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New York City's Economy Booming,
But Weaknesses Lie Ahead
October 1, 1998
H. Carl McCall
New York State Comptroller
Office of the State Deputy Comptroller
for the City of New York
Report 6-99
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Highlights
- Recent international economic turmoil and a slowing of corporate
profits have produced a sizable correction in financial markets,
which will slow the City's economic and tax growth, although probably
not before early 1999.
- Since the City had already lowered its forecast of financial
profits, it is unlikely the City will experience a sudden shock
to its budget. However, the City is not likely to generate a large
surplus, such as the record $2.1 billion recorded in FY 1998.
- Employment in New York City is increasing at the fastest pace
in 40 years, real wages have risen, especially in the financial
sector, and tourism remains strong.
- While the real estate market has been surging, with falling
vacancy rates and rising rental rates, unrest in the financial
markets has recently curtailed financing.
- With many commuters enjoying high Wall Street incomes, New York
City's suburbs are experiencing stronger job growth from increased
consumption and housing spending. In downstate New York suburbs,
Long Island has faster job and sales tax growth compared to Westchester-Rockland.
- Although growth in downstate New York has been strong, job growth
in the major upstate areas has slowed to 0.2 percent in the first
eight months of 1998. Sales tax collections in these upstate areas
gained only 0.9 percent in the first six months of 1998.
U.S. Economy is Not
Immune to Global Economic and Financial Problems
On a scale unprecedented in recent decades, many
signs point to a fragile world economy. The Asian economic crisis
and a protracted Japanese recession, Russia’s repudiation of
its sovereign debt, and recent volatility in Latin America financial
markets may be signals of an impending global recession. The U.S.
economy is not immune to such adverse global conditions.
Indeed, both President Clinton and Federal Reserve
Chairman Greenspan recently have acknowledged that inflation is
no longer the principal threat to the U.S. economy, but that there
is a growing risk of deflationary pressures spreading to the U.S.
as a result of falling commodity prices and widespread debt problems.
The fear is that more countries could be thrown into conditions
of economic depression.
Recent data show that the U.S. economy has already
started to slow. Real output grew at an annual rate of 1.8 percent
in the second quarter, compared to a 5.5 percent first quarter increase.
During 1997 gross domestic product increased by 4 percent for
the year. Forecasts suggest that gross domestic product (GDP) will
only moderately rebound in the second half of the year. The latest
Blue Chip Consensus forecast indicates that GDP growth in the third
quarter will reach 2 percent and rise to 2.6 percent in the final
quarter.
A steep drop in net exports, largely a result of
sagging exports to depressed Asian countries(1),
is the main factor behind the U.S. slowdown. Also, there was a sharp
drop-off in inventories, part of which was related to the General
Motors strike.
The pronounced fall-off in corporate profits, partly
from weaker Asian sales, dampened investor optimism. After growing
at an annual average rate of 14 percent from 1994 to 1997,
corporate profits decreased by 1.1 percent in the second quarter
compared to the preceding period, and forecasts suggest that overall
1998 growth will be less than 1 percent. Weaker profits is one of
the main reasons that business investment is likely to slow.
After reaching new highs in July, all of the major
U.S. stock indices began to lose value, especially in the last week
in August. From their July high to August low, the Dow Jones Industrial
Average (DJIA) and the broader New York Stock Exchange (NYSE) composite
index lost about 20 percent, while the technology-heavy NASDAQ
lost nearly 26 percent (see Figure 1).
This summer's substantial declines have not been
as severe as in 1987 when the equity markets fell over 30 percent.
Nonetheless, the worsening global economic picture shattered confidence
in all emerging markets and abruptly changed investor psychology.
Trading activity in September has been unusually volatile, with
no sign of a quick recovery. Moreover, the shares of many smaller
companies, as well as shares of large financial companies with foreign
lending exposure, have fallen by 40 to 50 percent from highs reached
earlier in the year.
As we noted in a recent report, New York City has
become increasingly dependent on Wall Street for economic and fiscal
stimulus in the 1990s(2). Weaker financial markets
and a slowdown in the national economy will eventually slow the
growth in income, spending and jobs in the City. Citicorp and Travelers
Group, two of New York’s largest financial firms, plan to eliminate
several thousand jobs, many in the City, as they merge later this
year. Other Wall Street layoffs are under consideration. While the
local economy has built up considerable momentum to carry it through
the remainder of 1998, the outlook for 1999 is not as bright.
Wall
Street Profits to Be Lower in 1998
Profits for New York Stock Exchange member firms,
which set new records in 1996 and 1997, increased by 16 percent
in the first half of 1998 compared to the first half of 1997. However,
the recent market turmoil has reduced profits at the major Wall
Street firms, and it is unlikely that another record will be set
this year.
