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Beige Book Report: New York

June 22, 1994

The Second District continued its moderate expansion since the last report although some signs of softness were noted. Unemployment rates fell substantially in May, and discussions with manufacturing firms suggest a continuing improvement in that sector. Office leasing activity in Manhattan resulted in lower vacancy rates in both the downtown and midtown areas. In addition, several recent and upcoming events indicate a pickup in the District's entertainment and tourist sectors. On the other hand, most District retailers reported disappointing sales results in May, and though homebuilders were generally positive, a slowing of traffic was noted in some areas. Officers surveyed at small and midsized banks reported a recent drop in mortgage loan demand but some strength in the demand for business loans.

Consumer Spending
Most District retailers reported disappointing sales results in May following April year-over-year changes that were better than expected at several chains. The slowdown in May was attributed in part to unseasonably cool weather which dampened interest in summer apparel. In addition, several contacts noted greater reluctance to spend.

Almost all retailers reported over-the-year sales gains in April despite the fact that Easter shifted from April in 1993 to this year's March. Sales results generally ranged from -2 percent to +10 percent with athletic apparel, jewelry, furniture, and electrical appliances cited as most in demand. With activity slackening in May, several retailers stated that sales were flat over the year and only one chain had results that were greater than plan. Durable goods sold more readily than soft goods in May. Inventories were generally at comfortable levels, aided by greater-than-planned markdowns at some stores. Retailers were hopeful that the May slowdown will prove to be a short-lived aberration.

Residential Construction and Real Estate
Homebuilders in the District were generally positive about conditions in the market for new homes though in some areas a slowing of traffic was noted in recent weeks. Higher mortgage rates were cited as the reason for this slowing, but observers in other areas stated that rates were still relatively low and the increases had motivated buyers to act before rates moved still higher. A majority of respondents expected starts to be somewhat above last year's level, but this was on the assumption that interest rates would not rise much further.

In New York City, two long-delayed projects are scheduled to get underway in June. In Queens, ground will be broken for the $2.3 billion Hunters Point riverfront project, under discussion for some ten years which when completed is to comprise 15 apartment buildings and four commercial buildings. In Brooklyn, construction of the first in a group of 126 three-family homes is to start. The project, initially planned in the 80's, will eventually include two large retail centers as well.

Office leasing activity in Manhattan during recent weeks resulted in lower vacancy rates in both the downtown and midtown areas. The midtown vacancy raw on primary properties is now at its lowest level since the end of 1989, but, on balance, the downtown rate has shown little overall improvement.

Other Business Activity
As was true nationally, unemployment rates in the District dropped substantially in May. New York State's rate fell to 6.5 percent from 8.2 percent in April while New Jersey's declined to 6.9 percent from 7.2 percent in April. It is possible that the seasonal adjustment factors for the revised household survey exaggerated New York's improvement. Nonfarm employment has been growing steadily in New York since last October and rose strongly in New Jersey during April following a moderate increase in March and a decline in February. No major new layoffs or expansions were announced lately in the District.

The results of recent discussions held with 25 manufacturing firms suggest a continuing improvement in the District's manufacturing sector. While a few large firms plan further employment cuts, most firms anticipate flat or rising employment, increasing unit sales, wage growth of 2-4 percent, and flat or rising capital spending. Such expectations contrast sharply with discussions a year ago which were dominated by anticipated sales declines, and contracting employment and capital expenditures. Price competition, however, remains intense. All but one firm expect that unit prices will remain unchanged or decline in the next six months. A sizable majority anticipate strong gains in exports, well in excess of the expected growth rates for domestic sales.

Several recent and upcoming events indicate a pickup in the District's entertainment and tourist sectors. During the 1993-4 season attendance at Broadway theaters reached its highest level in six years, and hotel occupancy has been steadily rising since last fall in New York City. Looking ahead, more than one million visitors from all over the world are expected in late June to attend three World Cup soccer games in East Rutherford, New Jersey, and to participate in and watch the eight-day Olympic-style Gay Games and Cultural Festival to be held at numerous locations in the New York metropolitan area. In addition, the New York Knicks made the NBA finals, and the Rangers won their first Stanley Cup in 54 years--the extra games played in the City aided the region's economy as well as dominated the headlines.

Financial Developments
Senior loan officers surveyed at small and midsized banks in the District reported a marked difference in mortgage and business loan demand. There was a pronounced decline in the residential mortgage and refinancing segments where four-fifths of the officers reported a decrease. The demand for commercial and industrial loans was stronger, with about a quarter of loan officers reporting higher demand and fewer than one-sixth, lower demand. Overall, loan demand was down, and most bankers attributed the decline to higher interest rates. Without exception, surveyed banks were charging higher rates on commercial and industrial loans, and almost all reported higher mortgage rates as well.

More than two-thirds of loan officers noted that spreads have widened between their average lending and deposit rates. Credit standards have generally remained unchanged, and most officers arc as willing to lend now as they were two months ago. Delinquency rates have been stable.