put on the market. Office vacancy rates did edge down in some parts of the District such as northern New Jersey and Fairfield and Nassau counties.

Manhattan is currently undergoing a spate of hotel-building activity in areas which, until recently, had been deemed unlikely locales. Three hotels are under construction near Times Square, where the first new hotel opened four years ago, and two others are going up in the Wall Street area, where the first hotel opened eight years ago. New developments such as tourist attractions, a convention center, and a cluster of new office buildings are created with turning these areas into more viable hotel sites.

Financial Developments
Based on a survey of senior officers at small-and medium-sized banks in the Second District, demand for commercial loans is generally the same or somewhat weaker than a year ago. Most officers did not believe that the rise in interest rates over the past year substantially dampened commercial loan demand. In their opinion, other factors such as projected sales and expectations of future economic conditions are probably more crucial in expansion and modernization plans of firms and the subsequent loan demand. With regard to particular types of commercial lending, bankers in upstate New York tended to report strong demand for construction loans while those in the southern portion of the Second District stated that the commercial real estate market is quite weak. However, except for the real estate sector, most respondents believed that their local economy is basically healthy, though only a few noted strong growth. The majority of those surveyed expect demand for commercial loans to remain stable through 1989, barring a sharp fall in interest rates.