There is also likely to be an adverse impact on
Wall Street's year-end bonuses. Although bonuses tend to fall less
than profits, we expect there will be some moderate decline this
year after rising by 60 percent in 1996 and another 25 percent
in 1997. This will reduce the growth in local wage and consumption
spending relative to last year. In addition, with the decline in
stock values a negative "wealth effect" will likely curtail
spending.
Wall
Street Downturn Threatens Future City Budget Surpluses
The record earnings generated by Wall Street in
1996 and 1997 helped fuel the creation of substantial surpluses
in both fiscal years 1997 ($1.3 billion) and 1998 ($2.1 billion).
These surpluses, which allowed the City to increase spending and
reduce the gaps in each successive year, partially resulted from
the City using a conservative forecast for Wall Street performance
and related tax revenues at the start of each fiscal year. For FY
1998, the City began the year assuming $8 billion in Wall Street
profits for calendar year 1997. When actual profits reached $12.2
billion that year, revenue forecasts for the personal income, general
corporation, and unincorporated business taxes, the three taxes
most influenced by Wall Street performance, were ultimately raised
by almost $1.2 billion, reflecting growth of nearly 14 percent.
The Adopted Budget for FY 1999 assumes Wall Street
profits will total $8 billion in calendar year 1998, a decline of
$4.2 billion from last year. Based on this forecast, the City is
projecting collections for the personal income, general corporation,
and unincorporated business taxes will decline 4.4 percent, after
adjusting for planned tax reductions.
In 1994, a downturn in the bond market caused Wall
Street profits to fall $7.5 billion from 1993 levels, to $1.2 billion.
As a result, collections of the above three taxes fell 1.1 percent
in FY 1995. Because the City had started the year expecting these
taxes to grow by 5.6 percent, the City's budget was subject to an
unexpected shortfall.
Given the City's current cautious assumptions for
FY 1999 and the year-to-date level of Wall Street profits, we currently
do not expect the budget to suffer a major shortfall. Collections
may be lower than in FY 1998, as the City has already projected,
with the impact likely to begin in the quarterly payments due in
December 1998. The likelihood that profits will not be higher than
the City expects will reduce the potential for another large surplus.
This will make it more difficult to close the $2.3 billion City
budget gap projected for FY 2000.
New
York City Employment Growing at a Record Rate
During the first eight months of 1998, New York
City's economy has added private sector jobs at the fastest pace
since the current employment series began in 1958. Average private
employment levels for the January-through-August period have increased
by 78,400, or 2.7 percent, compared to the same period in 1997.
For the first time in the 1990s, the City's private job growth rate
approaches the pace of job gains in the nation. Previously, the
best growth on record for the City was the 2.3 percent gain in 1984
(see Figure 2).
These strong gains have boosted the number of private
sector jobs recovered since 1992 to almost 86 percent of the number
lost in the recession. However, because government has continued
to lose jobs, the share of total employment that has been recovered
is only 65 percent.
New York City's employment can be grouped into
export, local market, and government sectors. The export sector
consists of industries that provide goods or services on a national
and international level, thereby bringing income into the City.
Local market industries are those that service the needs of residents
and businesses here in the City. Generally, the local market grows
in response to either job or income gains in the export sector.
Export Sector
Job growth in the export sector increased significantly
in 1998. Between December 1997 and August 1998, seasonally adjusted
employment increased by 37,900. The gains through the first eight
months of the year already surpass the number of jobs created in
all of 1997.
Job growth in 1998 has been led by business services,
with a gain of 17,200 (see Figure 3). In the last few years, most
of the growth in business services have been in computer software
and temporary help agencies, although advertising has also added
jobs over the last two years. Growth has likewise accelerated in
Culture & Media, largely due to gains in movie production and
the performing arts.
The rate of decline in manufacturing has continued
to diminish, with only 400 jobs lost through August. Most of the
improvement has been in printing, which has offset declines in apparel.
Banking and insurance employment increased by 3,800
jobs in the first eight months of 1998, compared to a loss of that
magnitude at this point last year. This year's gains mark the end
of a decade of declines in these industries.
Job gains in professional services, which includes
lawyers, accountants, and engineers, are higher than at this point
last year. Wall Street has added 4,500 jobs this year, and in June
surpassed its December 1987 all-time peak.
Local
Market Sector
Similar to the performance of the export market,
the local market sector is performing considerably better this year
than at the same point last year.
The retail sector, which has gained 11,100 jobs,
could be on its way to one of the best years on record. Almost half
of this year's growth is due to restaurants. While retail's performance
is encouraging, this sector is also at greatest risk from declines
in income and spending resulting from the financial market downturn.
