June 25, 1985
Activity in most sectors of the Second District economy slowed in recent weeks. Sluggishness of consumer spending has continued for the last few months, although many stores in the area were still doing somewhat better than for the nation as a whole. Fewer firms reported improving business conditions than did earlier in the year. Commercial real estate brokers indicated growing concern that their "boom" my be over. A major bright spot was in residential construction, where homebuilders reported the best market conditions in years. On the financial side, consumer loan rates began to decline, reflecting the trend in general market interest rates.
Consumer Spending
The pace of consumer spending in the Second District continued to
slow over the last two months. Although several retailers reported
that business in the metropolitan area was slightly better than in
other parts of the nation, gains over 1984 averaged only about 2
percent for April and 4 percent for May. Sales for some merchants
continued to fall short of expectations by significant margins.
Nevertheless, inventories were generally close to planned levels,
and promotions continued at a normal pace with few special price
markdowns. One department store chain, however, reported especially
weak sales even with extensive promotions, and was returning some
unsold summer merchandise to suppliers.
Business Activity
The erratic business expansion seems to have slowed recently in the
District. While the majority of purchasing agents still reported
improved or stable business conditions, fewer firm reported
improvements in May. In Buffalo, moreover, more firms indicated that
new orders had fallen. In line with this moderation of economic
activity, firms have been undertaking inventory reductions in recent
weeks.
Major capital investment projects continued to be announced, however, including two joint ventures involving foreign investors. Toshiba and Westinghouse will retool and restaff an Elmira plant (which had been closed for nine years) to produce TV tubes and computer display screens. In addition, the government of Yugoslavia will participate in a project to convert part of Bethlehem Steel's abandoned Lackawana plant to an aluminum mill. These undertakings would add several hundred jobs to areas facing persistently high unemployment rates.
Other large projects recently begun or announced in the District include the construction of a new shopping mall and the expansion of two existing ones in Niagara County, as well as a new financial center and corporate headquarters in downtown Albany.
Construction and Real Estate
Residential construction activity remained robust, with builders and
suppliers reporting the best market conditions in many years. Lower
mortgage rates have added an additional stimulus in recent weeks,
according to our contacts. Home prices have risen above year-earlier
levels, sharply in some areas. The outlook for the rest of the year
is for continued strength, and some homebuilders already are
optimistic about l986. Skilled labor remained scarce in some areas,
and some construction schedules have been delayed. Observers in
various parts of the District also reported price increases for
developed lots, lumber, or other materials.
The New York City government has proposed major zoning revisions to reduce the construction costs for apartment houses. The changes could encourage the construction of up to 5,000 now units annually, at 25 percent below current costs, according to the City's estimates.
Real estate brokers are becoming concerned that the "boom" in the region's office market may be over. Availability rates remain very high, over 20 percent in some areas, yet net absorption is not increasing. The outlook is uncertain, with the strength of commercial construction depending on the performance of the general economy in the coming months.
Our contacts also expressed uncertainty regarding the impact of the President's tax proposals. Most agreed that real estate would be a less attractive investment, especially to small investors and syndications. A slower pace of investment could depress property values, at least in the short run, but one observer was optimistic about the longer-term stimulus of the tax plan. Some brokers also believed that investment in Manhattan and Long Island might be discouraged to some extent by the elimination of state and local tax deductibility. Fairfield County (Connecticut) and northern New Jersey might derive some relative benefit.
Financial Developments
Consumer lending rates began to recede from their recent high
levels, reflecting the downward trend in market interest rates. Some
commercial banks in the District already have cut consumer rates,
and our contacts all agreed that the spread between consumer and
market rates will narrow soon. Auto loan rates appeared to have
fallen the most sharply, and bankers expect this downward trend to
continue. Rates on personal loans have fallen only slightly and
remain very high, but are expected to decline further. In contrast,
credit card rates have not declined and are not expected to fall in
the near future. Bankers attributed the reluctance to lower finance
charges to high operating costs.