Hudson Valley Review
Third Quarter 2002
Dr. Ann Davis,
The assistance of Scott Bergen, Viktor Sapezhnikov and Lindsay Furtado is acknowledged and appreciated.
Table of Contents
Third Quarter 2002
Third Quarter 2002 Exhibits
U.S. Nonfarm Employees
Stewart and Westchester Airports
Consumer Price Index, Bankruptcies and Sales Tax Collection
Temporary Assistance - Second Quarter 2002
Special Focus - Business Confidence Survey
In the third quarter, 2002, Gross Domestic Product increased by 4%, up from 1.3% in the second quarter, and down from 5% in the first quarter. The recovery from the 2001 recession has now continued for four consecutive quarters, although with variable growth rates.
Personal consumption expenditures increased by 4.1% in the third quarter, an increase from the 1.8% rate in the second quarter. Further stimulus was delivered as exports grew more rapidly than imports, and government expenditures also increased by 3.1%.
Gross private domestic investment increased by 3.1%, even while investment in nonresidential structures declined dramatically. Residential investment increased modestly, by 2.1% in the third quarter, down from 2.7% in the second and 14.2% in the first. Expenditures in equipment and software increased by 6.6%, up from 3.3% in the second quarter, and the first two increases after six consecutive quarters of decline.
After increasing by over 2% in full years of 2000 and 2001, the price index for Gross Domestic Product increased by only 1% in the third quarter, down from 1.2% in the second and 1.3% in the third.
At these relatively low rates of price increase, firms have more difficulty raising prices to protect profits. In the third quarter, corporate profits with inventory valuation and capital consumption adjustments declined from the preceding period for the third consecutive quarter. The third quarter decline was 1.8%, compared with 1.6% in the second quarter. Profits also declined in the full years of 2001 and 2000. Profits from domestic industries declined by 14.9% while the rest of the world increased by .8%. Within the domestic industries, financial corporations had declines of 6.2%, while nonfinancial corporations had increases of 6.4% in the third quarter. Unit profits for domestic corporations decreased, due to decreases in prices received, and an increase in unit nonlabor costs, while unit labor costs remained unchanged.
Productivity growth is accelerating, as output expands with a relatively flat employment structure. In the third quarter, productivity in the nonfarm business sector grew at a 5.6% rate, up from 4.9% in the second quarter, and 4.4% in the first, from year-ago levels. These rates exceed the full year record of 1.1% in 2001 and 2.9% in 2000. As the pace of productivity growth exceeds the growth of compensation, unit labor costs have been decreasing for the last four consecutive quarters. In the manufacturing sector, the same basic pattern holds, with a third quarter increase in productivity of 5.8%, and a decline in unit labor costs of over 2%.
For the year ending in September, 2002, wage pressures are actually moderating, as shown by the Employment Cost Index. For that period, wages and salaries increased by 3.2%,down from 3.6% for the prior period, while benefit cost increases were still in the 5% range.
Beginning with a 6.5% rate in the latter part of 2000, the federal funds rate has been reduced to 1.25%. The impact on long term rates has been mixed, with 10-year Treasury notes reaching the 4% range in mid-2002, from over 6% at the beginning of 2000.
Consumer sentiment has risen since September 11, 2001, only to return to those levels again in late 2002, according to both the Conference Board and the University of Michigan indices.
Graphic from Cleveland Federal Reserve Bank, Economic Trends, November, 2002, p. 7
Total employment in the U.S. has not regained its pre-recession peak of 132.5 million in February/March, 2001, although it has largely stabilized at a level of 130.9 million in the third quarter of 2002. Manufacturing employment declined during the 2001 recession for the U.S. with a net loss of over 1 million jobs, or 5.7% of the original total. In the year 2002, the job loss in manufacturing has continued, with a further decline in 2.3% from January to August.
The major stock market indices hit new lows in October, 2002, with the Dow at 7286 on October 9 and the S&P 500 at 776.76. The year-end markets of 2002 may sustain the third consecutive year of declines, for the first time since 1939-1941. Jobs in the securities industry in New York City have declined by 18,300 in August from one year ago. The average salary in the securities industry in New York City was $137,000, compared with the New York State average of $46,700, in 2001.
Federal and state governments once again face growing fiscal deficits, with recent tax cuts and a slowing economy.