Wholesale trade has added 3,600 jobs this year.
Reflecting the strength of the local real estate
market, construction employment has increased by 4,500 jobs through
August. This year is likely to be the best year for construction
employment since the boom of the mid-1980s. However, declines in
construction permit data from F.W. Dodge point to a possible slowdown
in this industry after projects already started are completed.
Employment growth has slowed in health and social
services. While the decline in private hospital employment has eased
— annual losses averaged 3,000 jobs in 1996 and 1997 —
growth in other areas of medical services has slowed.
Wage
Gains Remain Robust in the City
Total wages in New York City increased by 7.6 percent
in 1997 to reach $163.3 billion. While, on average, wages grew by
5.9 percent in 1997, more than twice the 2.3 percent rate of
inflation, the wide disparity in pay levels and wage increases in
New York City renders meaningless the notion of an "average."
There has been a growing reliance on bonuses as a form of compensation
for high earners, those making in excess of $75,000 per year, in
the FIRE sector, corporate headquarters operations, and the media.
Double-digit average pay gains for these employees have become commonplace.
For example, in 1997 the average Wall Street salary rose 10 percent
to $176,000.
On the other hand, low- and middle-income workers
in several industries, such as apparel manufacturing, construction,
transportation, and health services, received average wage increases
of less than 2 percent last year.
After adjusting for the effects of inflation, total
real wages have risen by over 10 percent between 1990 and 1997,
with most of the gains coming in the last three years. However,
this Citywide average masks a basic disparity. All of this increase
has come from the financial sector, as real wages in the nonfinancial
sector have actually declined 0.6 percent in the 1990s. Wall Street
firms alone account for over 88 percent of the increase in real
wages during this decade.
Unemployment
Recedes But is Still Much Higher Than U.S.
For the first eight months of this year, the City's
unemployment rate averaged 8.1 percent, seasonally adjusted. Although
this is notably lower than the 9.7 percent rate for the same period
in 1997, it is still above the 4.6 percent U.S. unemployment rate
through August.
Part of the decrease in the unemployment rate is
due to faster job growth and a declining number of unemployed, which
fell by 57,000 for the first eight months of 1998 compared to the
same period a year earlier. In addition, the labor force has contracted
this year, partly due to declining labor force participation rates
among men and teenagers, but also due to the method for making data
adjustments, which added to the increase in the size of the labor
force in 1997.
There has also been a 5.4 percent decline in the
number of initial claims filed for unemployment insurance through
August.
Tourism
Remains Vibrant in the City
The New York Convention and Visitors Bureau forecasts
that the number of visitors coming to the City will increase by
3 percent to 34 million people in 1998, after growing by over 13
percent last year. Although there will probably be a drop in the
number of international visitors due to economic slowdowns in some
countries, increased domestic tourism will offset this decline.
New York has become a choice destination as crime has been reduced
and the quality of life has improved. Hotel occupancy rates averaged
79.6 percent during the first eight months of 1998, while average
daily room rates rose to $199.77, an increase of 11 percent
over last year.
The
Real Estate Industry is Hot But Faces Problems in Coming Months
During the first six months of 1998 the real estate
industry, both commercial and residential, surpassed the records
set in 1997. Vacancy rates for Manhattan commercial space were in
single digits and at the lowest levels in over a decade. For the
first time in history, a number of buildings in Midtown rented for
over $60 per square foot. In Midtown South, where little space is
available, rental rates have increased by almost 20 percent since
mid-1997.
Both the volume and price of commercial office
building sales are at historic levels. The principal participants
in the extraordinary market for Manhattan commercial real estate
are financial services firms followed by media and telecommunications
companies. However, financial market volatility has started to crimp
the availability of financing for the purchase of commercial real
estate. Bank financing has become more difficult to obtain and the
market for real estate investment trusts (REITs) has collapsed.
Yet, because of the relative scarcity of office space, leasing activity
will probably not slow for a while. Unlike the 1980s, when extensive
new construction created a glut of space, there has been considerably
less new construction in recent years.
There is already a slowing in construction awards.
During the first seven months of 1998 compared to the same period
in 1997, the value of total construction contracts awarded in the
City has declined by over 43 percent, from $4.5 billion to $2.6
billion. Nearly half of this decline is from three sectors: offices
and banks, schools and colleges, and apartment buildings.
The
Metro Region and New York State Also Experience Strong Job Growth
New
York State and Metropolitan Areas
In New York State, total employment has grown by
125,000, or 1.6 percent, through the first eight months of
the year, compared to the same period in 1997 (see Figure 4)(3).
The State has posted stronger gains over the past year due to improvement
in trade and services, especially business and professional services.
