September 10, 1986
In general, the Second District economy registered a modest improvement since the last report. Most retailers had sales gains that were at or above plan. Residential construction remained strong, and business activity showed some pickup. Demand for office space was slack (as usually is the case this time of year), and few new projects were announced. Over the past year, small District banks have experienced increased competition from larger banking organizations in the market for business loans.
Consumer Spending
Consumer spending was stronger than had been expected at several
District stores during July, and most retailers reported
satisfactory gains in sales. As a result, inventories are currently
at or below planned levels throughout the region. Higher priced
stores registered sales growth of 11-19 percent, well above plan in
some cases, while sales at medium-priced retailers grew between 6
and 12 percent. Discount stores were the only major group with
lower-than-expected gains of just 3-4 percent.
While July is traditionally a month in which retailers clear out summer stock, sales of apparel were particularly strong during the recent period. In addition, a pickup in demand for consumer durables was also noted, with one store reporting "exceptional" sales of furniture and rugs. Continuing interest on the part of foreign visitors was cited as an important factor in the improved consumer spending, particularly in New York City. Industry sources attribute this increased foreign buying to the decline in the value of the dollar.
Business Activity
Economic conditions in the Second District were somewhat better in
recent weeks. The percentage of Rochester purchasing managers
reporting an improved business situation increased during July.
Groundbreaking ceremonies were recently held at New Jersey's first
trash-to-energy power plant. Electricity produced there will be
purchased by a major utility in the area. A large pharmaceutical
firm in New Jersey has also undertaken a multimillion-dollar
expansion of its research and development laboratory, which should
result in additional employment by 1987. Other recently announced
plans include the construction of a frozen food factory in central
New York, which a British food manufacturer will begin this fall,
and the building of an aircraft parts facility on Long Island.
In upstate New York some 2000 of an expected 10,000 soldiers have already arrived at Fort Drum where a new Army division is being assembled. The Pentagon plans to spend some $1 billion on construction in the area, and the addition of these soldiers and their families is expected to provide a significant stimulus to the regional economy. This should offset to some extent the impact of GM's recently announced plans to lay off or transfer 1200 of its foundry workers in that area over the next two years.
Construction and Real Estate
Homebuilders remain busy throughout the Second District, but
conditions are somewhat less hectic than in the spring and early
summer when buyer activity peaked. A major problem continues to be
getting homes completed on time, since certain types of skilled
labor are still in short supply. In some areas, particularly where
the stock of suitable land is almost depleted, a substantial
increase in home prices has also been noted. In Manhattan, however,
where a large amount of apartment building is underway (that was
started prior to the November 1985 cutoff date for city tax
abatement), some observers question the viability of the high prices
and rentals that will be asked for the new units.
The Second District commercial real estate market has shown little change in recent weeks, and conditions remain somewhat mixed. Only a few major new projects have been announced as most areas adjust to the ample supply of office space currently available. Leasing activity has been seasonally slow in many areas, and the prolonged sluggishness in northern New Jersey persists. Some pickup has been noted in Manhattan, however, where a major brokerage firm recently announced that it will occupy the last of the World Trade Center buildings in its entirety. Throughout the District observers anticipate that the new tax reform bill will curtail the pace of speculative office building.
Financial Developments
Small and mid-sized banks in the Second District report that
competition in the business loan market from larger banking
organizations has increased over the past year. Most of the increase
has been from large regional banks and smaller bank holding
companies, rather than from money center banks. The responses from
those surveyed suggest that only those banks large enough to service
mid-sized companies have been affected. Moreover, the intensity of
the competition seemed to increase directly with the size of the
bank surveyed. While most banks indicated that all types of business
loans were equally affected, a few felt that the commercial mortgage
sector had received special attention. The competition has taken the
form of increased advertising and direct solicitation of borrowers.
Among the steps, which the small banks have taken to preserve their
share of the commercial lending market are faster handling and
approval of loans, greater customer contact, and increased efforts
to match, though not undercut, competitors' rates.