May 4, 1987
In general, the Second District economy registered a modest improvement since the last report. Retailers had better-than- expected sales gains during March and the homebuilding season has gotten underway with a good start. Office leasing was reported to be good and general business conditions were described as stable to improved. On the financial side, small and mid-sized banks report that growth in consumer lending has been weak since the beginning of the year.
Consumer Spending
March sales at Second District department stores were reported as
good despite the fact that Easter did not occur until mid-April this
year. Over-the-year gains ranged from 6 to 9 percent and were
generally above plan since March 1986 had included the Easter
holiday. (Because of the shifting of Easter between March and April,
many retailers look at the two-month period as one combined selling
season.) Demand was favorable for goods such as furniture, home
furnishings and housewares, though sale of apparel and accessories
were relatively weak in March and stores specializing In these did
not fare as well. Interest in apparel and accessories, items
traditionally associated with Easter shopping, picked up
substantially as the holiday grew near, and District respondents
anticipate a good showing for the month of April as well.
With March sales ranging 1 to 3 percent above goals that were described as "aggressive", inventories have generally been maintained at or below desired levels. One chain with higher-than-intended stocks indicated that paring its inventories is a major objective in the weeks immediately ahead.
Business Activity
The improved tone in the District's economy continued in recent
weeks. Eighty percent or more of the Rochester and Buffalo
purchasing managers reporting in the March surveys described general
business conditions as stable or better than in February and a
modest buildup in inventories was not viewed as unfavorable.
Unemployment rates edged lower in both New York and New Jersey during March to 4.7 percent and 3.7 percent, respectively. As nonmanufacturing employment expanded further, unemployment rates remained at their lowest levels in 17 years.
With the termination of the Air Force training plane contract with Fairchild Republic in March, the long-feared closing of that company's Long Island plant is now underway. Some 1,800 of its 3,500 employees have already been dismissed and the plant is scheduled to close by year-end. A group of former employees is attempting to purchase the facility and resume aircraft production, but the success of this plan is seen as unlikely. More positive news in recent weeks was Eastman Kodak's announcement that it will build a new $200 million color film plant at its manufacturing complex in Rochester, consolidating technology it has been developing around the world.
Construction and Real Estate
As the homebuilding season gets underway, District contacts report
that the market continues to look very good and demand for new
housing remains strong. The recent sharp increase in mortgage rates
has apparently had little dampening impact as the level of rates
remains relatively low. However, shortages of available and
affordable land are increasingly cited as major problems and
possible deterrents to much additional homebuilding in some areas.
For 1987, though, builders are expected to be quite busy and the
level of activity to equal or be minimally below the 1986 pace.
Office leasing activity in the Second District has been good recently but not substantial enough to reduce vacancy rates in areas of oversupply. Rates in northern New Jersey and Fairfield and Westchester counties, e.g., remain in the 20 to 25 percent range and projects already in the pipeline continue under construction. With an overall official vacancy rate of about 8 percent, New York City is still one of the healthiest markets in the country. While it is generally expected that midtown will show some improvement in 1987, opinion is divided about the vacancy rate in lower Manhattan, where about 7 million square feet of new office space is scheduled to come on line.
Financial Developments
Small and mid-sized banks in the Second District report that growth
in consumer lending has been weak since the beginning of 1987. Most
banks indicated that originations of consumer installment 1oans,
primary mortgages, and agricultural loans have slowed while demand
for other types of loans, such as automobile loans, remains almost
negligible. High consumer indebtedness, housing shortages, problems
in the farm and dairy businesses, and competition from auto finance
companies were cited as reasons for the weakness. Some bank officers
reported that their applications for mortgage loans had picked up
recently as other banks announced increased lending rates and
consumers rushed to borrow prior to further rate increases. However,
the banks which experienced the surge of activity are now raising
their own mortgage rates or plan to do so in the near future.
Therefore, the demand for such loans is expected to drop off at
these banks and in the aggregate to fall below the usual level for
this time of year. Lending officers believe that increases in home
equity and unsecured personal loans will not be enough to compensate
for the weakness in other forms of consumer lending.