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New York: March 1990

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Beige Book Report: New York

March 14, 1990

Developments continued to be mixed in the Second District in recent weeks. January retail sales results varied widely and conditions in the District's commercial real estate market were mixed. Residential construction slowed throughout the District in 1989 and most observers do not anticipate much of a pickup in 1990. However, January surveys of purchasing managers in Buffalo and Rochester showed an improvement in general business conditions and District unemployment rates fell below the national average. Following the lead of major banks, small and medium-sized banks in the District dropped their prime lending rate in January.

Consumer Spending
The pattern of retail sales varied widely in the District during January. Over-the-year changes ranges from -7% to +22% and from "decidedly below" to "very much above plan." The Campeau bankruptcy was cited as a factor explaining the divergent results. Consumer uncertainty about the future of the Campeau stores and the reluctance of some suppliers to ship merchandise to them may have led to a shift in sales elsewhere. With an increasing number of manufacturers resuming shipments and growing consumer perception that the Campeau stores will remain open, respondents anticipate a less varied pattern of sales results in the months ahead.

Apparel and sportswear remained best-sellers during January and household items were also popular at some stores. However, big ticket items moved slowly, particularly at stores whose viability and ability to provide service were in question. In general, District department store contacts reported inventories to be on or below target.

Residential Construction and Real Estate
Residential construction slowed throughout the District in 1989 and most observers do not anticipate much of a pickup in 1990. While homebuilding activity was considerably more brisk in areas such as Buffalo and Syracuse than in the New York metropolitan region, the "boom" has apparently subsided everywhere. Factors most commonly cited are the continuing high prices of existing homes on the market, a lack of reasonably priced, developable land, and the satisfaction of much pentup demand. The need for "affordable" housing remains strong, however, and a number of communities are grappling with the problem in part because it is seen as a deterrent to future business development.

Conditions in the commercial real estate market have recently been mixed. Office leasing activity was quite strong in midtown Manhattan and, in Stamford, Connecticut overall leasing activity surpassed the addition to the market of new or existing space for the first time in several years. In Westchester County a sharp cutback in new construction is credited for the probable bottoming out of office rental rates and an expected decline in vacancy rates. However, the office market is described as soft in some other parts of the District such as Buffalo and downtown Manhattan, where financial firms have been retrenching, and in northern New Jersey as well. While a slowdown in new office building is expected to stabilize or lower vacancy rates in some of these areas, many observers expect Manhattan's rates to rise because of the lame number or buildings nearing completion and ongoing downsizing at brokerage firms.

Other Business Activity
January surveys of purchasing managers in Buffalo and Rochester showed an improvement in general business conditions, new orders and production. None of the Rochester managers reported a worsening of conditions and in Buffalo, the percentage reporting a decline in orders tell to 7 percent from 42 percent in December. A sizable majority in both surveys noted stable input prices. With regard to the outlook, 90 percent of Rochester respondents expect 1990 to equal or surpass business conditions in 1989 and 82 percent foresee capital expenditures either equal to or greater than investment in 1989.

District unemployment rates continued moving erratically in January as New York's rate fell .8 percentage point to 4.7 percent while New Jersey's rate rose 0.9 percentage point to 4.6 percent. As was true nationally, New York's rate declined slightly from a year earlier, but New Jersey's rate rose. Recent developments in the brokerage industry could result in an increase in District unemployment levels in the months ahead. The unexpected liquidation of Drexel Burnham and the employment cutbacks recently announced by Shearson Lehman and Merrill Lynch could entail the layoff of about 10,000 and some observers anticipate additional restructuring in the industry. In addition, Fisher-Price will close a toy factory in upstate New York, and G.E. Aerospace announced plans to lay off 5600 workers at its east coast plants.

Fiscal problems are now plaguing all three states in the District as tax revenues fall increasingly short of projections. New Jersey expects a $550 million deficit in the current fiscal year while New York faces a $1 billion deficit in the year ending March 31 and sizable deficits over the next few years.

Financial Developments
Following the lead of major banks, small and medium-sized banks in the Second District dropped their prime lending rate by one-half percentage point in January. The majority of the surveyed banks reported a general decrease in lending rates across the board. Almost all bankers noted that other business loan rates have fallen since they are usually tied to the prime. Most mortgage rates also dropped, reflecting the tying of many adjustable rate mortgages to the prime. Rates on consumer loans, however, were generally steady. Nearly all of the bankers noted that the change in the prime had no effect on general loan demand. Loan demand today is lower than a year ago and many bankers spoke of a particular weakness in the real estate market. One banker stated that demand for primary mortgages was especially slow. Most bankers see no basic improvement in this situation unless a significant decline in interest rates occurs.