May 6, 1986
In general, the Second District's economy has continued to improve since the last report. Retail sales showed over-the-year gains, particularly at higher income levels, and inventories remained in line. The spring homebuilding season was off to a good start, and the demand for office space continued to increase. Business activity was stable to somewhat improved. Demand for commercial mortgages has increased at small District banks as a result of declining interest rates.
Consumer Spending
Retail sales, although higher in general, have not shown equal
strength for all income groups or in all regions. After a weak
January-February period, retail sales in stores serving higher
income consumers downstate and in New Jersey grew strongly in March.
Most of these states reported over-the-year increases of 10 to 15
percent (well above plan), and early April figures suggest that
sales are continuing strong. However, sales at department stores in
western New York and at lower-priced stores throughout the District
showed more modest gains. Over-the-year increases in March and early
April of 6 to 7 percent were somewhat below expectations. Some
retailers mentioned an "economic stratification" of the market.
Higher income households appear to have the discretionary income to
continue generating strong sales growth. But low and middle income
consumers, feeling the weight of high consumer debt, appear hesitant
to increase spending.
Despite some difficulty in predicting sales, District stores were generally able to keep inventories in line with desired levels. Most retailers planned promotions and sales similar to earlier years, though some higher-priced stores bad more spring promotions this year. Sales of apparel end housewares—highly advertised items—were especially strong.
Business Activity
Economic conditions in the Second District have tended to stabilize
in recent weeks. More than 80% of purchasing managers surveyed in
Rochester and Buffalo reported unchanged or improved conditions in
March. Inventories at the majority of these firms held steady as
well.
Plans for several plant expansions and relocation into the District have recently been announced. These included an $11 million renovation and modernization at a Buffalo food plant, a $6 million expansion of a ceramics and brick plant in Niagara Falls, and the move to central New York of some frozen food operations from an Iowa location. In addition, an electronics firm that invested $14 million at its Long Island plant last year plans even larger capital outlays at that location in 1986.
Offsetting these developments, however, were announcements of some further layoffs and plant closings. In the Buffalo area, Westinghouse announced plans to close a factory, idling 800 workers by year's end. Layoffs associated with the recently announced production cutbacks at General Motors and further restructuring at Union Carbide could also have a negative impact on the District's employment. Thus far, however, the unemployment rates for March of 6.7 percent in New York and 4.2 percent in New Jersey remained below the national average.
Construction and Real Estate
The new homebuilding season is reportedly off to a good start in the
Second District, "Business is booming," according to one contact,
and builders in general are busy, fulfilling contracts negotiated
this winter as well as negotiating new ones. Strong buyer interest,
fueled in part by the sharp drop in mortgage rates, has led many
builders to anticipate a repeat of last year's lively pace. Some
possible deterrents were noted, however. A growing shortage of
suitable land was cited as a major factor behind rising home prices
in rural areas. In addition, a short supply of subcontractors and
other skilled labor could throw homebuilders behind schedule in the
months ahead.
The commercial real estate market remained relatively strong in the Second District, and the demand for office space has increased further in several areas. The pickup in office leasing activity was most evident in Fairfield County, in northern New Jersey, and on Long Island. Nonetheless, conditions generally continue to be characterized as favorable to tenants, and rent concessions have been widespread in some areas. New York City's efforts to expand its office market to the outer boroughs were recently rewarded. British Airways announced that it will move its U.S. headquarters to Queens, and a stock exchange subsidiary plans to relocate its corporate headquarters to downtown Brooklyn.
Financial Developments
With the continued decline in interest rates, small Second District
banks have seen an increased demand for commercial mortgages. At
some banks this demand has been mainly for refinancings of both
fixed and adjustable rate loans, while at others almost all requests
has been for new loans. Prepayment penalties at some banks may
discourage refinancings. Currently, some banks are incorporating
floors into their variable rate loans. There is also some preference
for shorter terms to maturity, in general in the 3 to 15 year range.
Expectations are that demand for both new loans and refinancings
will continue to increase.