Hudson Valley Review

First Quarter 2005

Marist College

Dr. Ann Davis, Director
Bureau of Economic Research
School of Management
Poughkeepsie, NY 12601

May 2005

This report and backup files are available on the Bureau of Economic Research homepage at

The assistance of FRED LAURICELLA, RESEARCH ASSOCIATE, ABHISHEK PANDEY, and CHARU VERMA is acknowledged and appreciated.

Now available as a downloadable PDF file.

Table of Contents

First Quarter 2005

Summary and Highlights
National Review
Hudson Valley Review

Special Focus: Local Government Expenditures & Revenue


First Quarter 2005

U.S. Nonfarm Employees

Hudson Valley Employment

Home Sales in Hudson Valley Counties


Stewart and Westchester Airports

Consumer Price Index

Special Focus

Hudson Valley Population

Local Government Regional Finance

Summary and Highlights
First Quarter 2005

  • For first quarter, 2005, employment in the Hudson Valley continued to rise, in terms of jobs held by residents, and also for jobs located in the region. Jobs held by residents increased by 2.3% y/y, and jobs located in the region increased by 2.2%. These regional job gains outpaced both state and national growth rates. Regional unemployment rates continued to decline for all counties in the region, and averaged 4.3% for the region as a whole in the first quarter.
  • Considering employment trends by sector, manufacturing and information sectors declined for the region, while there were strong gains in tourism, finance, as well as in professional and business services.
  • There was a slowdown in homes sold and in building permits for the Hudson Valley region in the first quarter, 2005, compared with one year ago. The number of sales declined by 5% for the region, compared with one year ago, with declines in most counties except for Columbia and Dutchess. The average and median sales price of homes sold continued to rise in all counties. For the region, the average sales price increased by 14%. The number of residential building permits decreased for all counties in the region, except for Rockland and Ulster.
  • Cargo and passenger traffic increased at regional airports, with large gains in passengers at Stewart. The pace at Stewart of 25,000 passengers per quarter is near the peak of 40,000 in 1997, and substantially greater than the recent pace of 10,000-15,000 in 2001 . 2003. The 34,000 quarterly pace of Westchester is also below the peak of 2001 of 50,000, but with gains of 20% from one year ago.
  • Tourism continued to decline at regional historic sites, with FDR paid tours down by almost 10% from one year ago. The pace of 10,000 visitors per quarter is down from over 20,000 in the late 1980s.
  • An indicator of retail sales, sales tax revenue continued to grow, with gains of 15% for the region, and increases in all counties.
  • Inflation increased in the New York/New Jersey Metropolitan area from one year ago, compared with all U.S. cities. Consumer Price increases in the range of 4% for the New York City area compared with 3% for the national urban average.

Special Focus

Updating a special focus of second quarter, 2002, patterns of local government revenues and expenditures are influenced by regional patterns of growth, local fiscal capacity, as well as intergovernmental revenue sharing. For example, at the national level, the long run trend in intergovernmental revenues as a share of total government expenditures reached a peak of 10% in 1978, falling to a low of 5.5% in 1987, and reaching another peak of 10% in 2003, according to data from the Economic Report of the President in 2005.

For counties in the Hudson Valley, the primary sources of revenue have changed since 1989. From 26% in 1989, the share of total revenue from property taxes declined to 21% in 2003 for the region. The share of total revenue from sales tax increased from 16% in 1989 to 26%, while intergovernmental revenue increased from 27.5% in 1989 to approximately 30% in 2003.

For the region, the largest category of county expenditures remains economic assistance, with 35% of the total, followed by health, at roughly 15%. Public safety and transportation are the next largest, accounting for approximately 10% each.

Total expenditures per capita for local government varied roughly from $1000 to $2000 across the region in 2002, the last year for which data is available. Total revenue varies more widely, with per capita receipts ranging from $2000 to $12,000 across the counties. The differential can be partly accounted for by roughly 30% of the total local budget which is supported by intergovernmental revenue, from state and federal governments.

Property tax base varies widely by county, from over $100,000 per capita for Westchester, $90,000 for Rockland and Putnam, and the range of $50,000 - $60,000 for Sullivan, Greene, Dutchess, Columbia, Ulster, and Orange.

Reliance on property tax varies widely by county and has remained roughly stable over the period of 1995 - 2002, with a range of $200 to $500 per capita across the region. Reliance on sales tax has increased from $200 - $300 per capita in 1995 to $275 - $400 in 2002.

Rather than direct employment, counties are increasingly relying on contractual services. Direct employment has declined from 30 - 40% of total expenditures in 1995 to 15% - 25% of total expenditures in 2002, partly to offset increasing benefit costs.

Per capita expenditures for transportation have increased for the region from less than $1000 in 1995 to more than $1300 in 2002. Per capita health expenditures have remained stable in the range of $2000 over the same period.

