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Beige Book Report: New York

January 24, 1990

The Second District economy has continued to show little change from the mixed patterns described in other recent reports. Sales results at department stores were uneven in what retailers described as an unusually competitive environment, and homebuilding activity was seasonally slow. Unemployment rates in New York and New Jersey moved in opposite directions and office vacancy rates also varied. Most officers of small to medium-sized banks reported an over-the-year decline in demand for many types of bank credit.

Consumer Spending
Sales results at District department stores were mixed in recent weeks with some meeting or surpassing planned levels and others falling below. All respondents commented on the unusually competitive environment this holiday season which manifested itself in a high level of price-cutting throughout the period and resulted in below-targeted profit margins. Over-the-year sales gains during November ranged between 1.5 percent and 9.7 percent while the December range was from 3 to 12.2 percent. A survey conducted by the Retail Council of New York State covering some 100 stores across the state found sales during the five-week pre-Christmas period to be 7 to 10 percent above a year earlier.

In general, women's apparel remained the strongest selling item. However, with the arrival of unusually cold temperatures in November, retailers also experienced strong demand for outerwear, leather goods, sweaters and down comforters. Some contacts mentioned a pickup in sales of furniture and home furnishings following earlier softness. Due in large part to the heavy promotional activity in recent weeks, inventories are generally at desired levels with the major exception of the reportedly understocked Campeau-owned chains which some manufacturers are reluctant to supply.

Construction and Real Estate
Homebuilding activity is seasonally slow throughout the District but the underlying demand for new homes remains mixed. A glut of homes for resale continues to plague much of the New York metropolitan area whereas some upstate New York communities report that buyer interest in their areas is still strong. Home prices have declined somewhat in the New York metropolitan area, due largely to reductions by hardpressed sellers. Regarding the outlook, homebuilders in the downstate area are not optimistic, anticipating that, despite lower mortgage rates, "1990 will be another tough year".

While office leasing activity in Manhattan was reported brisk in recent weeks, substantial amounts of additional space were placed on the market by consolidating and restructuring firms. As a result, vacancy rates for primary space in both midtown and downtown Manhattan rose and some observers anticipate further increases as buildings now under construction are completed. Office vacancy rates remain high in some of the District's suburban areas but, for the most part, have stabilized or declined recently due to a slowdown in new construction.

Other Business Activity
District unemployment rates moved in opposite directions during December. New Jersey's rate fell to 3.6 percent from 5.1 percent in November while New York's rate rose to 5.6 percent from 5.1 percent. Rates in both states varied erratically and over an unusually wide range in 1989. More recently, as part of the nationwide cutback in auto production, several thousand workers have been on temporary layoff at District auto plants, and close to 1000 workers have been permanently laid off due to the closing of the Lockheed Electronics plant in Plainfield, New Jersey.

The percentage of Buffalo purchasing managers reporting improved new orders rose sharply in December but continued to be surpassed by firms reporting a decline. The number of firms reporting greater production increased slightly but was also surpassed by those with declining output.

Among recent developments in the District, Ford Motor Co. announced a $200 million modernization plan for its Buffalo stamping plant and the Newark Housing Authority unveiled plans for a $400 million riverfront project to be built in the downtown area with construction to begin this year. On a less positive note, tax revenues throughout the District are falling short of expectations and both New York City and New York State face sizable budget deficits in their current fiscal years.

Financial Developments
Most officers of small- to medium-sized banks in the Second District reported an over-the-year decline in demand for many types of bank credit, frequently citing sluggish local economies as the cause. Commercial and industrial loan demand declined at all but one reporting bank. Bankers indicated that caution in the business community and anticipation of interest rate declines may be forestalling demand. The single officer who noted an increase in strength said his community is home to large, non-cyclical firms which are currently expanding. Most respondents reported that consumer loan demand has also fallen off. A few officers ascribed the decline to consumer uncertainty about interest rates and the future of the economy. However, most believed that as a result of incentives created by tax reform, consumer borrowing has been largely redirected into home equity financing. While all other loan demand has declined, nearly half of the officers reported increased demand for home equity loans. Most respondents said that mortgage lending has also declined. Several bankers indicated that in recent years real estate prices have been somewhat overvalued and that potential buyers are waiting for the market to complete its natural correction. Two officers noted that mortgage demand in their communities is quite strong, crediting the growth to businesses relocating into their vicinities because other areas were too expensive. Despite the fact that overall loan demand has been soft recently, bankers foresee slow to moderate loan growth in the coming year.