January 23, 1991
Developments in the Second District economy since the last report remain soft to mixed. Retail contacts reported disappointing sales results on balance despite some improvement just before and after Christmas. The underlying demand for new homes remains weak, and office vacancy rates in Manhattan rose somewhat further from already high levels. More positively, both the Buffalo and Rochester surveys of purchasing managers reported an increase in firms with improved business conditions in November, though more recent news from upstate New York suggests some slackening. Nearly all small and medium-size banks surveyed reduced their prime rate recently.
Consumer Spending
District retail contacts reported disappointing sales results in
both November and December though several experienced a decided
improvement during the last two weeks of the year. The sales
environment was very competitive and marked by a high level of
price-cutting throughout the period even though most stores entered
the holiday season with inventories substantially reduced from year-
earlier levels. Retailers cited concerns about impending layoffs and
the Middle East crisis as well as unseasonably warm weather for the
recent consumer apathy. Over-the-year sales changes at department
stores ranged from -3.5 percent to -13 percent in November and from
flat to -14 percent in December. A survey conducted by the Retail
Council of New York State covering some 200 stores across the state
found sales during the pre-Christmas period to be basically
unchanged from a year earlier.
Items which sold well included some women's and children's apparel, men's shirts and costume jewelry as well as certain toys. Furniture and rugs remained weak, however, and sales of cold weather items such as outerwear and comforters were also slow. Due in large part to a pickup in sales during the last two weeks of December, inventories are generally at or slightly below targeted levels.
Residential Construction and Real Estate
Homebuilding activity is seasonally slow throughout the District.
Moreover, the underlying demand for new homes remains weak. A glut
of homes for both resale and initial purchase continues to plague
most of the Nest York metropolitan area and has spread to upstate
areas as well. Sales in some New York City cooperative and
condominium apartment buildings have slowed to such a point that one
realty firm recently announced plans to hold an auction for
individual apartment owners. Some developers and lenders in the
District have already been holding auctions in order to pare their
housing inventories.
Office vacancy rates in both midtown and downtown Manhattan moved higher in recent weeks. In midtown, where an additional 2 million square feet of space is scheduled for completion in 1991, the higher rate resulted from slow leasing activity over the past few months. Although leasing activity has been more brisk in downtown Manhattan, blocks of excess space continue to he added to the market in the wake of consolidations and cutbacks in the financial services sector. Elsewhere in the District, the recent annual survey of Buffalo's downtown office space found the vacancy rate there had jumped to the highest level in more than five years, in part due to restructuring in the financial services sector.
Other Business Activity
Both the Buffalo and Rochester surveys of purchasing managers
reported an increase in the percentage of firms with improved
business conditions in November. However, more recent news reports
from upstate suggest that some slackening in economic activity is
now occurring. Several of these communities are hopeful that
Canada's mid-December imposition of a 7 percent sales tax will bring
an increase in Canadian shoppers.
The unemployment rate rose in New Jersey during the last quarter of 1990 but showed little change in New York State. In December, New Jersey' s rate stood at 5.9 percent, up from 5.2 percent in September while New York's December rate of 5. 5 percent was unchanged from September. Although New York's unemployment rate has remained stable, some observers are concerned because the number of employed persons has declined. Both New York City and State anticipate substantial layoffs more because of their budget gaps, and several corporations have announced impending cutbacks as further restructurings occur. One possible bright spot: the Navy is reportedly considering modifying an old Grumman jet fighter built on Long Island now that the Pentagon has canceled further work on the A-12 attack plane.
Financial Developments
Nearly all small and medium-size banks surveyed in the Second
District recently reduced their prime rate. When asked what factors
determined their bank's decision, most senior loan officers
indicated that their banks tend to follow a particular bank or large
money center banks while taking into account their credit risks,
competitive environment, and profitability. Bankers generally
reported that from twenty to thirty-five percent of loans
outstanding are directly tied to the prime. The vast majority of
their loans are above prime, usually by one or two percentage
points. Most bankers stated that the reduction in the prime had not
affected other lending rates but some banks did lower rates on other
business and commercial real estate loans. A few banks also reported
a slight easing of rates on some categories of consumer loans.
Most of the bankers surveyed indicated reduced willingness to make business and real estate-related loans. Respondents were evenly divided on the desirability of making consumer loans between "willing", "less willing", and "not willing". Most banks reported some strength in demand for either consumer or commercial real estate loans, but two noted weak demand in all sectors. Half expected loan demand to increase over the next three months, and half expected loan demand to weaken or stay uncharged. Factors contributing to reluctance to lend over the next few months included a national recession and a worsening of local unemployment and business failures.