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Beige Book Report: New York

June 20, 1990

Recent reports on District developments have tended to be somewhat weak. Retail sales were generally sluggish and in some parts of the District homebuilders reported that a shortage of credit is becoming a major problem. Office vacancy rates in Manhattan have reportedly reached their highest level in two decades but have stabilized in some other parts of the District. Nonetheless, District unemployment rates remain below the national average. Small and medium-sized banks stated that the demand for home equity loans is unchanged from a year ago.

Consumer Spending
District retail sales were generally sluggish since the last report. Two chains reported strong over-the-year gains during April and a marked slowdown in May, while others noted a slight improvement in May but with results that were well below plan in both months.

During April over-the-year changes in sales ranged from -6.9 percent to +14.0 percent with several stores reporting declines despite Easter's falling in April this year. Year-to-year changes in May covered a narrower range-from -8.0 percent to +1.0 percent. Rain and unseasonably cold weather were cited as major factors behind the recent sluggishness, though one retailer characterized it as a more generalized slowdown in consumer spending which might or might not continue. Home furnishings and women's apparel were mentioned as the weakest selling items.

Despite the disappointing sales results, for the most part inventories remain in good shape due primarily to careful monitoring. Indeed, the reluctance of some suppliers to provide goods to stores in bankruptcy or with substantial debt has in some instances reportedly resulted in somewhat lower-than-desired inventories.

Residential Construction and Real Estate
In some parts of the District homebuilders reported that a shortage of credit for acquisition and construction loans is becoming a major problem. This was particularly true in downstate New York and northern New Jersey where many commercial banks as well as thrift institutions were described as reluctant to lend. One respondent noted increased buyer interest in the resale market because of more realistic pricing, but expressed concern that potential "move-up" sellers may be stymied if homebuilders are unable to obtain the necessary funds for construction.

In both midtown and downtown Manhattan office vacancy rates have reportedly climbed to their highest levels in two decades as new buildings are completed in midtown, and financial services firms continue to contract and place superfluous space on the downtown market. In contrast, office vacancy rates have stabilized recently in other parts of the District including Westchester and Fairfield counties, northern New Jersey and Long Island. This has resulted from a slowdown in the delivery of new buildings together with strong leasing activity in some areas.

Other Business Activity
District unemployment rates in May remained below the national average. New Jersey's rate edged down to 4.8 percent from 4.9 percent in April while New York's rate rose to 5.1 percent from 4.9 percent. The growth in Second District nonfarm employment has lagged the national pace since 1986, however, due to substantial declines in the manufacturing sector and slower gains in nonmanufacturing industries.

The percentage of Buffalo purchasing managers reporting a decline in new orders rose sharply in April as did the number of firms with lower production. The percentage of managers reporting higher input prices also increased.

In response to an expected decline in defense outlays, G. E. aerospace announced plans to eliminate 4200 jobs over the next two and a half years with 50 percent of the job losses in upstate New York. A partial offset will be the creation of 500 new jobs at a new G.E. electronic parts manufacturing center outside Binghamton, New York. In New York City, the second phase of a conversion of the Brooklyn Army Terminal into an industrial park is scheduled for completion this month. With 94 percent of the first phase already rented (primarily to printers and garment/accessories manufacturers), the city estimates that 4400 will be employed at the facility by year-end.

Expressing concern over the state's financial condition, its heavy debt load, and economic uncertainties in the region, Moody's Investors Service lowered its rating on New York's general obligation debt as Standard & Poor's did earlier. Only Louisiana and Massachusetts now have a lower rating. New York State adopted a budget calling for a total of $1.4 billion in revenue increases. The New Jersey legislature continues to consider increasing revenues $1.4 billion to balance the budget. A further $1 1/4 billion proposed income tax increase would be mostly used to increase state aid to poorer school districts. According to press accounts this plan is broadly consistent with a recent New Jersey Supreme Court ruling.

Financial Developments
Based on a survey of small and medium-sized banks in the Second District, demand for home equity loans is generally unchanged from one year ago. While one banker noted that falling home values have eroded borrowers' collateral and driven down loan demand, another stated that declining home values had a positive effect because borrowers are reluctant to sell their homes at lower prices and are instead opting for home improvements. Most bankers anticipate strong demand for home equity loans over the next year since the tax deductibility of interest payments on other types of consumer loans is expiring at year-end.

Home equity loans as a share of consumer loans generally range between 15 and 35 percent at the surveyed banks. At moat banks this share has increased over the last year. However, respondents also stated that, in general, their lending policy has become more conservative. Some noted that they are staying away from speculative loans, such as those collateralized by non-owner occupied real- estate, and a few bankers stated that they are basing ability to pay more on income than on collateral. Almost all bankers surveyed said that their loan-to-value ratio has been reduced, or is expected to be reduced soon, and many noted that they are discounting the appraisal value of homes. All but one banker said the interest charged is tied to the prime rate with most charging 2 percentage points above the prime. Bankers expect to continue charging this rate on home equity loans.