Hudson Valley Regional Review
Jobs held by residents in the Hudson Valley increased by 2.3% in third quarter, 2002, with gains in all counties. New York City and the U.S. showed declines, with a slight gain in New York State. The labor force grew faster in most counties than the number of jobs, so the unemployment rate increased, except for Greene and Sullivan. The regional unemployment rate remains at 4%, less than New York City, New York State, and the U.S. Counter to recent history, the highest unemployment rate in the region is in Westchester, at 4.2%, and the lowest is in Columbia, at 2.9%.
Jobs located in the region grew slightly, by .3%, with job losses in manufacturing, finance, and transportation and utilities. The largest growth rate was in construction, and the largest loss in manufacturing. Jobs located in New York City continued to decline, with a slight decline also in New York State. In the region, there were slight losses in Columbia and Dutchess, and a large gain in Greene, with the remaining counties roughly stable. The job losses in manufacturing in the region were 3,500 jobs, or 3.8%, compared with roughly 5% declines in New York City and New York State.
The average hourly earnings of production workers increased by 1.05% in the third quarter, from one year ago. The largest increase was in Dutchess, with a gain of 3%, and the largest decline was in Newburgh. Weekly hours declined in three of the five places for which data is available, and the regional average increased by less than 1%. In combination, these factors led to a modest increase in weekly earnings of 2% for the region, with declines in Dutchess, Newburgh, and Rockland. There were substantial gains in both Albany and Westchester, where both hourly rates and weekly hours increased. Throughout most of the decade of the 1990s, the average hourly earnings of production workers in the Hudson Valley exceeded the U.S. average. This relationship switched in the late 1990s, and has continued into the 21st century, with the Hudson Valley average lower than the U.S. wage rates. Production workers in New York City continue to be compensated at lower rates than the regional and the U.S. average.
Home Sales and Prices
The number of homes sold decreased in the third quarter from year ago levels, with declines observed in all counties except Greene. The regional decline was 8.4%, compared with a state decline of 7.2%, while the U.S. increased by 1.5%. This decline is all the more startling in light of the trend decrease in interest rates over the past two years, and perceptions of a heated regional real estate market. On an annual basis, the peak in the number of homes sold in the region was 17,122 in 1999, with lower total sales in 2000 and 2001.
Both the average and the median sale price increased in the region in the third quarter. The regional average price of homes sold increased by over 20%, compared with 18% in New York State and 8% in the U.S. The median selling price increased in all counties also, with the greatest increases in Orange, Dutchess, and Ulster.
A significant statistical relationship can be demonstrated between number of miles from New York City and average selling price of homes. A series of regressions from 1993 to 2002 shows a consistently valid relationship, while the average estimated price differential per mile has increased over this period. While the estimation method is linear, and so may have some distortion, the price differential per mile has increased from $2,184 in 1993 to $3,763 in 2002, with a higher rate of acceleration after 1998. This distinct rise in the price differential per mile could indicate an increase in relative desirability of homes in the region, or the potential for a housing price bubble, or both. The estimates for 2002 do not include an entire year, as of this date.
A standard housing affordability index shows Westchester County as the least affordable and Sullivan and Greene the most affordable. Over the period since January, 2000, significant declines in affordability have occurred in Dutchess, Orange, Putnam, Rockland, and Ulster, while Columbia and Sullivan have shown recent increases.
The average number of construction permits has declined from one year ago in the third quarter, for single family homes and for all residential construction. While some counties showed large increases, such as Columbia, Sullivan, Ulster, and Greene, there were significant declines in Westchester, Rockland, and Dutchess in single family and all residential permits. Even while average selling price is increasing, there is a slowdown in the development of future production in the pipeline.
The average value per permit increased for the region as a whole, for roughly 5% for residential construction, and 7% for all residential construction.
There was a slight decrease in the number of visitors taking tours in the Roosevelt/Vanderbilt sites. The number of tours of 86,916 in the third quarter is down from the quarterly peak exceeding 100,000 in the late 1990s.
The average number of passengers at Stewart Airport decreased by 13% in the third quarter from one year ago, continuing a declining trend since 1997. There was an increase in cargo tonnage, with an increase of 13% in cargo leaving the region, and an increase of 1.55% in cargo deplaning at the airport.
Westchester County airport showed an increase in passengers of roughly 4% in the third quarter, from one year ago.
