March 15, 1988
Economic activity in the Second District has continued mixed. Retail sales were relatively strong in January, but a decided slowing occurred during February. While overall business conditions were generally satisfactory, demand for new homes and office space varied among areas. Business borrowing at small and medium-sized banks was somewhat spotty.
Consumer Spending
The pattern of retail sales in the District has been mixed since the
last report. Respondents stated that consumer spending was
relatively strong in January, due in part to continued heavy
promotionals. During the first half of February, however, sales
activity showed a decided slowing, which they viewed with some
concern. Nonetheless, District retailers were hopeful that, given
the early occurrence of Easter this year, activity would soon
improve.
Over-the-year gains during January ranged from 9 percent to 15 percent and were reported to be on or above plan. Demand was strong for a number of categories including adult and children's apparel, accessories and home furnishings. Buying by foreign consumers continued somewhat heavier than usual according to New York City retailers. As a result of the strong sales activity, inventories were generally pared in January. Respondents described their inventory situation as ranging from on plan to 3 percent above. Some unwanted accumulation occurred over the first half of February, however, when consumer demand weakened.
Residential Construction and Real Estate
Conditions in the District's market for new homes are varied. In
some areas of speculative building and high prices, developers are
offering a variety of incentives in order to try to sell new houses
and condominiums. In many other areas, however, overall demand
remains strong, and the need for affordable housing in unabated.
Several large-scale residential projects have recently begun or will
soon be undertaken. In downtown White Plains the foundation was
poured for a 316-unit apartment building—the largest in Westchester
County—which will provide medium-priced housing for some of the
workers in the many new office buildings there. Elsewhere, a
residential community is developing in what has been an industrial
area of Queens, a desirable site located on the water and facing the
Manhattan skyline. One apartment building has already been
constructed, another is underway, and a third will probably be
started there this spring.
The pace of commercial leasing activity has also varied during recent weeks. Demand for office space is strong on much of Long Island, due in part to last year's moratoriums on construction in some areas. Moreover, despite the fact that their vacancy rates remain well above 20 percent, Fairfield County and northern New Jersey have seen some improvement in leasing activity. In Westchester County, however, net absorption of office space has been minimal due to lackluster demand and corporate relocations and downsizing. Leasing has also slowed in New York City where a substantial amount of office space was recently added as the result of a merger of two financial services firms. Midtown and downtown Manhattan vacancy rates have risen and are expected to move higher in the months ahead. Six years ago the City offered zoning incentives to stimulate the commercial development of Midtown west. Since developers wanted to meet the May 1988 deadline for laying foundations, an additional 12 million square feet of office space is now under construction in midtown.
Business Activity
Economic conditions in the Second District have generally been
satisfactory with the major exception being the widespread layoffs
which are taking place in the financial services sector. Despite
these layoffs however, February unemployment rates in New York and
New Jersey fell further to 3.9 percent and 3.4 percent,
respectively—the lowest in 18 years. The New York City rate also
remains some two and a half percentage points below its year-earlier
level. While further cutbacks by the City's financial services firms
are in the offing, several other areas report that their economy
continues to expand. In Rochester, for example, where 84 percent of
surveyed purchasing managers found current business conditions to be
the same or improved in January, 60 percent anticipated further
gains over the next three months.
Financial Developments
Demand for commercial loans in the Second District has been somewhat
spotty in recent months based on a survey of senior officers of
small and medium-sized banks. Though most stated that the level of
borrowing activity was about average, some reported strong demand
while others noted sluggishness. Reductions in lending rates at
these banks during early February have not triggered a significant
increase in loan applications. Several bankers commented that
businesses tend to be less sensitive to interest rate changes than
individuals. Among the different sectors, demand for commercial
mortgages for office construction is particularly weak. Some of the
bankers believe that suburban office space surrounding New York City
is overbuilt, a troublesome situation given the weakness of the
securities industry. One bank reported a dramatic drop in demand for
import loans, particularly those for Taiwanese products. Most
respondents anticipate that 1988 will eventually prove to be a year
of healthy growth for their banks. Though they were generally less
optimistic about the U.S. economy at large, most were confident that
a recession would be avoided and the second half of 1988 would show
stronger growth.