View Economic Notes

-Report includes analysis of prior financial market crises and their impact on city’s economy-

According to Economic Notes, a quarterly publication released today by New York City Comptroller William C. Thompson, Jr., New York City’s economy grew more rapidly than the nation’s during 2007, but slumping housing prices, the sub-prime mortgage crisis and high oil prices are signaling an economic slowdown this year.

The Comptroller’s Economic Notes – which can be read at www.comptroller.nyc.gov – contains a special focus examining the impact of Wall Street cycles – both past and present - on New York City’s economic fortunes.

“Although New York City experienced an overall increase in economic activity in 2007, a number of signs point to trouble ahead,” Thompson said. “Our economy and employment rate rests heavily on the shoulders of Wall Street. The sub-prime crisis has not yet affected unemployment levels in New York as dramatically as it has in other cities and states, but if its reach extends to the stock market this year, our financial future will become increasingly uncertain.”

Thompson’s new report finds that Real Gross City Product (GCP), a measure of the City’s overall economy, grew 1.1 percent in the fourth quarter of 2007 and 3 percent for the full year. In comparison, the nation’s economy expanded by 0.6 percent in the fourth quarter and 2.2 percent in 2007. Although the City’s economy grew in 2007, Thompson cautioned that instability in the credit markets and other factors could lead to an economic slump this year.

The Comptroller noted that in 2007, New York City payroll jobs increased by 54,500, or 1.5 percent over 2006, resulting in a stronger pace of job growth in the City than in the nation.  The leading job-creating sectors in New York were Professional and Business Services, Health Services and Finance and Insurance. Together, these three sectors were responsible for creating more than 37,000 jobs in the City.

Additionally, the report specifically found:

• New York City’s unemployment rate averaged 5.1 percent in 2007, a slight increase from the 4.9 percent annual rate seen in 2006. The country’s unemployment rate remained unchanged at 4.6 percent for 2007. The City’s labor force participation rate rose to 59.4 percent for the year, its highest level since data were collected, while the national rate declined to 66 percent.

• Personal income taxes withheld from paychecks of New York City workers, an indicator of resident income growth, rose 12.3 percent in 2007. Boosted by record Wall Street bonuses, taxes withheld grew 14.7 percent in the first half of 2007 compared to the first half of 2006, and 9.4 percent in the second half of the year. Estimated tax revenue, which is based on taxpayers’ estimates of interest earned, rental income, and capital gains, rose 16 percent.

• General sales tax collections rose 5.3 percent in the second half of 2007 over the same period of 2006. Sales taxes rose only 3.6 percent in the fourth quarter after surging 7.3 percent in 3Q07, possibly a sign of weakening consumer spending. Retail jobs rose 5,300 in 2007, the same as in 2006, but were down by 1,400 in the fourth quarter.

• Manhattan’s office vacancy rate remained unchanged at 5.7 percent in the fourth quarter of 2007, after rising slightly in the third quarter, according to Cushman & Wakefield. The average asking rent in Manhattan office buildings continued to rise, reaching $65.08 per square foot (psf) in the fourth quarter compared to $53.43 psf in 1Q07.

• Manhattan apartment sales prices continued to rise in 2007 but housing prices in the other boroughs softened. On a square-foot basis, Manhattan condo prices rose 17 percent in 4Q07 compared to 4Q06, but Queens home prices declined 3 percent in the third quarter from a year earlier, according to MillerSamuel. The Case-Shiller Home Price Index for the New York metro area was down 4.8 percent in November 2007 compared to November 2006, while the OFHEO Home Price Index (based on mortgages purchased by Fannie Mae and Freddie Mac) showed existing home prices in the New York metro area up by 1.7 percent in the 3Q07 compared to a year earlier.

• Building permits issued for new residential units in the City increased 3.2 percent in 2007 to 31,902; this marked the third consecutive year new housing permits exceeded 30,000 units.

• Transit ridership, an indicator of the City’s economic activity, continued to increase. According to the MTA, for the 10-month period ending in October, subway ridership increased by 4.5 percent over the same period in 2006, ridership on the LIRR increased 5.3, and Metro-North passengers increased 4.2 percent.  MTA bus ridership declined by 0.2 percent.

Wall Street Focus

The report explains that New York City’s economic fortunes are closely tied to the success of the financial sector, which accounts for roughly 11 percent of the City’s payroll employment but almost 35 percent of salaries and wages paid.  Strong earnings and record bonuses on Wall Street allowed the City’s economy to outpace the nation’s the past two years.

Although the first half of 2007 looked positive for the City’s financial sector, the outlook changed dramatically in August when investors began to appreciate the extent of the sub-prime crisis.  Many of these investors began a flight from mortgage-backed securities and other investments that were perceived as high credit risk.  Since then, financial conditions have worsened and many economists have significantly increased their calculations of the probability of a recession.

Due to the decline, large banks and securities firms have announced approximately 16,000 intended layoffs since August.  Most have not disclosed where the layoffs will take place, but many of these companies hold a significant presence in New York City.

Job losses in the financial industry thus far have not been overly concentrated in New York. The nation’s financial sector lost 52,500 jobs between July and December of 2007, but most of the job losses have been in mortgage broker and real estate credit establishments.  Those types of financial business are less common in New York City than they are elsewhere. Employment in New York’s financial sector actually increased by 1,900 between July and December.

Securities industry jobs, however, did not fare as well in New York.  Almost 3,700 jobs were eliminated in the last three months of 2007, a departure from the previous years in which the City saw an increase in jobs during the last quarter.  Based on recent employment trends in the industry, the Comptroller estimates that the credit crisis has cost the City about 6,000 securities industry jobs through December 2007. Among the major securities industry cities, only Chicago was showing job losses similar to New York.

In order to guard for and understand the ramifications of a possible recession, the Comptroller’s Office studied financial events from recent past: the 1987 Stock Market Crash, 1998 Asian Crisis, the unraveling of Long Term Capital Management hedge fund, and the 2000 Technology Stock Bubble. Each of these tumultuous times had its own result on the economy of New York City.

• 1987 Stock Market Crash – Although the Crash had relatively little effect on the national economy, it had a profound effect on New York’s financial industry. Employment began to decrease almost immediately and continued through the 1990 recession. By 1993, 85,000 jobs were lost.

• 1998 Asian Crisis and LTCM – The 1998 Asian Crisis spurred a “flight to quality” by international investors. The crisis spread as far as Russia, and as a result, one of the largest Hedge Funds of the 1990’s, Long Term Capital Management unraveled.  The Fed acted quickly and bailed out LTCM amid fears that a sell-off would could collapse securities markets and spread through the financial system.  As a result, the local economy performed extremely well in the aftermath of the crisis.

• 2000 Technology Bubble - The burst of the tech bubble in 2000 in combination with rising interest rates attributed to a national recession. GDP contracted for three consecutive quarters. The terror attack of September 11th occurred at the end of the slump. By August 2001, the recession caused the loss of 9,600 jobs.  The long-term combined loss of jobs from the attacks and recession stands at roughly 40,000.

“In order to identify our future prospects, it is necessary to examine the past financial cycles that have affected our economy,” Thompson said. “The review suggests that market turmoil need not have a corresponding severe impact on the City’s financial industry employment if the problems are quelled quickly and future opportunities appear plentiful”

Thompson added: “Thus far the adverse employment effects of the sub-prime crisis have come primarily in financial activities outside New York. However, if the Fed is unable to reassure investors and avert a national recession, that may change dramatically in 2008.”

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