January 28, 1986
Almost all sectors of the Second District economy experienced modest gains since the last report. Consumer spending during the Christmas season met most retailers' conservative expectations and inventories were generally at low levels going into the new year. Residential construction has continued strong, in part because of mild weather. In addition, the long-awaited pick-up in office leasing activity appears to have started in northern New Jersey. In contrast, reports are mixed about the strength of current business activity. Nonetheless, the outlook for early 1986 is generally viewed favorably. On the financial side, small District banks report a sharp rise in business loan demand.
Consumer Spending
Consumer spending during the 1985 Christmas season was 5 to 10
percent above last year's disappointing level, and most stone had
sales close to plan. New Jersey merchants posted larger than
projected gains, while New York City retailers generally experienced
modest growth in line with expectations. However, stores in western
New York tended to report increases somewhat below plan. Severe
snowstorms may have inhibited less hardy shoppers, but some store
officials also mentioned the continued weakness in that area's
economy. For the most part, department stores fared better than
discount houses and low-priced stores. The high level of consumer
debt was cited as a deterrent by stores catering to blue-collar and
lower-middle income shoppers.
In general, retailers avoided the inventory problems of last year that had necessitated substantial price-cutting to reduce stocks. Most merchants entered this holiday season with much lower inventories than a year earlier and maintained stocks close to planned levels throughout the period. Because they were able to stick to planned promotions and pricing policies, they anticipate higher profits than last year.
Construction and Real Estate
Residential construction remains strong in the District, and
respondents found no evidence in their areas of the sharp drop-off
in November housing starts reported for the northeast. In the
Syracuse area, for example, November starts were virtually unchanged
from a year earlier, and starts through the first 11 months of 1985
equaled the full-year record set there in 1978. Due in part to mild
weather, home builders in various parts of the District began the
new year at a good pace. Most now expect activity in 1986 to equal
or surpass 1985, at least through late summer. However, they said
that rising interest rates or unfavorable tax legislation could
change this scenario.
While office market conditions were generally stable, in northern New Jersey increased leasing activity and a slowing of new projects have taken some of the slack out of the market. In New York City, additional financial firms are expanding outside Manhattan. Citicorp proposed construction of an office complex in Queens that would be the largest ever built in the outer boroughs. At the same time, a second financial services firm has announced plans to locate some of its operations in an area now under development in Brooklyn.
Business Activity
Economic activity in the Second District showed no clear direction
in recent weeks. While a much higher percentage of Rochester
purchasing managers reported improved conditions in December, the
proportion in Buffalo declined. Inventories remain under control in
both areas, though, and the near-tern outlook is generally described
as favorable.
Very few industrial developments of major significance have been announced recently. Of considerable concern in the Rochester area, however, is the likely impact of a recent court ruling that Eastman Kodak must terminate its instant photography business because of patent infringements. At the time of the ruling Kodak employed 800 full-time workers in that operation. Also, Avon announced cutbacks of almost 500 workers in the New York metropolitan area. On a more positive note, Piedmont Aviation plans to center its northeastern operations in the upstate New York communities of Utica and Syracuse. In the Buffalo area, a group of local investors recently completed the purchase of a metal-working firm, preserving almost 900 jobs.
The unemployment picture in the District remains relatively good. December unemployment rates were 6.3 percent in New York State and 5 percent in New Jersey, down slightly from November. For 1985 as a whole, unemployment in New York State was 6.5 percent and in New Jersey 5.7 percent, rates below the national average. These were also the lowest levels since the mid-1970s.
Financial Developments
Business loan demand rose sharply during November and December at
small Second District banks (and at commercial banks nationwide).
Explanations for the increase varied. One bank suggested that it was
seasonal borrowing to meet end-of-year business needs, with demand
by retailers particularly strong. Other banks indicated that loan
demand was not limited to any particular type of borrower or single
purpose. In fact, an upstate bank noted that the large volume of
loan requests were continuing into l986, although it thought that
the strong demand would not persist.