Sales Tax Collections
The average monthly sales tax collections increased by 13.4% for the region, with gains in all counties. Sales tax collections are a good proxy for retail sales, while appears robust by this measure.
Consumer Price Index
While deflation is a concern at the national level, prices in the region are increasing at the modest pace of 2.5% for the third quarter, from one year ago. The average monthly increase for the year to date is 2.37%, compared with 1.38% for all U.S. cities. This regional pace of price increase is lower than the 3% pace in 2000, but higher than the 1.5% rate in 1998 and 1999.
The pace of bankruptcy filing has increase for all regions in the third quarter over one year ago. The increase in the Hudson Valley of almost 30% exceeded the pace of other regions in New York State, and the U.S. The increase in bankruptcies in the region was nearly double the pace for New York State as a whole.
The total number of recipients of financial assistance decreased in the region for the second quarter, 2002, the last quarter for which data is available. Although there were continuing declines for the federal program, Temporary Assistance for Needy Families (or TANF, the successor to the federal welfare program) by over 30%, the number of recipients for the safety net, which is a state and local program in New York, nearly doubled. The safety net recipients also dramatically increased for New York City and New York State. Of the total number of recipients of temporary assistance in the Hudson Valley of 34,566, 12,120 were safety net recipients.
Overall expenditures for TANF declined slightly for the region, while safety net expenditures increased by 40%. The safety net is funded by the state and the local areas, representing a potential budget drain for local governments.
Food stamp recipients and expenditures also increased for the third quarter. There were 88,899 recipients of food stamps, an increase of 4.24% from year-ago levels, and an increase in expenditures of nearly 10%.
There was also an increase in the number of recipients and expenditures for Supplemental Security Income, affecting nearly 40,000 people in the region.
By contrast, there are roughly 46,000 people unemployed in the region, even with an unemployment rate as low as 4%, which does not include those who have dropped out of the labor force, the so-called "discouraged workers."
In cooperation with the Hudson Valley Regional Council, and the Hudson Valley Technology Development Center, a business confidence survey was conducted in November, 2002, both before and after the election. A total of 229 surveys were completed of manufacturing and other firms in the region. There were not significant differences in response patterns, across the counties, before and after the election, or across sectors of high tech, manufacturing, or others sectors.
Profits and sales were the same and lower for most firms for the current year. Seventy one percent had same or lower profits this year compared with last, and 27% had higher and much higher profits this year. Almost 74% had same or lower sales this year compared with last year, and 25% had higher or much higher.
Similarly most expect higher sales and profits next year, with roughly 20% unsure of the future forecast. Seventy-two percent expect same or higher profits next year, and 8.6% expect lower or much lower. Seventy three percent expect same or higher sales for next year, while nearly 7% expect lower or much lower.
Roughly 80% had same or higher prices of materials this year compared with last year, while only 10% had lower or much lower. Seventy-four percent expect same or higher materials prices next year, while 7.4% expect lower and much lower. Again roughly 20% are unsure of future price trends for materials.
Even in a period when capital investments nationally were declining, fully 26% of the firms in this region indicated increases in capital expenditures this year compared with last year, while 28% reported lower expenditures, and 40% reported the same. For next year almost 27% report expected increases in capital expenditures, 37.4% the same, and 16.7% lower and much lower. Once again, there is greater uncertainly of the coming year, with roughly 20% reporting uncertainty.
In a period in which manufacturing firms nationally are contracting employment, over 18% of the firms in this region reported higher and much higher employment this year than last year, while 28.5% reported lower and much lower, and 52.6% the same. For next year, 30% expect increased employment, 56% the same, while only 6% expect lower and much lower. The 8% of respondents who reported uncertainty regarding next year's employment was a lower fraction of "not sure" answers than for other elements of business confidence. That is, respondents report projections of employment gains with more certainty than forecasts of sales, profits, and investment.
Overall, the respondents expect an improvement next year in sales, profits, investment, and employment. The expected increase in materials prices may cut into profits, a trend consistent with the national picture. The survey, which included high tech and non high tech manufacturing, reveals a resilience and continuing relative strength in the manufacturing sector in the region.
Sources: Cleveland Federal Reserve Bank, New York Times, Wall Street Journal, Business Week, U.S. Department of Commerce, U.S. Department of Labor, New York State Department of Taxation and Finance, New York State Department of Labor, New York Association of Realtors, National Park Service, Stewart Airport, Westchester County Airport.