National Review - First Quarter 2005

The U.S. Gross Domestic Product grew by 3.5% in the first quarter of 2005, down from 3.8% in the fourth quarter. This pace is also slower than the full year rate for 2004 of 4.4%. Consumption expenditures grew by 3.6%, and the rate of purchase of consumer durables was much slower than recent trends at 1.7%. Gross private investment increased by 10%, with the most rapid increase in the residential sector of 8.8%. Equipment and software purchases increased by 5.6%, again much slower than recent trends. Export growth of 7.2% was exceeded by the 9.1% growth of imports, expanding the trade deficit, consistent with recent trends. Total government spending declined, driven largely by the slower increase in federal spending, and the declines in state and local spending.

Inflation, as measured by the GDP price deflator, increased by 3.1% in the first quarter, 2005, the most rapid rate of growth since second quarter, 2004, and faster than recent full year trends for the years 2002 - 2004, which were significantly less than 3%.

Increasing inflation can be caused by oil price increases as well as the declining dollar, which makes imports more expensive.

Productivity also influences inflation, through its effect on unit labor costs. Productivity in the nonfarm business sector grew by 2.6% in the first quarter, compared with one year ago. This is the slowest gain since first quarter, 2003. As a result of this slower productivity growth, unit labor costs rose by 4.3%, a striking turnaround from the declines in full year 2003 and increase of less than 1% for the full year of 2004. Manufacturing productivity grew by 5.7% compared with one year ago, the fastest growth since second quarter, 2004. Unit labor costs in manufacturing also increased by 2.4%, also a distinct contrast from a decline of .5% in 2004.

According to the Employment Cost Index, total compensation increased by 3.5% for the full year ending in March, 2005, continuing the steady decline since the 4.3% growth rate in 2000. Wages and salaries grew by only 2.4%, while benefit costs expanded by 5.9%, down slightly from a recent peak of 6.9% in 2004.

Since late June of 2004, the Federal Reserve Bank Open Market Committee has raised the target federal funds rate from 1% to 3% in eight rate hikes, the latest of which was May 3. Nonetheless the yield on 20-year maturities has remained within the range of 4.5% to 5%, as the yield curve has flattened, and 10-year Treasury bonds closed below 4% in early June. This phenomenon indicates either low inflationary expectations, a surplus of global savings, or expected slow growth.

Even as the Fed has been tightening monetary policy, the interest on conventional 30-year fixed rate mortgages has remained in the 6% range, low by historic standards. As a result the housing boom has continued, with rapid price increases in many markets throughout the U.S. The low rates have also fueled home refinancing, as consumers obtain new mortgages at lower rates and often with higher debt. As a result, outstanding debt on home mortgages has risen steadily since 1996, even while other types of consumer debt has grown more slowly since the recession of 2001.

outstanding debt

At low interest rates, the net national saving rate has declined to new lows in the period after 2001. Since net domestic investment has recovered somewhat after the 2001 recession, some analysts suggest that this investment must be funded by global savings, made available to the U.S. in the form of imports from the rest of the world.

u.s. saving and investment

In fact, the U.S. trade balance has continued to decline, even as the dollar has weakened in the last two years.

u.s. trade balance

The U.S. trade deficit is largest with China and Japan. These countries utilize dollars acquired from their trade surplus with the U.S. to hold large amounts of U.S. assets, particularly U.S. Treasury bonds. In fact, in March, 2005, Japan and China were the largest foreign holders of U.S. Treasury bonds, with 34.4% and 11.3% respectively.

u.s. and foreign current account balances

Of the $4.5 trillion of outstanding U.S. debt held by the public in May, 2005, foreign holders account for $1.98 trillion, or 44%. In turn, 62% of that amount of foreign holdings is held as reserves by foreign central banks. According to the Economic Report of the President, foreign holdings of total privately held U.S. government debt has increased from 20% in 1993 to 51.6% in 2004.

In March, 2005, the last month for which data is available, foreign central banks sold $15 billion in holdings of U.S. Treasury bonds, the first month of net sales since September, 2002. In fact, the total net foreign purchases in that month were only $28 billion, down from a peak of $51.2 billion in March, 2004.

There has been much speculation in the press regarding the reallocation of assets by foreign central banks and other foreign holders of U.S. Treasury bonds. The order of magnitude of foreign official holdings seems large enough to disrupt the global market for U.S. Treasury bonds, even though it is the largest and most liquid in the world.

u.s. current account balance and components

If foreign holders of U.S. government bonds were inclined to sell rapidly, the value of the dollar may fall dramatically. The U.S. government can protect the value of the dollar in three ways: a) raise interest rates, b) produce desirable commodities for world trade, and c) use foreign exchange reserves to purchase the dollar on global currency markets. Each method has its problems. Raising interest rates further would stifle the recovery since the recession of 2001. Producing desirable commodities in the U.S. would raise the cost of production, compared to outsourcing and off-shoring by U.S. multinational corporations. Third, the U.S. does not have sufficient reserves to support the value of the dollar in global currency markets. For example, the U.S. share of total international reserves at the IMF has declined from 27.4% in 1962 to 2.4% at year-end 2004. Given this situation, the U.S. may prefer to allow Japan and China to continue to purchase U.S. Treasury bonds and to hold them as reserves, even if this situation does not allow the dollar to fall enough to stimulate exports, and also keeps U.S. long term interest rates unusually low.

