August 4, 1993
Most sectors of the economy of the Second District made headway during June but there are a few preliminary indications of some retrenchment in July. June retail sales were reported "good" to "very good" with gains averaging 4 to 13 percent above year ago levels. Home builders reported generally fair-to-good housing starts although there was considerable variation within the region. Office leasing activity gained in most areas throughout the district and vacancy rates inched lower. The unemployment rate in New Jersey fell to 6.9 percent in June, from 7.4 percent in May, while in New York the unemployment rate rose from 7.5 percent to 7.8 percent. Early reports of economic activity in July, however, suggest some softening of the economy with a retreat in retail sales and housing.
Consumer Spending
Retailers were generally upbeat, reporting good-to-strong gains in
all merchandise categories during June. For many merchants, calendar
shifts pushed extra spending into June because the timing of
Memorial Day and July 4th meant that sales on those days would he
counted in the June figures. Sales gains generally ranged from 3.8
percent to double digit growth. Demand was strong across all
categories including apparel, electronic goods, fashion and
furniture. Inventories were largely in good shape, the result of
close control throughout the year. Several retailers mentioned that
there is no pricing power, however. In contrast, early July sales
were characterized as very disappointing or poor. Because of the
erratic trend in the month-to-month retail figures and the sharp
retrenchment in July sales, retailers have lowered their
expectations and now expect generally modest gains in the coming
months, below the rates of increase in the first half of the year.
Residential Construction and Real Estate
Residential construction activity was mixed with the market tone
improving with the distance from the New York City metropolitan
area. Most builders report that banks will lend construction money
only if the builder has a signed sales contract in hand. There is no
lending for construction on speculation. Thus current building
activity represents the strength in April-May sales. Since then,
floor traffic has faded in many areas and fewer contracts were
signed in the June-July period, suggesting some slowdown will
develop in August-September construction. Even as lumber prices
continued to move lower, some builders reported a cost-efficient
trend of substituting steel for lumber in certain applications.
Higher loan-to-value ratios with downpayments as low as 10-15 percent were a boost to New Jersey home sales but credit remained a difficult issue for many builders. The scarcity of acquisition and development loans is driving many builders out of the market; those who can borrow cite private lenders and pension funds as their sources, not banks. In addition, restructured projects from the Resolution Trust Corporation are viewed as a potential threat by many builders who feel that they cannot compete financially, and the potentially larger supply of RTC projects is viewed as particularly worrisome.
Commercial vacancy rates drifted lower in most areas throughout the region including Fairfield County, Northern New Jersey and Westchester, but the trends in Manhattan were mixed. Because employment growth remains negligible in most areas, the absorption rate for office space is slow. In addition, declining vacancy rates for primary space were also frequently associated with rising vacancy rates for secondary space.
Other Business Activity
Signs of strength were evident in state tax collections. Following
two months of declines, personal income tax collections, a proxy for
personal income, rose 3.8 percent in June from a year earlier in New
York State, while tax collections for retail sales posted a 4
percent gain for the April-June quarter. Tourism sustained minor
gains, despite the bombing of the World Trade Center and the
subsequent revelation of additional terrorist plots -- no
significant cancellations of tours or conventions were reported.
Base closings in or near the Second District over the next five
years are estimated to cost the region a net 7400 military and
civilian jobs, representing less than 0.1 percent of the combined
job base in New York and New Jersey. The monthly reading of the
unemployment rate remained erratic with New York rising to 7.8
percent in June, while New Jersey declined to 6.9 percent. However,
the overall trend remains definitively down; the unemployment rate a
year ago for both states was close to 9 percent. A major regional
retailer, Jamesway Corporation, filed for protection under Chapter
11 of the U.S. Bankruptcy Code and retail analysts expect several
stores to be closed in the coming months. Merck & Co., a New Jersey
based pharmaceutical manufacturer, announced plans to eliminate 2100
jobs through an early retirement program. The reduction will be
diffused throughout their worldwide operations which employ
approximately 38,000 people.
Financial Developments
Almost all senior loan officers surveyed at small and midsized banks
in the Second District indicated that their willingness to lend was
unchanged relative to two months ago. The few bankers who cited an
increased willingness to make loans attributed it to a sharp
increase in demand deposits. However, this increase in deposits was
not widespread, as a majority of officers instead noted a decline or
a lack of growth in certificates of deposit and money market
accounts. Passbook savings accounts grew slightly. Overall demand
for loans stabilized, although demand for commercial and industrial
loans continued to improve. Interest rates on loans were steady or
lower. Delinquency rates for all types of loans were unchanged or
improved slightly during the preceding two months.