October 18, 1988
The Second District economy remains generally healthy and registered one further modest expansion since the last report. The percentage of purchasing managers who reported improved business conditions increased and leasing activity in the District's office markets continued at a moderate pace. Retail sales were sluggish during August but spending picked up somewhat in September. Activity among homebuilders has generally been slow though there continue to be some areas of strength. Small and medium-sized banks report strong demand for home equity loans.
Consumer Spending
District retail sales remained sluggish in August when a prolonged
heat wave continued in many areas. Spending picked up somewhat in
September though the extent of the improvement varies. Thus far, the
sales results for the new fall fashions in women's apparel have been
mixed. Items cited as in stronger demand were children's back-to-
school clothes, athletic apparel, electronics and toys.
During August sales at District retailers whom we contact declined from a year earlier by from 0.5 percent to 5.5 percent, results which were definitely below plan. With the unusual heat, the main items in strong demand were air conditioners and fans. September brought a general improvement in sales with over-the-year changes ranging from -2.0 percent to +10.0 percent. For the most part, sales remained somewhat below plan but retailers are hopeful that year-to- year gains will increase as the holiday season nears. Despite lower- than-expected sales, inventories are generally at satisfactory levels and actually below plan at some retail chains as a result of strict monitoring.
Business Activity
Some further expansion in the District s business activity occurred
in recent weeks. During September the percentage of purchasing
managers in both Rochester and Buffalo who reported improved
conditions increased—in Rochester to the highest level since March.
Rochester, New York's leading manufacturing export center, is
benefiting greatly from the dollar's relative weakness with its
average factory workweek climbing to a record 45.4 hours at one
point this year. Major exporters there include Eastman Kodak, Xerox
and Bausch & Lomb.
Plans for several new projects in the District were recently announced. Port Chester, N.Y. officials signed an agreement for a $200 million harbor redevelopment which will include condominium homes, a yacht club, boat slips, a restaurant and commercial-retail space. In another attempt to reclaim a waterfront, Buffalo officials approved a $63 million plan which will include shops, offices, a hotel and a lakefront park. Since one of the developers of this plan was involved in the restoration of the Boston, Baltimore, and New York City waterfronts, Buffalo is hopeful that its project will also prove to be a popular tourist attraction. In the manufacturing sector, Bethlehem Steel unveiled plans to spend some $45 million over the next few years to enhance its three remaining operations in the Buffalo area. This follows announcements made earlier that General Motors will invest $80 million to build a new series of hi- tech engines beginning this fall and that Motorola will build a new plant in that area as well.
Residential Construction and Real Estate
Activity among District homebuilders has generally been slow in
recent weeks though there continues to be some strength in upstate
New York. Sluggishness in the resale market was cited as a major
deterrent. Potential new homebuyers have reportedly not reduced
asking prices sufficiently to sell their current dwellings, and a
substantial inventory of existing homes for sale has developed.
Higher mortgage rates and the satisfaction of pent-up demand during
the past few years were also mentioned as contributing to the
current slowdown in residential construction. Few observers
anticipate improvement in the near future.
Leasing activity in the District's office market continued at a moderate pace in recent weeks. Additional leases were signed for extensive space in several of the commercial buildings under construction on the developing west side of Manhattan and some renewed activity took place in lower Manhattan as well. Long Island continues to have one of the lowest office vacancy rates in the suburban U.S., due in part to temporary moratoriums placed by some communities on new buildings in recent years. Realtors report a turnaround in Westchester County's office market with increased demand and virtually no new supply resulting in lower vacancy rates and increased rentals.
Financial Developments
Based on a survey of small and medium-sized banks in the Second
District, demand for home equity loans remains strong. Some officers
stated that demand for home equity loans has never been greater,
though others reported that demand is not quite as high as during
the introductory period. Most expected demand will rise through
early 1989 and especially during the upcoming holiday season.
Approximately half of the banks in the survey indicated that they
were aggressively marketing home equity loans at the present time.
Because most home equity loans have adjustable interest rates, a
popular marketing feature is a low cap on potential interest rate
increases. Even at those banks without a promotion campaign, home
equity loans comprise a large and growing share of total consumer
lending. Home equity credit is most commonly used to defray expenses
related to home improvement and college costs, as well as for debt
consolidation.
A number of bankers noted that borrowers using home equity credit for debt consolidation usually did so for the tax advantage, not because they felt pressed to reschedule overwhelming debt. However, few banks actually inquire about the purpose of the loan in the credit screening process. The officers believed that prudence by borrowers and strict credit standards have thus far resulted in very low delinquency rates for home equity loans. Many commented that home equity loans have by far the lowest delinquency rates of any consumer loan in their bank's portfolio.