July 12, 2023
Summary of Economic Activity
Economic activity in the Second District stabilized in recent weeks following a period of moderate weakness. Labor market conditions were strong, with ongoing modest employment gains and steady wage growth. Inflationary pressures eased as both input and selling price increases slowed noticeably. Supply availability continued to improve, particularly for manufacturers, and manufacturing activity edged slightly higher. Consumer spending grew steadily and tourism in New York City remained strong. While housing markets were solid, exceptionally low inventory remained a challenge and there were some signs of a pullback in demand in parts of the District. Commercial real estate markets remained mostly unchanged, with persistently high office vacancies. Conditions in the broad finance sector continued to deteriorate, though at a more subdued pace than in recent months. Regional banks reported ongoing declines in loan demand, tighter credit conditions, and narrowing loan spreads. Looking ahead, businesses expect economic conditions to improve, though optimism remained muted.
Labor Markets
Labor market conditions were strong, with several contacts pointing to some firming in recent weeks. On balance, employment increased modestly, though there were stronger gains reported by personal service providers and wholesalers. While firms in the construction sector reportedly shed workers, layoffs generally remained concentrated in large firms outside of the region. A contact from the Adirondacks reported that J-1 visa seasonal workers have arrived following a pandemic pause, providing a much-needed seasonal boost to the strained workforce as the tourism season gets into full swing. Though it has become slightly easier to hire, finding skilled workers remains a major challenge.
While hiring plans remained solid, a few employers pointed to scattered signs of easing in labor demand. Contacts reported that the use of temporary workers has declined noticeably. Further, attrition rates have continued to fall at many businesses and are in some cases below normal levels, reducing the need to hire replacements. With signs that the labor market may start to cool, some employers are beginning to require workers to come to the office more often. Indeed, a New York City employment agency focused on financial services noted that roughly half of open roles were now fully in-person.
Wage growth has remained modest and steady since the last report. Several contacts noted that candidates' wage demands have become more reasonable and are now inline with pre-pandemic expectations.
Prices
Inflationary pressures eased noticeably in recent weeks. Businesses reported that the pace of input price increases has slowed considerably, and one construction contact noted softening in the prices of inputs, such as doors and windows. Still, the high cost of many inputs remains a major challenge for businesses in the region. The pace of selling price increases also moderated, especially among goods producers and retailers, though businesses in leisure & hospitality noted growing price pressures in travel services and entertainment. Manufacturers generally expect continued easing in price increases in the months ahead, while firms in the broader service sector anticipated more persistence.
Consumer Spending
Consumer spending grew steadily in the latest reporting period. Consumers have continued to shift their spending away from goods toward experiences, such as travel, entertainment, and restaurants. Indeed, amid higher prices and changing preferences, department store contacts reported sagging sales. Increasingly discerning shoppers eschewed purchases of seasonal items in favor of high-quality basics during a cool spring season, leaving an inventory surplus of certain summer wear. Still, auto dealers in upstate New York reported that new car sales have been strong as pent-up demand has been satisfied by ongoing improvements in inventory, while used car sales remained subdued.
Manufacturing and Distribution
Manufacturing activity edged higher. Supply availability improved, delivery times held steady, and inventories moved lower. Businesses in transportation & warehousing reported modestly increasing activity, but activity for wholesalers was unchanged. Manufacturing and distribution firms have become more optimistic about the six-month outlook.
Services
Service sector activity generally edged lower in the latest reporting period, though businesses in the information and professional services sectors reported increasing activity. Looking ahead, businesses in the service sector anticipated some improvement in the coming months.
Tourism activity remained strong in New York City and is on track to reach pre-pandemic levels this summer. The recent air quality problems from wildfire smoke had only minor effects on tourism, with the biggest blows to outdoor attractions. The recovery of business travel has been slower, hindered by a shift to virtual events and a budget-driven reduction in attendance at in-person meetings.
Real Estate and Construction
While the home sales market has remained solid, there has been some cooling in parts of the District. In particular, demand softened in much of upstate New York as discouraged buyers frustrated by low inventory increasingly stepped aside. Meanwhile, home sales markets in and around New York City remained resilient as potential buyers were undeterred by low inventory. Home prices were steady to up slightly; bidding wars were common across the District, though at reduced intensity.
Residential rental markets have continued to firm, as a strong economy and relatively high mortgage rates have continued to boost demand by pushing some potential homeowners into the rental market. In New York City, vacancy rates were below historic norms and rents reached new highs, and rents also edged up in much of upstate New York.
Commercial real estate markets were mostly unchanged. Office vacancy rates held steady at elevated levels across the District and rents were mostly flat, though some businesses reduced their footprints and opted for higher-quality office space. Of note, the prolonged weakness in office markets has begun to spillover to architecture and engineering firms, who noted negative impacts on business activity. New York City's retail market was flat, with no change in vacancy rates, rents, or leasing activity in recent weeks. By contrast, vacancy rates remained at low levels in the industrial market and rents trended up modestly, except in northern New Jersey, where vacancy rates increased somewhat.
Overall, construction contacts reported that conditions continued to weaken since the last report. Office construction remained steady at a low level in most of the District, though there were some new starts in northern New Jersey and upstate New York. Industrial construction activity was little changed across most of the District. Multi-family residential starts increased in Long Island and Westchester but were flat elsewhere.
Banking and Finance
Conditions in the broad finance sector continued to deteriorate, though at a more subdued pace than in recent months. Small to medium-sized banks in the District reported ongoing declines in loan demand across all loan segments. Credit standards continued to tighten for all loan types, loan spreads narrowed, and deposit rates moved higher. Delinquency rates edged up. Contacts cautioned that the average loan-to-value ratio on outstanding used car loans has risen to about 120 percent, presenting potential risks to the auto finance market.
Community Perspectives
Contacts noted that shortfalls in community services are worsening food insecurity, homelessness, and public safety. Community leaders expressed concerns about the inadequacy of the region's mental health care system. Contacts expressed the need for supportive housing units that are integrated with social services and medical support for addiction treatment and mental health care. Non-profits reported working with hospitals that own large real estate portfolios to develop sites for middle-income and supportive housing, though elevated construction costs and strained supply chains have hindered progress on this front.
For more information about District economic conditions visit: https://www.newyorkfed.org/regional-economy