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Beige Book Report: New York

August 9, 1989

The pattern of developments in the Second District continued to be mixed across sectors. Some retailers reported sales well above plan, while others experienced demand that met or fell below targeted levels. Upstate New York reports on new orders, production, and general business conditions indicate some leveling off. Nevertheless, more respondents continued to report gains in these areas than reported declines. Office leasing activity in the District has maintained a moderately strong pace. The pace of homebuilding activity has been uneven across the District, and based on a survey of small- to medium-sized banks, demand for residential real estate credit has weakened.

Consumer Spending
Sales results at District department stores were mixed during June. While some retailers reported sales were well above plan, others experienced demand that just met or fell below targeted levels. Over-the-year gains in June ranged from 0.2 percent to 9.5 percent among District retail contacts. Women's and junior apparel, accessories and cosmetics continued to be in strong demand and men's departments showed some improvement from their earlier weakness. In contrast, home furnishings and appliances were generally weak. Partial results for the first half of July indicate some slowing may have occurred in recent weeks.

With the exception of one store, which had stocks well above desired levels, department store contacts described their inventories as being in good shape. In one case, this was due to unusually heavy markdowns, which were being continued in July.

Residential Construction and Real Estate
Homebuilding activity in the District has been mixed in recent weeks. A glut of homes in the resale market continues to be cited as a major deterrent to homebuilding in downstate New York and northern New Jersey, but a slight pickup was noted as a result of lower mortgage rates. Many observers believe that existing home prices will need to be lowered considerably more before current owners can sell and "move up" to new homes. By way of contrast, homebuilders in several upstate New York communities are currently quite busy after an unusually rainy spring, which slowed things down, and home prices continue to rise in response to strong demand. With regard to the outlook, projects have recently been proposed for 4700 new moderate income residential units in Brooklyn and 7000-10,000 units in Queens, and a survey in Monmouth County (N.J.) projects the need for some 33,000 new units to be built in that area over the next few years.

Office leasing activity has continued at a moderately strong pace since the last report as Manhattan's largest lease of the year was signed for space in a 40-story midtown building scheduled for completion in 1992. Vacancy rates declined in several parts or the District including northern New Jersey and Suffolk and Westchester counties (N.Y.). Rates moved higher in some other areas, however, including downtown Manhattan where downsizing or merging financial firms are adding to the available supply of office space.

Other Reports on Business Activity
June surveys of purchasing managers in Buffalo and Rochester suggest some tendency to a flattening out in general business conditions, orders and production with an increased majority reporting "no change" in these various categories. Nevertheless, improving conditions are still reported by substantially more firms than are reporting a deterioration. Noticeably fewer purchasing managers reported higher input prices in June. Concerning the outlook, both the monthly Rochester survey and a semi-annual survey by the Manufacturers Association of Central New York showed a large group in the percentage of respondents expecting a further improvement in business conditions over the next three to six months.

June unemployment rates of 4.2 percent and 5.0 percent in New Jersey and New York, respectively, were again below the national average. Nevertheless, the growth in second District nonfarm employment has increasingly lagged the national pace since l986. In large part this results from continued declines in manufacturing employment in the District. In addition, some nonmanufacturing industries are growing more slowly than elsewhere in the nation. As a result of this and other developments, much discussion is going on in government and private circles regarding what can be done for the region to maintain its competitive position.

Several new projects were announced or undertaken in recent weeks. The Mahwah, New Jersey, United Parcel Service broke ground for a computer and telecommunications center which will be part of a $1.4 billion investment in its worldwide operations. In Monmouth County plans have been announced for two large mixed-use projects which it is hoped will revitalize an old resort area. Ground was also broken in northeastern New York for a $50 million mall scheduled to open next year, and downstate plans were announced for a major expansion of the New Rochelle mall.

Financial Developments
Based on a survey of small- to medium-sized banks in the Second District, demand for residential real estate credit has softened. While interest in second mortgages remains strong, demand for primary mortgages is modest or falling. According to the bankers, adjustable rate mortgages still appear more popular than fixed-rate ones, especially those with first-year discounts. Several reasons were suggested for the softening of real estate loans. Some bankers said that the real estate market may have overexpanded and is now undergoing an adjustment period. Other reasons given were: continued uncertainty about the outlook for financial markets, relatively high interest rates, and the slowdown in the national economy. Most of the surveyed bankers characterized their local economies as strong, however, and reported that employment levels were very high. They forecast continued but slower growth in the future for their communities. In general, the respondents were not worried about inflation with many stating that its current rate is not high enough to warrant concern. Most anticipate that inflation will continue at relatively moderate rates during the next year.