June 15, 1988
Economic activity in the Second District has continued mixed. Overall business conditions were stable to improved and office leasing activity was moderate to good. Retail spending remained sluggish, however, and demand for new homes varied somewhat among areas. Small-and medium-sized banks raised their mortgage rates following the May 11 prime rate increase.
Consumer Spending
Retail spending in the Second District continued somewhat sluggish
in recent weeks with April sales ranging from below year-earlier
levels to moderately above. The earlier Easter this year was noted
as one factor in the slow April performance, but partial results for
May were disappointing as well. As one retailer commented:
"Customers just aren't spending and we really don't know why".
Women's apparel sales have remained weak and the gains which
occurred in other lines were not particularly strong.
Year-to-year changes at District stores in April ranged from -6.9 percent to +3.3 percent, results which were "well below" to "just about on" plan. Partial data for May show some over-the-year gains but smaller than were expected. Inventories were generally at comfortable levels, however, due to close monitoring and aggressive markdowns, though one respondent reported an undesired buildup.
Business Activity
Economic conditions in the Second District have been stable to
moderately improved in recent weeks. The proportion of Buffalo
purchasing managers reporting higher new orders rose by 13
percentage points in May while the latest Rochester survey indicated
little overall change. In both areas the percentage of surveyed
firms with lower inventories has declined.
As was true nationally, unemployment rates in the District were somewhat higher in May. However, rates of 4.2 percent in New York and 3.7 percent in New Jersey represented May-to-May declines of 0.7 and 0.4 percentage point, respectively. While May data for New York City are not yet available, it appears that, through April, the employment declines resulting from the stock market crash were offset by job growth in other sectors.
Several recent announcements point to continuing expansion in the District's economy. The Defense Department awarded a $236 million contract to a team headed by General Electric for the development and initial deployment of the "Star Wars" defenses. In addition, a number of firms are planning substantial growth and modernization here. These include firms making products ranging from radial tires and fiberglass insulation to aerospace and telecommunication equipment.
Residential Construction and Real Estate
Residential construction activity has varied within the District
since the last report. In some areas the prime homebuilding season
began strongly with little or no slowdown from the year-earlier
pace, while in others, builders are busy but activity has declined
to a more normal level compared with the past few years. Things
remain sluggish in some areas, however, particularly where home
prices are quite high and where layoffs resulting from the Wall
Street cutbacks have occurred. The rise in mortgage rates was
reported to have had little impact on homebuilding thus far.
Developments in the District's commercial real estate market have been mixed. Office vacancy rates have declined in areas such as northern New Jersey and Long Island while remaining at virtually unchanged high levels in Westchester and Fairfield counties. Leasing activity has generally been moderate to good, particularly for buildings in desirable locations and of good design. The major exception is downtown Manhattan where leasing activity continues weak. Given the large number of buildings currently under construction in midtown Manhattan and northern New Jersey, however, there is concern that vacancy rates will rise as this new space becomes available.
Financial Developments
Small-and medium-sized banks in the Second District survey generally
raised their mortgage rates in response to the May 11 increase in
the prime rate. However, rate increases on non-prime based business
and consumer loans have been more spotty. Most of the bankers expect
further rate increases during the second half of 1988, though none
predicted sharp rises. A few of the surveyed officers believe that
interest rates have already reached their 1988 highs and should
stabilize at current levels. While many analysts link rising
interest rates to inflation fears, most of our respondents did not
expect a surge in inflation though nearly all believe their local
economy is strong. The rise in mortgage rates has reduced mortgage
activity somewhat, but the response to date has not been pronounced.
Mortgage activity in the New York City metropolitan area remains
more sluggish than in other parts of the District. With the rise in
interest rates, many mortgage officers have noted a shift back to
adjustable rate mortgages. One banker said that those with caps on
future rate increases were particularly popular. Business in home
equity loans, usually priced separately from mortgages, continues to
be brisk.