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Beige Book Report: New York

May 3, 1989

The pattern of developments in the Second District economy was mixed since the last report. Unemployment rates fell sharply in New Jersey and New York during March, though primarily as a result of fewer job seekers, and office leasing activity continued at a moderately rapid pace. In contrast, however, demand for new housing varied considerably over the District and consumer spending was generally slow in March. Most small and mid-sized banks reported that demand for home mortgages is approximately unchanged from what it was last spring.

Consumer Spending
District retail sales were sluggish during March. Several respondents reported over-the-year declines despite the fact that Easter occurred in March this year instead of April as in 1988. As a result, sales fell well below targeted levels at most stores contacted. Only one chain of department stores reported that sales were "right on plan." While some retailers attributed the disappointing March results to "un-spring" like weather, others were at a loss for explanations. Year-to-year changes in March ranged from -6.0 percent to +3.2 percent with sluggishness noted in many categories. One category in which sales generally remained good was women's apparel, a slow seller throughout 1988.

In spite of the lackluster sales results, most respondents reported that inventories were at satisfactory levels, due in part to large markdowns on some items. Based on one weeks results, April is showing a better tone than March and respondents were hopeful that this would continue.

Business Activity
Unemployment rates in New York and New Jersey fell by almost one percentage point in March as New Jersey's rate hit a record low. The improvement was primarily the result of fewer persons seeking work rather than a marked increase in employment and may not be sustainable in the months ahead. On Long Island, for example, the local economy is braced for the continuing impact of the Navy's cancellation last December of an attack bomber contract. A loss of several thousand more jobs is expected at the aircraft company and its suppliers by year-end. In addition, the recent announcement by a major New York City securities firm that it plans a substantial restructuring which could result in the layoff of a couple of thousand employees is also a source of concern. The brokerage industry is still feeling the effects of the October 1987 stock market crash and a slowdown in retail activity since that time.

Eighty-four percent of purchasing managers in Rochester and 75 percent in Buffalo reported stable to improved general business conditions in March, virtually unchanged from the February numbers. In both cities more than half the surveyed firms reported higher prices on the commodities they purchased.

Few new investment projects were announced in recent weeks. Among the largest of these was a $70 million business park in the Rochester area which Eastman Kodak and Pioneer Development Corporation hope to begin constructing this year. The park would include office buildings, shops, restaurants and hotels to be built on vacant land owned by Kodak.

Residential Construction and Real Estate
Demand for new housing in the District has been mixed in recent weeks. A glut of homes in the resale market was cited as a major deterrent to homebuilding activity in the New York metropolitan area and northern New Jersey. Existing home prices have begun to come down somewhat, but many observers believe still lower prices are needed before current owners can sell and "move up" to new homes. In sharp contrast, homebuilders in several upstate New York communities are quite active and home prices are rising in response to strong demand.

Office leasing activity has been at a moderately strong pace since the last report, with vacancy rates showing little or no change. Upward pressure on vacancy rates in Manhattan is expected to build, however, with the completion of many new commercial buildings now under construction and an increased supply of existing office space as these new buildings become occupied. Elsewhere in the District, the volume of new construction in northern New Jersey and Fairfield County has slowed somewhat and some observers believe this represents a turning point in the prolonged and rapid expansion of those suburban areas.

Financial Developments
Senior officers of most small and mid-sized banks in the Second District survey reported that demand for home mortgages is approximately the same as last spring. Responses were mixed regarding the strength of the bankers' local residential real estate market. About half described their local real estate market as active, while half, particularly those in the New York City metropolitan area, characterized it as soft. Most of the respondents have noticed that homebuyers are currently showing greater interest in fixed-rate loans, possibly because the rise in interest rates from a year ago has seen less for fixed-rate loans than for adjustable-rate mortgages. Others speculated that buyers have become more favorable toward fixed-rate mortgages because of uncertainty about the future course of interest rates. Moreover, despite aggressive marketing of home mortgages at some of the banks, few were offering concessionary, or so-called "teaser", first-year rates on adjustable-rate loans. Though some surveyed bankers believe rates will remain stable, most expect rates will decline somewhat over the next six months.