September 6, 1988
In general, the Second District economy registered a modest uptrend since the last report. Business activity picked up somewhat and several areas reported either an improvement in residential construction or less softening than was anticipated. Office leasing continued at a moderate pace while the pattern of department store sales was mixed. Demand for commercial loans remained strong at small- and mid-sized banks in the District.
Consumer Spending
The pattern of District department store sales was mixed during July
as respondents reported results ranging from somewhat below to well
above plan. A prolonged period of hot and humid weather was cited by
several retailers as a factor in slower-than-anticipated apparel
sales since consumers were reluctant to try on new fall clothes.
Furniture and housewares were also somewhat weak. Among items
mentioned as selling well were accessories, handbags, and women's
at-home clothing.
Over-the-year sales changes in July ranged from -l percent to +10 percent with most stores registering a net gain. Inventories were generally reported in good shape, due in part to heavy markdowns of summer merchandise. However, one respondent noted that stocks are somewhat higher at his store than planned. After about a year of sluggish sales of women's apparel, all are hopeful that the new fall fashions will be able to turn things around.
Business Activity
Economic conditions in the Second District have picked up somewhat
recently. The percentage of Buffalo purchasing managers reporting an
improvement in general business activity increased in July while the
percentage with a worsening declined. A semiannual survey of
manufacturers in the Syracuse area found that four-fifths of the
responding firms were operating at a capacity of 80 percent or
higher, up from only 50 percent at that operating level in January.
Purchasing managers in the Rochester survey generally reported
stable conditions and most anticipate little change over the next
quarter.
Unemployment rates in the District remain lower than the national average with July readings of 4.1 percent in New York and 3.6 percent in New Jersey. A midyear review of labor market conditions in the New York-Northeastern New Jersey area noted that the first half of 1988 saw continued but slower job growth compared with the last half of 1987 and much lower unemployment than a year earlier. For the first five months of 1988 the area's unemployment rate averaged 3.8 percent, down from 4.7 percent a year earlier. Thus, despite cutbacks in New York City's finance and manufacturing sectors, the predicted large increase in regional unemployment has so far not materialized.
Residential Construction and Real Estate
While the overall pace of homebuilding activity remains somewhat
slower than in the past few years, several areas reported either an
improvement in recent weeks or less softening than had been
anticipated. The moderate rise in mortgage interest rates reportedly
has motivated some potential buyers to act now before rates move
higher. In addition, some upstate New York communities continue to
experience stronger homebuying and higher levels of residential
construction than a year earlier. The outcome of several cases now
under litigation will have a decided impact on future residential
construction in the District. Hundreds of units of affordable
housing have been mandated in a number of communities, but several
plans for implementing the mandates are being challenged in the
courts.
Office leasing activity has continued at a moderate pace since the last report. The expansion of foreign firms was a major factor in both midtown and downtown Manhattan leasing, and negotiations with several other international companies are reportedly underway. In addition, some financial services firms which had earlier contemplated moving have decided to retain in lower Manhattan, where excess space has made rental rates and other terms more flexible. With little or no new office construction planned, vacancy rates in Westchester and Fairfield counties have either declined or stabilized in recent months, albeit at high levels. A modest slowing has also occurred in office construction in northern New Jersey where the overall vacancy rate remains about 20 percent.
Financial Developments
Officers of small- and mid-sized banks in the Second District report
that demand for commercial loans continues to be strong. The
majority of bankers said that demand is the same or greater than a
year ago. The few who noted a decline in activity attributed the
slowdown to a weak commercial real estate market, particularly in
Stamford and northern New Jersey. Except for the real estate
sector, nearly all respondents believed that their local economy is
quite strong. Most officers expect that interest rates will continue
to increase for the remainder of 1988, though some anticipate that
rates will stabilize in early 1989. Higher interest rates have not
as yet dampened commercial loan demand at the surveyed banks.
Opinion was split as to whether further increases in rates would
cause an appreciable reduction in loan activity in the next several
months. Several bankers expect demand to continue brisk so long as
the economy remains strong. Others noted that some clients have
expressed apprehension concerning any further rise in rates. In
terms of loan distribution, most of the officers said that the bulk
of their loans go to established firms that are expanding or
modernizing. However, some mentioned that they issue many small
business loans and help finance new companies.