The decline in manufacturing jobs continues to ease, with a drop
of only 2,500 jobs on a year-over-year basis. On a private-sector
basis, job levels in the State rose by 2 percent.
The downstate area ¾
New York City, Nassau and Suffolk counties, and Rockland and Westchester
counties ¾ accounts for 63 percent of
the State's employment but 85 percent of the new jobs over
the past year. The 2.1 percent growth in the downstate area
continues to outpace that of the major upstate urban areas. The
upstate areas have experienced job growth of only 0.2 percent, following
growth of 0.8 percent during the first eight months of 1997.
Albany led the upstate areas with total job growth
of 0.9 percent, slower than the 1.1 percent growth last year. Rochester
employment levels, reflecting the impact of downsizings at two major
employers ¾ Kodak and Xerox ¾
declined during the first eight months of the year.
Sales tax collections in the four major upstate
areas mirror the area's weak job growth. While statewide there has
been an approximately 4 percent increase in sales tax receipts,
the major upstate metro areas have recorded only a 0.9 percent
increase for the first six months of 1998 compared to the 2.7 percent
gain during the same period last year. Syracuse had growth of 2.3 percent,
with Albany slightly lower at 1.5 percent, and Buffalo posted
a slight decline. In contrast, sales tax collections in New York
City grew by 4.3 percent during the year’s first half, while
the growth for Long Island was 4.5 percent, but only 0.2 percent
for Westchester-Rockland.
New
York-Northern New Jersey Region
Total employment in the 20-county New York-Northern
New Jersey region has grown by nearly 165,000 jobs, or 2.2 percent,
for the first eight months of the year, compared to the same period
in 1997. Employment growth has improved over last year in every
section except Middlesex-Somerset-Hunterdon, although this area
still leads the region with a 3.8 percent rate of job growth.
Every major industry except transportation has
posted stronger growth in the first eight months of 1998 compared
to the same period in 1997, and manufacturing employment in the
region has actually grown by 2,500 jobs.
The New York City suburbs have large commuter populations
working in high-wage industries in the City, and the strength on
Wall Street over the last few years has helped the suburban economies
rebound. High Wall Street earnings have given suburban residents
more disposable income, and greater consumption spending has translated
into job growth in retailing and local services.
On Long Island, total employment growth has accelerated
to 2 percent, or 23,000 jobs, this year, following growth of
1.8 percent in the same period of 1997. Construction and services
continue to set the pace, and retail trade employment has reached
levels not seen since the 1980s.
In Westchester County, employment has grown by
1.4 percent, the fastest rate of growth since 1995, mostly due to
gains in trade. Rockland County has added jobs at a rate of 3.7
percent this year, led by services and retail trade.
Employment in Northern New Jersey has grown by
2.4 percent, or 58,000 jobs through August on a year-over-year basis.
Manufacturing employment increased by 2,700 jobs. The services industry,
particularly business and professional services and private health
care, continues to drive employment gains. Northern New Jersey has
regained all the jobs lost during the 1989 - 1992 recession, while
New York City and New York State have not reached pre-recession
employment levels.
Employment growth in the Newark metropolitan area
continues to improve, with a gain of 2.1 percent, on a year-over-year
basis. Business services, management consulting, and retail trade
led the job growth, and manufacturing saw a 1,500-job gain in nondurables.
Endnotes
1. See our Technical Memorandum
1-99, "The East Asian Economic Crisis: A Background Report
on the Implications for New York City," issued April 27,
1998.
2. See our Report 5-99, "New
York City's Fiscal and Economic Dependence on Wall Street,"
issued August 12, 1998.
3. Because regional and area
jobs data are not seasonally adjusted, growth comparisons in this
section are with the same period in the prior year. The earlier
analysis of New York City employment used seasonally adjusted data,
allowing comparisons to be made on a December-to-August basis.
Additional copies of this report may be obtained
from:
Office of the State Comptroller
Office of the State Deputy Comptroller for the
City of New York
270 Broadway, 23rd Floor
New York, NY 10007
Telephone: (212) 417-5442
FAX: (212) 417-2144
e-mail: js@osc.state.ny.us
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please notify the Office of the State Deputy Comptroller at (212)
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H. Carl McCall
New York State Comptroller
Office of the State Deputy Comptroller for the
City of New York
Kathleen Grimm
Assistant Deputy Comptroller
Report Prepared By
James Parrott, Chief Economist
and Director, Bureau of Fiscal and Economic Analysis
Michael Brisson, Chief Analyst
Diane Diamond, Analyst
Michelle Holder, Analyst
Maureen Ryan, Analyst
Sandy Stevenson, Analyst
Report Production
Gail Bessoir
Francine Cox
Ann M. Shea
Jesse Simmons
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