Beige Book Report: New York
June 19, 1996
Second District economic conditions have shown some signs of improvement in recent weeks. Retail sales strengthened in May and were generally above plan, though they retreated in early June. While there has been some softening in New York City's commercial real estate market, the District's housing market has improved. The District's manufacturing sector accelerated sharply in May, according to purchasing managers in the New York City and Buffalo areas. Tourism remains exceptionally strong. There are some signs of price firming in a number of different sectors. Finally, banks report declining delinquency rates and steady growth in loan demand in May.
Consumer Spending
Retail sales in the district strengthened in May and were generally
ahead of plan for the month, though business slowed noticeably in
early June. There continued to be wide variation among the retailers
surveyed in May, with same-store sales gains ranging from less than
1 percent to more than 10 percent, versus a year earlier. In
general, upscale product lines continue to sell better than lower-
end merchandise. Much of May's pickup was in seasonal merchandise
(air conditioners, fans, swimwear, etc.) and was attributed to warm
weather following an unusually cool April. It is unclear how much of
the early-June slowdown was weather related.
A few retailers reported that inventories were a bit lean at the end of May, but with the early-June sales slump, inventories are generally back on or close to target. Virtually all retail contacts report that they are making fewer and smaller mark-downs on merchandise than last year, which has translated into a modest rise in effective selling prices. With little or no change in merchandise costs, this has boosted profit margins somewhat.
Construction & Real Estate
Commercial real estate markets in the New York metro area weakened
slightly in May. After holding steady in April, office vacancy rates
edged up in May, due to a drop in leasing activity and to new space
coming on the market. Midtown Manhattan's vacancy rate rose from
14.2 percent to 14.8 percent (a 2-year high) at the end of May,
while downtown's climbed from 24.6 percent to 24.9 percent.
The District's residential real estate markets have improved, on balance, though new construction activity remains at a low level. Realtors in New York state report that sales of existing homes picked up substantially in April, following a sluggish first quarter, while selling prices rose modestly. Permits to build new homes, particularly multi-family structures, are up sharply from a year ago-albeit from a very low base. Housing demand continues to be stronger downstate than upstate. Manhattan's residential rental market is particularly tight: vacancy rates are exceptionally low and rents on unregulated apartments have reportedly increased by more than 10 percent over the past year.
Realtors in northern New Jersey report that the market for existing homes is improving slowly but steadily, with both unit sales and average prices increasing at a 3-5% rate. However, homebuilders in northern New Jersey report that market conditions were weak in April and May-"in the pits", as described by one contact. With inventories of unsold homes at a relatively high 13 months worth of sales in May, builders have stopped virtually all speculative building. At the lower end of the market, which includes mostly existing homes, traffic and sales have been fairly good. In contrast, most newly built homes are higher priced and are moving very slowly. Concern over job security is viewed as the overriding constraint on demand for higher-priced homes.
Manufacturing
Regional surveys of purchasing managers indicate a strong
acceleration in manufacturing activity in May. Purchasing managers
in Buffalo report that production activity, new orders, and
employment all accelerated sharply in May, while commodity price
pressures increased. Similarly, purchasers in metropolitan New York
report a sharp improvement in manufacturing-sector conditions. The
composite diffusion index signaled the strongest pace of growth in
more than a year and a half, although there was only a modest
increase in price pressures. (A separate diffusion index covering
purchasing managers in New York City's non-manufacturing sectors
signals continued moderate growth).
Other Business Activity
The district's labor market was stable in April. New York state's
unemployment rate edged down from 6.5 percent to 6.4 percent, while
New Jersey's edged up from 6.4 percent to 6.6 percent. Payroll
employment growth slowed in April, following above-trend job
creation in the first quarter. While part of this slowdown is due to
an acceleration in job losses in manufacturing and government, much
of it reflects a temporary statistical quirk: the survey week
coincided with schools' spring break.
Tourism continues to boom, with hotel occupancy rates in New York City holding at 16-year highs through April, and average daily room rates posting double-digit gains over the past year. Two major transportation infrastructure projects were recently completed in northern New Jersey: a monorail system connecting Newark airport's three terminals, and a new rail link that facilitates the commute to midtown Manhattan.
Financial Developments
Loan demand continued to increase, according to a survey of senior
loan officers at small and medium sized banks in the District.
Demand for commercial and industrial, as well as nonresidential
mortgage loans, accelerated slightly in May, with demand higher at
nearly 30 percent of the banks and steady at approximately 60
percent. However, demand for consumer loans grew at a slower pace
than in April. Refinancing activity for all types of loans continued
to dwindle, declining at approximately 40 percent of the banks and
holding steady at close to 55 percent.
Loan delinquencies decreased across all segments in May. Just 8 percent of the banks reported rising delinquency rates, down from 19 percent in April. At nearly all of the banks surveyed, loan officers report that credit standards have not changed and that they are at least as willing to lend as they were two months ago. Average loan rates are higher or stable at almost all of the respondent banks. The spread between the average lending rates and deposit rates widened at close to 30 percent of the banks and held steady at 35 percent.