WASHINGTON (MNI) – The following is the Beige Book summary of
business activity in the Federal Reserve’s Second District, published
Wednesday:

SECOND DISTRICT – NEW YORK

Economic activity in the Second District has weakened since the
last report, largely reflecting widespread disruptions from Sandy.
Prices of finished goods and services have generally been stable. The
labor market is difficult to gauge at this point-while hiring activity
tapered off noticeably due to the storm, relatively few business
contacts indicate that they plan to reduce headcounts in the months
ahead. Retailers report fairly strong sales for October but indicate
that business in the last two weeks has been severely hampered by storm
disruptions; auto dealers in upstate New York report some softening in
auto sales in October. Tourism activity in New York City was fairly
strong prior to the storm; hotel business tapered off only modestly in
early November, as the adverse effects of travel cancellations were
partly offset by increased demand from local residents without power or
access to their homes. Residential real estate markets were generally
firm through the latter part of October, though the storm has caused a
substantial slowing in sales activity in and around New York City.
Finally, bankers report some weakening in loan demand and increased
delinquency rates in the consumer and commercial & industrial loan
segments; for residential and commercial mortgages, both loan demand and
delinquency rates are little changed.

Consumer Spending

Retail sales are reported to have been ahead of plan in October but
exceptionally weak in early November in the New York City area, mainly
due to widespread power outages, store closings and accessibility
problems for both customers and workers. With the holiday sales season
coming up-and with many residents in the region needing to replace
destroyed or damaged property-all the lost sales are expected to be made
up in the weeks ahead. One major chain reports that it is hiring more
holiday-season staff than in 2011. The pricing environment is described
as stable. Auto dealers in upstate New York report some flattening out
in sales in October, though used car sales reportedly remain fairly
robust. There has also been some softening in business at dealers’
service departments. Wholesale and retail credit conditions remain
favorable.

Tourism activity in New York City was mixed in October but dropped
off noticeably following the late-October storm. Hotels across much of
lower Manhattan lost business in late October and early November, when
they were without power for a number of days. Overall revenue for
Manhattan hotels slumped nearly 10 percent below 2011 levels during the
week of the storm but bounced back in the subsequent week. The New York
City marathon, although cancelled at the last minute, likely brought
large numbers of visitors to the city during the first weekend in
November. Attendance and revenues at Broadway theaters, which had
already weakened modestly in October, fell sharply during the week of
the storm; attendance rebounded modestly in the second week of November
but remained roughly 15 percent below last year’s level. Finally,
consumer confidence in the region climbed to its highest level in well
over a year in October (prior to the storm), based on both the
Conference Board’s survey of residents of the Middle Atlantic states
(NY, NJ, Pa) and Siena College’s survey of New York State residents.

Construction and Real Estate

Residential real estate markets in the District were mixed but
generally firm prior to the storm, and its effects on the market remain
unclear at this point. Manhattan’s rental market remained on a positive
trajectory in October, with rents up roughly 5 percent from a year
earlier and vacancy rates continuing to decrease. Sales markets in both
Manhattan and the outer boroughs were fairly active in October, with
prices steady and the inventory of available homes characterized as low.
On the other hand, housing markets in the Buffalo area showed signs of
softening in October. An expert on New Jersey’s housing sector notes
that conditions were improving gradually prior to Sandy and expects that
post-storm rebuilding will boost multi-family construction.

The storm caused a noticeable slowdown in sales activity throughout
the New York City metropolitan region, but this is expected to be
temporary. With many homes along the New York City, Long Island and New
Jersey shorelines severely damaged or destroyed, the lean housing
inventory is a concern, as displaced residents seek short-term rentals.
There is some concern as to how much of the shore communities will be
rebuilt and how quickly, but one industry expert anticipates that
residents in the severely-damaged areas will be strongly motivated to
return and rebuild. Some of the biggest potential challenges are likely
to be shortages of construction equipment and materials, and steeper
prices for insurance.

Commercial real estate markets were mixed prior to the storm. A
number of large office buildings in lower Manhattan remain out of
commission due to extensive flooding; however, a major brokerage contact
indicates that displaced businesses do not seem to have had much trouble
finding temporary quarters. Overall market conditions are not reported
to have changed much, thus far, since the storm-between the end of
September and mid-November, asking rents have risen modestly in
Manhattan but declined modestly in northern New Jersey. Office markets
across upstate New York, which was not directly affected by the storm,
have shown some signs of softening in recent weeks.

Other Business Activity

Manufacturers across the District indicate continued weakness in
general conditions since the last report; virtually all contacts in the
New York City area report some loss in business due to storm-related
disruptions. Manufacturers in upstate New York, which was not
significantly affected by Sandy directly, reported only scattered and
indirect effects from the storm, though these contacts also report some
further weakening in business conditions.

Business contacts throughout the southern part of the District-in
both manufacturing and other sectors-report widespread effects of the
storm, particularly in northern New Jersey and on Long Island. In these
parts of the District, many businesses indicate that the impact has been
both severe and protracted, due to prolonged power and communications
outages, as well as transportation disruptions that have prevented both
workers and customers from accessing the business. A trucking industry
expert notes that many terminals and warehouses sustained severe
flooding, which has disrupted business; at least one firm has gone out
of business as a result. Business contacts in both manufacturing and
other sectors report steady input price pressures and little change in
selling prices.

Labor market conditions have weakened, probably temporarily, in the
aftermath of Sandy. A major New York City employment agency specializing
in office jobs reports a sharp drop-off in business after the storm,
because many firms either shut down or operated without key personnel.
Separately, a growing number of manufacturing contacts-not only in the
New York City area but also in upstate New York-report declines in
employment at their firms. However, businesses in other sectors report
little or no change in employment. Contacts in both manufacturing and
other sectors expect headcounts to remain steady, on net, over the next
six months.

Financial Developments

Small-to medium-sized banks across the District report weaker
demand for consumer and especially commercial & industrial loans but
steady demand for commercial and residential mortgages. Bankers report
increased demand for refinancing. Respondents do not report any change
in credit standards in any loan category. Bankers indicate a decrease in
spreads of loan rates over costs of funds for all loan
categories-particularly commercial mortgages. Respondents also indicate
decreases in average deposit interest rates: nearly two in five bankers
report a decrease while none reports an increase. Bankers note increased
delinquency rates for consumer loans and commercial & industrial loans
but no change in delinquency rates for residential or commercial
mortgages.

When asked what effects Sandy had on their business, almost half of
the bankers report no noticeable effect so far; however, many of these
respondents expect that effects of the storm could become evident in the
future, especially for commercial businesses and as damage to collateral
is assessed. On the other hand, more than 40 percent of those surveyed
were affected directly by the storm, with widespread branch closings and
power outages reported. Banks in the most severely affected
areas-largely New Jersey, as well as lower Manhattan and Queens-have
received a high volume of calls from customers with home damage, and
banks are physically inspecting buildings for damage before making new
loans.

** MNI Washington Bureau: 202-371-2121 **

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