May 4, 1988
Developments in the Second District economy varied among sectors in recent weeks. General business conditions improved moderately and commercial leasing in much of the District expanded. Residential construction has been somewhat sluggish, however, and retail sales have generally been below plan. Small and medium-sized banks also report that demand for home mortgages has been weak.
Consumer Spending
Sales at District retail stores have been rather sluggish since the
last report. This was particularly true in February when all
respondents experienced disappointing results. Sales improved in
March, but generally remained somewhat below expectations. While one
retailer attributed the recent slowdown to continuing resistance to
the current styles in women's apparel, others noted a more
widespread sluggishness which they were unable to explain.
For February, year-to-year changes in District retail sales ranged from -6.7 percent to +2.0 percent, results which ran from slightly below to "way behind" plan. Aided by this year's early Easter, over-the-year gains of from 3 percent to 11 percent were registered in March—results which ranged from somewhat below to slightly above plan. Despite the lackluster sales, inventories are generally reported at relatively comfortable levels as a result of close monitoring and some aggressive markdowns.
Business Activity
The Second District's economy expanded moderately in recent weeks.
The percentage of purchasing managers recruiting improved business
conditions in the Rochester survey jumped from 38 percent in
February to 53 percent in March. The Buffalo survey registered a
much smaller rise. A much larger percentage of surveyed Buffalo
firms also reported lower inventories in March than in February.
Recent developments point to some further strength in the District's economy. In Syracuse, General Electric has begun working on its almost $1 billion submarine combat system contract which the company was awarded by the Navy late last year. In the Buffalo area, Sierra Research just received a $100 million award from the Air Force for the production of computerized flight inspection systems with the possibility of additional support work later on as well. Plans have been announced for the construction of several large co-generation plants that manufacturing firms hope will reduce energy costs. A recent negative announcement was that Grumman Corporation will reduce its workforce on Long Island by 2300 employees as a result of losing a Navy aircraft bid. With Long Island's February unemployment rate at 3.3 percent, observers anticipate that these workers can be absorbed without much difficulty.
Residential Construction and Real Estate
Activity in the District's residential construction market has been
somewhat sluggish due in part to the unusually cold weather this
spring season. Homebuilders report some recent improvement and
anticipate much more traffic and interest in the months ahead.
However, few expect the 1988 pace to match that in recent years.
Less pent-up demand, a growing shortage of suitable land in some
areas, and the high level at which home prices seem to have
stabilized are cited as factors which are expected to contribute to
some slowing this year.
The pace of office leasing generally has improved within the District. Demand for office space in midtown Manhattan picked up substantially in recent weeks, but downtown Manhattan leasing remains slow. Elsewhere in the metropolitan area demand is reported strong. Some Fairfield County spokesmen state that a real upturn is occurring. The relatively few new office projects currently planned there and in Westchester County are generating some optimism that the high vacancy rates may soon decline. Hotel construction is one category in which considerable building is either planned or underway—most noticeably in Manhattan where four hotels are currently being built and four more are scheduled. Higher rentals, relatively high occupancy rates, and a record number of visitors are spurring this development.
Financial Developments
According to loan officers of small to medium-sized banks in the
Second District, demand for home mortgages is rather weak. Though
the number of loan applications has recently begun to rise, most
bankers attributed this to seasonal factors. Some officers,
especially those in the New York metropolitan area, believe that the
stock market unrest has made some potential homebuyers wary. Given
the relatively low mortgage rates, buyers currently prefer fixed-
rate loans. However, most bankers expect that interest rates will
rise by the end of the summer and demand will shift back to
adjustable rate mortgages with their typically lower introductory
rates. Demand for home equity loans is still strong, but
considerably below last year's level when they were heavily
promoted. Nearly all respondents believe the high cost of housing
has resulted in a significant drop in the percentage of first-time
homebuyers. This trend seems to have become more pronounced in the
last two years. Increasingly, those in the real estate market are
either trading up to a better home or buying vacation homes.