March 20, 1986
The Second District's economy improved somewhat in recent weeks. Department store sales were moderately higher than a year earlier, resulting in generally satisfactory inventory levels. A pickup in office leasing activity was noted in a number of areas, and homebuilding remained strong where weather permitted. Reports on business activity were mixed, however, and several manufacturers announced sizable cutbacks. Small banks in the District have not yet adjusted mortgage rates to reflect the latest sharp decline in market rates.
Consumer Spending
During the first two months of l986, District consumer spending grew
only moderately from year-earlier levels, more or less in line with
retailers' expectations. As a result, inventories were generally
reported close to target.
Bad weather during the February President's Week promotions was cited as a factor in the moderate performance of District department stores. Moreover, some retailers believe consumers spent cautiously because of uncertainty over the course of the economy. Also, several stores noted that consumers seem to be increasing their buying at small specialty and discount stores, leading to lower sales at the department stores.
Business Activity
Second District business conditions continued mixed in recent weeks.
Buffalo purchasing managers reported a marked increase in new orders
and in production during January, following a slowdown in December.
However, managers in Rochester noted the opposite pattern. The
percentage of Buffalo firms with higher inventories also rose
somewhat, but by far the majority of purchasing managers in both
cities reported inventories at stable or lower levels.
While some plant expansions and new projects were announced, plans for large-scale employment cutbacks by District manufacturers have recently dominated the news. By the end of March, Eastman-Kodak will have terminated 1,200 jobs in the Rochester area over a three-month period. By year's end, Kodak plans a 10 percent reduction in its worldwide workforce from the 1985 level. A full 10 percent decline in Kodak's Rochester employment would mean the eventual elimination of 5,400 jobs there. Also in Rochester, a GM unit has announced a possible reduction of 1,500 workers as it changes from making carburetors to producing a less labor-intensive fuel system. In addition, while GE plans to hire 270 workers for a new subway repair shop which will begin operating in the Buffalo area by July, it also will eliminate some 1,500 jobs at a Schenectady plant because of depressed demand for the turbines and generators produced there. (In February, the unemployment rates of 6.8 percent in New York State and 5.9 percent in New Jersey remained below the national average.)
Construction and Real Estate
Homebuilding in the District has slowed somewhat due to cold and
snow, but a good deal of activity continues on structures with
foundations laid earlier. In Manhattan, where an unusually large
number of multifamily units was started to qualify for local tax
benefits before they expired in November, a shortage of structural
wall laborers is currently reported due to the high level of
building activity. Throughout the District, builders expect 1986 to
be another good year following the record level of housing starts in
several areas during 1985.
High or rising levels of leasing activity are reported in office markets throughout the District, and improving occupancy rates are anticipated. Despite a softening market for downtown Manhattan office space, observers are encouraged by the resurgence of residential and retail development in the area. However, in midtown Manhattan, an oversupply of such space is prompting caution on the part of lenders. In Fairfield, Connecticut fewer new office projects are being undertaken because of concerns that a shortage of affordable housing will limit the county's ability to attract new office tenants.
Financial Developments
Mortgage rates at small Second District banks have been trending
down for several months, but they do not yet reflect the sharp drop
in market rates since Mid-February. Fixed rate mortgages are still
in the 11 to 12 percent range but are expected to come down in the
near future. The consensus among bankers is that the expectation of
further rate declines is keeping mortgage demand relatively constant
and forestalling any sizable shift out of adjustable rate mortgages.
Refinancings account for as much as 40 to 50 percent of business at
some banks, but this percentage has been relatively stable over the
past few years.