NEW YORK STATE ECONOMIC FORECAST

Short-term prospects for economic growth in New York are tied to the strength of the national economy, as well as to continuing success on Wall Street. While the national economy is expected to slow from its brisk 1997 pace of growth, inflation and interest rates will remain within ranges capable of sustaining solid stock market growth, thus enabling the State to continue reaping its benefits. However, employment growth will continue to remain well below both the national average and the State’s performance during the 1980’s.

Employment

The New York economy is projected by the Committee staff to generate 95,000 jobs, for growth of 1.2 percent, significantly below the expected rate of national employment growth of 1.9 percent (see Figure 15). New York added 96,000 in 1997, for growth of 1.2 percent. The Committee staff employment estimates are based on the Current Employment Statistics (CES) data series.


Figure 15

By far, the biggest employment gains have occurred in the service sector, a trend which is expected to continue (see Table 21). Services sector employment is predicted to grow by 2.5 percent in 1998, following 2.8 percent growth in 1997. The Committee staff is also forecasting net job gains in the trade sector for 1998 with expected growth of 1.0 percent, following 1.1 percent growth in 1997. The construction sector is predicted to grow by 4.1 percent in 1998, following an estimated increase of 3.5 percent for 1997. The utilities sector is expected to increase by 0.8 percent in 1998, following a 1.0 percent increase in 1997.

The long-term decline in the State's manufacturing sector is expected to continue. The Committee staff predicts a 0.5 percent decline in manufacturing employment for 1998, following a decline of 0.4 percent for 1997. Since 1977, manufacturing employment has been falling at an average rate of 2.3 percent per year. This trend deteriorated further with the onset of the last recession when the average annual rate of decline rose to 2.8 percent. Total manufacturing employment now stands at about 923,000 workers, compared to over 1.6 million in the mid-1970's.

The forecast for government employment calls for a decline of 0.1 percent in 1998 following a 0.6 percent decline in 1997. The number of federal government employees in New York State has been falling since 1990 due to the downsizing of the federal government, particularly the defense department. State and local governments have also reduced their employment levels, a trend which has been accelerated by the current administration.

Wages, Personal Income, and Inflation

As we have explained in previous Committee publications, the unique composition of the New York economy can support strong income growth, even in the absence of strong growth in employment. Over the past twenty years, personal income has grown at a substantially higher average annual rate than employment. Since 1977, employment growth has averaged 0.8 percent per year while personal income grew at an average of 7.5 percent. Even after adjusting for inflation, real personal income grew at 2.5 percent per year, over three times the rate of job growth.

Personal income grew by 5.8 percent in 1997, and is predicted to grow 5.3 percent in 1998 (see Table 22). Its largest component, wages and salaries, grew 6.6 percent for 1997 and is expected to grow by 5.7 percent for 1998.21 Much of the strong income growth in 1997 was due to robust finance industry bonus earnings. According to Committee staff estimates, the State economy will generate $24.2 billion in bonuses during the 1997-98 State fiscal year, with more than half of it earned in the securities industry alone.
21. The Committee staff’s wages and salaries series is based on the more reliable Department of Labor’s ES-202 data. Thus, our Personal Income series is also based on the ES-202 data series. The inherent uncertainty in personal income forecasting emanates not only from "normal" forecasting error, but also from measurement error in the historical data. The Bureau of Economic Analysis (BEA) regularly revises its regional personal income and wage numbers to reflect the so-called "benchmarking" with the universe of businesses. The size of these revisions can be quite large, thus rendering forecasting, based on the BEA numbers, highly questionable. For example, prior to the revision, 1994 New York State wages and salaries were estimated to have grown by 4.6 percent. However, the final revision brought that number down to 2.2 percent. Similarly, the initial estimate of 1995 wages and salaries growth of 0.9 percent was later revised upward to 4.9 percent. Any forecast completed between the publishing of the preliminary and final revisions would have been based on highly erroneous data. The Committee staff’s estimate for State wages and salaries is based on ES-202 data, the data upon which the BEA’s benchmark revisions are based. Our direct use of this data permits us to avoid the revision issue altogether, and also explains why our personal income historical data differ from the data published by the BEA. The comparable Bureau of Economic Analysis numbers for Personal Income for 1997 and 1998 are $561.17 billion and $591.47 billion respectively. For wages and salaries the comparable numbers are $321.93 billion and $340.66 billion for 1997 and 1998 respectively.

Comparison with Other Forecasting Groups

As of February 1998, the WEFA Group was predicting New York State personal income growth of 5.3 percent in 1997, followed by 4.6 percent for 1998. They predict wage and salary growth of 6.2 percent in 1997 and 5.3 percent in 1998. For nonagricultural employment, WEFA is predicting growth of 1.1 percent for 1997 and slightly stronger growth of 1.3 percent for 1998.

According to DRI/McGraw-Hill’s most recent forecast, State personal income is expected to grow 5.5 percent in 1997, followed by 4.2 percent growth in 1998. DRI is forecasting wage and salary growth of 6.2 percent in 1997, and 4.6 percent in 1998. DRI expects non-farm employment to grow 1.2 percent in 1997 and 1.0 percent in 1998. As of February 1998, the Executive was forecasting personal income growth of 5.4 percent for 1997 followed by 4.7 percent in 1998. The Executive predicts wages and salaries to grow by 6.1 percent in 1997 followed by 5.4 percent in 1998. The Executive predicts employment will grow by 1.4 percent in 1997, followed by 1.3 percent growth in 1998 (see Table 23).

 

 Risks to the New York Forecast

The uncertainty that surrounds the national economy is expected to be the primary source of risk to the State forecast. If the national economy slows down more than we have predicted for 1998, or if the Asian economies fail to stabilize, then our forecast for the State will have been overly optimistic. Should extraordinary inflationary pressure emerge (like an oil price shock), the Federal Reserve may adopt a more restrictive monetary policy resulting in higher interest rates. This policy change would restrain State income growth due to the pivotal role of the FIRE sector to the State economy. On the other hand, stronger corporate profits than expected will result in higher bonus income as well as stronger stock market growth than predicted, producing in turn, higher profits on Wall Street, and, again, higher bonus income. The possibility of a stronger than expected world economy also creates upside risk for our forecast.
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