Executive Summary
The National Economy
The current economic expansion just keeps on going. Through 1998, the national
economy will exhibit moderate growth of 2.6 percent measured by real Gross
Domestic Product (GDP), low unemployment, with inflation remaining in check.
The competitive pressures of a more global business environment, the Federal
Reserve Board’s aggressive anti-inflation stance, as well as high rates
of worker productivity growth have all contributed to this environment.
Both the restraining effect of these factors on inflation and the dampening
effect the economic crisis in Asia could have on the U.S. economy, makes
it very unlikely that the Federal Reserve Board will increase short-term
interest rates between now and the end of 1998. The Committee staff predicts
U.S. employment to grow 1.9 percent in 1998, down slightly from 2.3 percent
growth in 1997. U.S. wages and salaries are expected to grow 6.1 percent
in 1998, following 6.7 percent growth last year.
Figure 1
The New York State Economy
The strength of the national expansion is finally having a modest impact
on the New York State economy. The State economy added 96,000 jobs in 1997,
an increase of 1.2 percent. However, New York’s rate of job creation appears
weak when compared to the rest of the nation and in comparison to its own
recent history. The State’s average annual rate of employment growth was
2.0 percent during the 1980’s expansion, compared to 0.5 percent for the
current expansion.
New York is lagging in virtually every sector of the economy. In terms
of rates of job growth, the State ranked consistently in the bottom 20
in every sector with the exception of the transportation, communication,
and utilities sector. New York lags behind even when compared to its eight
neighboring states in the Middle Atlantic and New England regions. The
Committee staff predicts State job growth of 1.2 percent for 1998, compared
to 1.9 percent growth for the nation (see Figure 1). Consistent with recent
trends, New York employment growth will be led by the service sector, while
the manufacturing sector will continue to experience job declines.
Wall Street
As the world’s financial capital, New York City’s economy has benefited
immensely from the recent surge of financial market activity. The total
volume of corporate underwriting in the United States reached $1.3 trillion
in 1997, exceeding the volume of any previous year. Moreover, the volume
of mergers and acquisitions announced in 1997 reached $917.7 billion, exceeding
the 1996 total by 46.5 percent and more than doubling the value of deals
completed in 1995. Wall Street firms have enjoyed spectacular profit growth
for the past three years, with financial firm employees seeing equally
spectacular growth in their bonus income. Bonuses earned in the State’s
finance, real estate, and insurance (FIRE) sector during the 1996-97 State
fiscal year are estimated to have contributed an additional $4.2 billion
to New York personal income growth. Bonuses earned outside of the FIRE
sector accounted about $0.6 billion of added income. Within FIRE, the securities
industry accounted for about $4.0 billion, or about 80 percent of total
New York bonus income growth. State bonus income, which has been increasing
in importance, is expected to grow but at a slightly slower rate for 1998-99.
At this writing, it is uncertain how the Asian crisis will affect the
U.S. economy and the current bull market. Nevertheless, we can still expect
a successful year on Wall Street related to continuing high levels of merger
and acquisition activity, strong stock market volume, as well as a large
volume of corporate debt underwriting which tends to be associated with
low interest rates. This success should translate into continuing high
levels of bonus income for the 1998-99 bonus season.
New York State Regional Disparity
There is no doubt that the strength of the national economic expansion
is having a positive impact on Wall Street. However, the impact on Main
Street has been much more variable (see Figure 2). Strong Wall Street performances
from 1995 onward have nourished momentum in the downstate regions, particularly
in Manhattan, Staten Island, and Suffolk County. Meanwhile, an only modest
upstate recovery began to weaken considerably in 1996, as large manufacturing
firms continued to announce layoffs and military bases closed. Moreover,
even the downstate areas are not benefiting equally from the financial
market boom. Between 1995 and 1997, the Bronx experienced job growth of
only 0.3 percent, while Brooklyn actually lost 0.8 percent of its employment
base during the period.
Figure 2
The Distribution of State Wages
Between 1992 and 1996, State employment grew 2.1 percent, while the average
wage grew by a much more impressive 13.6 percent. The contrast between
New York’s rates of job and income growth is largely a reflection of the
three trends which have dominated the New York economy during the recent
period—spectacular growth on Wall Street, the durability of the national
expansion, and corporate downsizing. The impact of these trends has varied
significantly not only across regions, as indicated above, but by industry
group as well.
It is no surprise that the FIRE sector experienced the fastest rate
of wage growth. The average annual FIRE sector wage increased 25.5 percent
over the period from 1992 to 1996, a reflection of strong financial market
performance. Moreover, this increase in the average wage is accounted for
by a dramatic increase in the number of workers earning $100,000 and above
from just over 100,000 employees in 1992 to about 156,000 by 1996. In contrast,
the number of employees earning less than $30,000 fell during the period
due to downsizing in the commercial banking and insurance industries. The
State’s health care industry has also undergone a substantial degree of
downsizing, particularly among employees’ earning less than $30,000 per
year, with very little growth in the income ranges above $50,000. The average
health industry wage grew by only 8.1 percent during the period.
The State’s business and professional services firms serve not only
the local market in which they reside, but a national market as well. Therefore,
the business and professional services industry has benefited not only
from growth on Wall Street, but also from the strength of the national
expansion. The average wage for the industry group grew a healthy 13.7
percent over the period. The absence of a significant shift in the industry
wage distribution indicates that the rise in the average wage has been
the result of wage increases across the board, rather than a consequence
of either downsizing on the lower end of the wage-scale or a concentration
of wealth at the upper end.
The Committee staff predicts New York personal income to grow 5.8 percent
and 5.3 percent for 1997 and 1998, respectively. The largest component
of personal income—wages and salaries—will grow 5.7 percent in 1998, following
6.6 percent growth in 1997 (see Figure 1).
Small Business and the New York State Economy
Continued downsizing among large New York firms has increased the importance
of small business as the engine of State job growth. Since the State economy
began to recover in 1992, small businesses have added over one-half million
jobs, while large companies have reduced their workforce by almost one-quarter
million. Is this unbalanced growth scenario having a negative impact upon
State wage growth? Although average large business wages are higher and
growing faster than small business wages, a close look at wage trends across
industries indicates little evidence of a slowdown in wage growth attributable
to this structural change. In the State’s fastest growing industry—business
and professional services—the average wage paid by small businesses is
higher than the large business average wage, while in other industries,
small business wages are catching up with those paid by larger firms.