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Beige Book Report: New York

March 15, 1989

Recent reports on District developments have tended to be generally on the positive side. Retail sales were mixed during January, but showed some signs of improvement in February. Reports on upstate New York business conditions indicate a strong new orders picture and an optimistic outlook for 1989, but with indications of capacity pressures and rising input prices. Unemployment in the District continues below the national average, though the unemployment rate in New York State did rise on a year-to-year basis in January and employment growth in the District has been slower than in the nation as a whole. The demand for new housing remains generally weak in the District, but a slight increase in buyer interest has been noted recently and office leasing activity has picked up. Following the actions of major banks, small and medium-sized banks raised there prime lending rate a full percentage point in February.

Consumer Spending
District retail sales were mixed during January but respondents reported an improvement in February. The February upturn was primarily centered in home furnishings and men's and women's apparel, with retailers stating that the current fashions finally seem to have caught on. Year-to-year changes in January ranged from -4 percent to +3 percent, results which were below or on plan, while February gains were generally on plan at +4 percent to +8 percent. For one chain February marked the first time sales reached targeted levels in several months.

A survey of major consumer electronics firms in the District found that during the 1988 Christmas season, stores posted strong over- the-year gains of 20 to 30 percent, in sharp contrast to the past two years. Firms are cautiously optimistic about future demand since, at a recent trade show, a number of them commented about a shortage of televisions and VCRs.

Business Activity
Unemployment rates in New York and New Jersey—4.9 percent and 3.9 percent, respectively, in January—remain lower than the national average. However, while the national rate declined by 0.4 percentage point between January 1989 and a year earlier, New York's rate rose 0.5 percentage point and New Jersey's showed virtually no change. Over this same period, nonfarm employment growth in both New York and New Jersey was only about half as rapid as the national average, due in large part to sizable declines in manufacturing and in New York's banking and brokerage industries.

The percentage of surveyed Buffalo purchasing managers reporting increased new orders rose in January to its highest level since late l987 while the percentage reporting higher input prices also showed a sharp rise. Elsewhere in western New York, 65 percent of the purchasing managers in Rochester's annual outlook survey anticipate an improvement in general business conditions during 1989 and 83 percent expect their capacity utilization to top 90 percent this year.

Among recent developments in the District, plans were announced to build a new police academy and a large middle income housing complex in the South Bronx. The complex is to include almost 300 units in new two-family homes on a 40-acre site now containing dilapidated and burned-out buildings. In the Buffalo area Du Pont will undertake a multimillion-dollar expansion of its plant and Ford Motor will make a major investment in new equipment at its stamping plant. Elsewhere, Crouse-Hinds approved a multimillion-dollar project to modernize its iron and aluminum foundries in Syracuse; and in Connecticut, the Stamford Urban Redevelopment Commission has chosen a builder for a large, mixed-use downtown project. As part of a plan to bring residents and nightlife to the city's center, it will include housing, restaurants, cinemas and medical office space.

Residential Construction and Real Estate
Demand for new homes continues weak in much of the District but a slight increase in buyer interest occurred in the New York metropolitan area, and builders are somewhat more optimistic about the outlook than they were earlier. With a heavy supply of homes for resale still remaining, more owners reportedly are lowering their prices. Some builders are doing the same while others are providing "extras" and maintaining stable prices. However, builders in western New York and some other upstate areas anticipate good housing demand following last year's strength.

Office leasing activity picked up further in recent weeks and several areas with relatively high vacancy rates report some improvement. Demand from tenants requiring small to mid-sized space was especially strong in midtown Manhattan while some renewed interest from securities and financial services firms was noted downtown. Leasing activity on Long Island and in Fairfield County has also been good and some observers state that the worst of the Fairfield overbuilding is now past. Office vacancy rates in Westchester and northern New Jersey have moved down as a result of virtually no new construction in the former and a slowdown in new undertakings in the latter. However, with almost 7 million square feet of new office space scheduled for completion this year in midtown Manhattan and more than 2 million on Long Island, higher vacancy rates are expected there.

Financial Developments
Following the actions of major banks, small and medium-sized banks in the Second District raised their prime lending rate a full percentage point in February-though several bankers stated that they had been surprised at the back-to-back increases by the major banks. Most reported that rates on adjustable rate mortgages tied to the prime reflected the full increase while fixed rate mortgages were up only twenty-five basis points. Despite the higher rates, demand for business loans is steady or growing. Hone mortgage loan demand is more sporadic with pockets of slowness. One banker did note that the mortgage market should not be greatly affected unless rates climbed to thirteen percent or more. In the deposits market, sharp increases in rates on certificates of deposit were cited, while rates on money market accounts were unchanged or slightly higher.