August 7, 1996
Most sectors of the Second District's economy improved in recent weeks. Both the commercial and residential real estate markets continue to strengthen-vacancy rates are down, construction of multi-family units has surged, and sales of both new and existing single-family homes are up. Regional purchasing managers report continued growth in the manufacturing sector in July. The boom in tourism continues, with New York City hotels approaching full occupancy. On a weaker note, retail sales, which had been fairly brisk in May, slowed in June and July, and were generally below plan; also, banks reported a slight rebound in delinquency rates in July. Wage and price pressures generally remain subdued, except in Manhattan's tight real estate market, where rents on apartments and hotel-room rates have risen sharply.
Consumer Spending
Retail sales in the district were, on balance, below plan in June
and July, as business slowed from May's brisk pace. On a year-over-
year basis, same-store sales ranged from a 1 percent decline to an 8
percent gain in June, with gains of 0 to 6 percent in July. Most
department stores continue to cite women's apparel, and upscale
apparel more generally, as the top performing categories, and home
goods as the weakest. Discount chains report that only
"consumables"-small-ticket, frequently purchased items-have sold
well in recent weeks. Some of the recent weakness was attributed to
cooler than usual weather in June and July (especially compared with
last year), but a number of contacts believe that underlying demand
has softened a bit. It was noted that June and July are not
considered critical months for retailing.
All of the retailers surveyed reported that inventories were on or close to target as of late July. With retailers now starting to build inventories for the fall season, most say they are "cautious" in their expectations for the second half of the year. Virtually all contacts report that their effective selling prices are steady, that merchandise costs are flat to declining, and that there are no wage pressures.
Construction & Real Estate
The region's commercial real estate markets are firmer than they
have been in a number of years. In New York City, office vacancy
rates, which had blipped up in May, retreated in June-midtown
Manhattan's rate fell to 14.5 percent, from 14.8 percent in May,
while downtown's rate edged down to 24.7 percent from 24.9 percent.
The reduced vacancy rates were due to a lack of new properties
coming on the market and to existing office space being converted to
residential use; leasing activity remained steady. In northern and
central New Jersey, brisk leasing activity has pushed vacancy rates
down 0.8 points to 17.9 percent in the second quarter--two points
lower than a year ago, and the lowest level since 1987.
The District's residential real estate markets were generally strong in June, led by the multifamily sector. Manhattan's housing shortage and double-digit rent increases continue to make headlines, while prices for co-ops and condominiums have reportedly risen more modestly. In New York State, building permits for multi-family structures surged in both the first and second quarters, and are running at more than double last year's level. Virtually all the gains were concentrated in New York City and its northern and eastern suburbs.
Realtors in the district also report fairly brisk demand for existing single-family homes. In New York State, second-quarter sales surged 16 percent from a year earlier, though gains were more moderate in June. While second-quarter data are not yet available for New Jersey, most realtors report that the market is strong, fueled by first-time buyers. Home prices are rising at about a 4 percent annual rate in both states. The market for new single-family homes is mixed. New York State homebuilders report steady improvement-down-state New York remains strong, while upstate markets are beginning to snap out of their chronic slump. In New Jersey, however, builders report that the housing market remains "in the doldrums"--traffic is mediocre, there is no sense of urgency to buy, and affordability remains a problem.
Manufacturing
Regional surveys of purchasing managers suggest continued growth in
the manufacturing sector and a slight uptick in prices paid in July.
Purchasing managers in Buffalo reported that production activity
held steady in July, following brisk growth in the second quarter,
while new orders continue to expand at a moderate pace. Meanwhile,
growth in metropolitan New York City's manufacturing sector
accelerated from its already rapid second-quarter pace, with that
survey's diffusion index climbing to a new cyclical high in July. (A
parallel survey of purchasing managers in New York City's non-
manufacturing sectors signals steady, moderate growth). Finally,
purchasing managers in both Buffalo and New York report a moderate
rise in prices paid, with both diffusion indices climbing into the
mid 50's.
Other Business Activity
Labor markets were relatively stable in June. New Jersey's
unemployment rate held steady at 6.1 percent, after falling a half
point in May; New York State's edged down to 6.3 percent in June,
from 6.4 percent in April and May. Employment grew in both states in
June, but at a slower pace than in prior months. Consumer
confidence, though still at an exceptionally low level, improved
noticeably in July. Finally, the boom in tourism shows no signs of
abating: hotel occupancy rates in New York City climbed to a 17-year
high in the second quarter, and room rates continued to rise at a 10
to 15 percent rate.
Financial Developments
According to a survey of senior loan officers at small and medium
sized banks in the District, loan demand has softened over the past
two months. The largest decline in activity occurred in the
residential mortgage loan segment, with demand lower at nearly 45
percent of the banks surveyed and steady at over 35 percent.
Refinancing activity for all types of loans continues to decline,
though at a diminishing pace. However, demand for commercial and
industrial loans continued to increase.
Banks reported modest increases in loan delinquencies in all lending categories. Loan officers are generally more willing to lend than two months ago, and nearly all have maintained the same credit standards. Average loan rates continued to rise-they are higher or unchanged at almost all of the participating banks. The spread between the average lending and deposit rates is steady at nearly 60 percent of the banks and narrower at close to 30 percent.