August 8, 1990
Developments have been mixed to somewhat soft in the Second District economy since the last report. On the positive side, District unemployment rates have remained below the national average. Retailers have had varied sales results. Despite a decided pickup in office leasing activity, vacancy rates in Manhattan have moved somewhat higher and homebuilding activity has weakened in much of the District. Based on a survey of small and medium-sized banks, demand for both residential and commercial real estate loans is weaker than a year ago.
Consumer Spending
The pattern of District department store sales was mixed in recent
weeks. Some contacts reported that sales were well below plan but
results at other chains met expectations. Moreover, sales in Buffalo
and some other upstate areas are reportedly being bolstered by an
influx of Canadian buyers.
During June, over-the-year changes in sales ranged from -7.3 percent to +7.4 percent. Some New York City retailers with disappointing results expressed concern that the local economy may be in a downturn and were not optimistic about any near-term improvement. One cited the continuing layoffs at banks and brokerage firms, the disarray in the retail industry, and the weak real estate market as major factors in the slowdown.
Sales of home furnishings and men's apparel were most frequently cited as weak, while over-the-year gains in some types of women's apparel were widespread. Inventories remain satisfactory due primarily to careful monitoring. Some stores in bankruptcy or with substantial debt noted an improvement in their level of stocks due to less reluctance on the part of manufacturers to supply them. In Manhattan the space vacated on Fifth Avenue by a recently failed chain has just been leased by the largest department store company in France.
Residential Construction and Real Estate
Homebuilding activity in the Second District weakened somewhat
further in recent weeks. Upstate New York areas where the pace of
construction had previously remained strong are now reporting a
slowdown and the New York metropolitan area and northern New Jersey
showed no improvement. While the shortage of credit for acquisition
and construction loans appears to be spreading, several respondents
stated that the continuing glut of homes for resale is also a major
deterrent to new construction. Prices on resale homes have declined
but apparently are still unacceptably high in many cases. Demand for
lower priced, "affordable" housing remains strong however, though
the available supply is limited.
Despite a decided pickup in office leasing activity during recent weeks, in part because of declining rents and other concessions, vacancy rates in both midtown and downtown Manhattan moved somewhat higher primarily as a result of a continuing contraction by financial service firms and the relocation of some companies to other areas. Elsewhere in the District, vacancy rates have recently declined in Fairfield County and have stabilized in Westchester County and northern New Jersey as a result of strong leasing activity and a slowdown in new office completions. Since few new office projects are being proposed given the more than ample supply of space in the District, a shortage of credit seems to be less of a problem in this market than among homebuilders.
Other Business Activity
District unemployment rates in June were unchanged from May and
remained somewhat below the national average. New Jersey's rate was
4.8 percent and New York State's 5.1 percent. The employment
situation is even stronger in western New York where the
unemployment rate declined in May to 4.6 percent in Buffalo and 3.6
percent in Rochester. However, two recent announcements cast a cloud
on the employment outlook. Fisher-Price Toys plans to close a
Buffalo area plant by the beginning of November, eliminating more
than 700 jobs. In addition, Maxwell House plans to close its coffee-
processing plant in Hoboken, New Jersey, that city's largest
industrial employer with 600 workers.
The June Rochester purchasing managers' survey described local conditions as stable. With regard to the outlook, 47 percent of respondents expect conditions to improve over the next three months compared with only 9 percent in June 1989. In Buffalo the percentage of purchasing managers reporting a rise in output increased while the percentage of firms with higher new orders showed little change from May.
Financial Developments
Based on a survey of small and medium-sized banks in the Second
District, demand for both residential and commercial real estate
loans is weaker than a year ago. Two bankers stated that local real
estate prices are inflated and that the market is currently
undergoing an adjustment. With regard to supply, a majority of
bankers characterized their real estate lending practices as tighter
than three months ago. Although only two had changed their
qualifications for accepting loans, many are placing more scrutiny
on existing qualification requirements. In particular, several banks
are evaluating property appraisals more carefully and one banker
reported placing an increased emphasis on the cash flow and net
worth of borrowers. Only two bankers have lowered their maximum
loan-to-value ratio, and none of those surveyed had changed the
spread between the interest rate they charge on real estate loans
and their benchmark rate. Three bankers reported declines in real
estate loans as a share of all loans at their institutions. One
mentioned that his bank had increased its advertising for consumer
installment lending, hoping that it will be a safer market in which
to make loans. Several bankers noted that an oversupply of
commercial and residential development has led to an increase in
both commercial and residential vacancy rates over the past year and
that real estate prices have fallen as well. Two bankers stated that
the drop in prices may result in a leveling off or perhaps a slight
increase in real estate loan demand over the next year.