New York City’s Gross City Product (GCP) – an inflation-adjusted measure of the overall City economy – shows that the City’s economy grew slightly faster than the nation’s Gross Domestic Product (GDP) for the second consecutive quarter with an annualized growth rate of 3.4 percent in 2Q05, compared with the nation’s GDP growth of 3.3 percent.

Thompson’s report found that as the City’s economy has improved over the past several quarters, economic growth and favorable financing terms have also created a “housing bubble,” or prices rising in excess of what underlying economic factors can reasonably be expected to sustain. Thompson’s report concludes that there is a housing bubble in the City based on a comparison of housing prices with changes in the consumer price index, changes in personal incomes, and rents.

“Housing costs in the City have had a direct impact on the economy and revenues over the past five years,” Thompson said. “Mortgage refinancings have generated a 211 percent increase in mortgage recording tax revenues and a 120 percent increase in real property transfer tax revenues since 2000.”

“New York City’s housing bubble is mostly due to low mortgage rates,” Thompson explained. “In 2000, a 30-year mortgage was 8.04 percent. That rate dropped to 5.78 percent in 2004. These low rates have increased purchasing power and the demand for housing in the City.”

Thompson also discusses the possible impacts of the City’s economy in the event that the housing market cools. The report suggests that the impact is likely to be less serious in New York than in other cities that have seen rapid increases in housing prices.

“Although New York City’s housing prices have surged 77 percent in the last five years, other large cities have seen much higher rates of increase,” Thompson said. “A cooling market will not impact New York as hard as places such as Santa Barbara, California, which have seen a price increase of 122 percent over the same period.”

Other than the high costs of housing, Thompson’s report also notes that an increase in job growth and low rates of unemployment have also improved and benefited the City’s economy.

During the second quarter, the City had the eighth-highest rate of job growth of the 20 largest metropolitan areas. Also, the number of City residents employed increased by 14,500 in 2Q05, to 3,511,800, which is the highest level on record. The number of unemployed New Yorkers fell by 1,700 this quarter.

The City’s three leading economic indicators – the business conditions index, the number of building permits and help-wanted advertising index – each increased and showed improvement on a year-over-year basis. In addition, tourism, including the hotel industry, had one of the busiest times in the second quarter of 2005. Average daily occupancy was 89 percent, the highest since 1980.

The Comptroller’s publication shows a fairly healthy picture of the City’s economy. However, the report cautioned that the City’s inflation rate outpaced the nation’s in nine out of 11 categories including housing, food and beverages, and apparel. The price of energy in the City also increased by a whopping 12.0 percent.

Economic Notes also includes the following New York City data:

• Real Gross City Product (GCP), a measure of the overall City economy, grew 3.4 percent in 2Q05, slightly above the 3.3 percent for the United States. Of the five key economic indicators for the City and nation, only two improved in the City, but four improved in the nation.

• Payroll jobs in the City, seasonally adjusted, grew 9,200 in 2Q05, about half 1Q05 growth of 16,400. The City’s 1.0 percent annualized 2Q05 job growth lagged the nation’s 1.9 percent. All gains in the City were in the private sector. The City’s job growth ranked eighth-highest of the 20 largest United States metropolitan areas.

• Personal income tax revenues (PIT) rose 24.5 percent in 2Q05 vs. 2Q04. Estimated-tax payments on interest income, rental income, and capital gains rose 42.6 percent. The more broadly based withholding taxes rose 3.4 percent. United States PIT revenues rose 28.9 percent in 2Q05 (vs. 2Q04).

• New York City’s inflation fell to 3.3 percent in 2Q05 from 4.1 percent in 1Q05. New York City’s core inflation (excluding food and energy prices) fell to 2.6 percent in 2Q05, from 3.7 percent in 1Q05.

• New York City’s unemployment rate was 5.7 percent, seasonally adjusted, in 2Q05, the same as in 1Q05 (lowest since 5.5 percent in 2Q01), as the nation’s unemployment fell to 5.1 percent (lowest since 4.8 percent in 3Q01). Seasonally adjusted, 14,700 more New Yorkers were working in 2Q05 than in 1Q04. New York City’s unemployment rate was seventh lowest of the 20 largest United States metropolitan areas.

• Average Manhattan commercial vacancy rates fell in 2Q05 for the sixth consecutive quarter, to 9.8 percent, from the 2Q04 rate of 11.8 percent, implying rising demand and higher rents. The average Manhattan commercial rent rose slightly to $40.80 per square foot in 2Q05 (from $40.56 in 2Q04) and rents increased in Midtown and Midtown South. But in Downtown Manhattan, where the vacancy rate fell the least, average rents decreased.

• Leading economic indexes improved. On a year-over-year basis, in 2Q05 the New York City business-conditions index increased 17.7 percent; the number of building permits authorized rose 5.7 percent; and the City’s help-wanted-advertising index rose 9.3 percent.

1. GCP/GDP Growth, SAAR 2. Payroll-Jobs Growth, SAAR 3. Personal-Income-Tax Growth, NSA 4. Inflation Rate, NSA 5. Unemployment Rate, SA
NYC 3.4% Worse 1.0% Worse 24.5% Better 3.3% Better 5.7% No Change
U.S. 3.3% Worse 1.9% Better 28.9% Better 2.9% Better 5.1% Better
Summary Table. Five Key Economic Indicators, NYC and U.S., 2Q05
Note: Data explanations are in the report. NSA means Not Seasonally Adjusted. SA means Seasonally Adjusted. SAAR means SA Annualized Rate. Comparisons for “Better” or “Worse” are with the prior quarter.

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