Debt Trap

As foreigners purchase and hold U.S. assets, the income earned on these assets becomes larger than the income earned by U.S. citizens on their holdings abroad. This net balance on income has been negative from time to time in recent years, as shown in the graph above. Added to the growing deficit on goods and services, such a deficit on income would further worsen the overall current account deficit, leading to a kind of a "debt trap."

That is, the trade deficit on goods and services leads foreigners to hold more financial assets in dollars. As these foreign holdings of U.S. financial assets earn interest income, there is a tendency for the U.S. to have a negative balance on income as well, which worsens the current account balance even more. A rise in interest rates to defend the dollar would exacerbate this "debt trap" phenomenon, by making the existing debt more costly to finance. The dramatic increase in total U.S. government debt outstanding, from $3.5 trillion in 2002 to $4.5 trillion in 2005, an increase of 28.5% in three years, makes this possibility more likely. Total U.S. assets held by foreigners has exceeded foreign assets held by U.S. residents since the mid 1980s, and the gap growing more negative, with a negative U.S. balance of $2.5 trillion in 2003. Repatriation of profits from the overseas operations of U.S. multinational corporations would reduce this danger of a "debt trap," facilitated by a recent tax cut.

On the other hand, there is a global excess capacity in several key industries, such as automobiles. The importance of the U.S. consumer market looms larger in this context, as well as the stability of the U.S. financial system overall. The growing emerging markets such as China and India offer an alternative to the U.S. consumer market as a site for foreign direct investment, although financial systems in emerging markets are not yet stable and flexible, with China and Japan still suffering from problem loans, for example.

Housing Bubble

There are four possible contributors to a housing bubble. First, record low interest rates following the 2001 recession, with a federal funds rate of 1% for one year, with gradual increases since June, 2004, making real estate investment attractive relative to financial assets; second, the decline of the stock market since its March, 2000 peak, and failure to return to pre-recession peak levels in nominal or real terms since that time; third, funds available for investment from elsewhere in the world, due to the U.S. trade deficit and greater savings rates in other countries, particularly Asian developing nations; fourth, excess liquidity, particularly from excessive monetary expansion to promote economic growth. Recent research from the Federal Reserve Bank confirms that growth in the money supply can lead to asset price inflation. That is, expansionary monetary policy by the Federal Reserve may feed consumer demand and housing, instead of investment by firms.

There is considerable debate regarding the possibility of a bubble, assessing evidence regarding the rate of housing price increases, in various parts of the country, compared with rental prices, unsold inventory, levels of mortgage debt, and demographic trends.

The most likely scenario of a piercing of the housing bubble is rapid interest rate increases due to decline in foreign demand for U.S. financial assets, as discussed above. If the central banks of East Asia continue to hold U.S. Treasury bonds, this rapid rise in interest rates is less likely.

Global Liquidity Trap

U.S. capacity utilization has not yet returned to its post-2001 recession peak, in spite of record low interest rates and highly expansionary monetary and fiscal policy. The stock market has gyrated in the first quarter of 2005, but remains essentially down for the year, in spite of sizeable rallies from time to time. Increasing competition from foreign affiliates of U.S. multinational corporations and government-sponsored or government-subsidized development in emerging nations is leading to global excess capacity in many key industries, such as autos and semiconductors. China's economy is cooling, reducing its upward pressure on commodity prices, but only slightly modifying its downward pressure on the price of world traded goods.

In this context, U.S. interest rates may remain low due to limited profitable opportunities globally relative to the pool of available funds, or may rise to protect the value of the dollar against precipitous devaluation, due to global financial imbalances. Ironically U.S. monetary stimulus may drift overseas in the form of increased imports, which then gets reinvested in the U.S. financial markets by Asian central banks, holding the dollar up and long term interest rates down.


On balance there is a greater likelihood of slow growth and continued low interest rates. Recent issues in the European Union have weakened the euro relative to the dollar, and any political instability may lead to a "flight to quality" and the relative safety of long term U.S. Treasury bonds, which dipped below 4% in early June. Home prices may moderate due to lack of affordability and increasing levels of consumer debt. Such a "soft landing" for the housing market may not prevent the less visible issue of the growing "debt trap" for the U.S. economy as a whole.

Hudson Valley Review

Place of Residence

Jobs held by residents in the Hudson Valley increased by 2.32% in the first quarter, 2005, compared with the same quarter one year ago. Every county recorded strong gains in excess of 2%, with Sullivan county growing nearly 7%. By contrast, New York City and New York State grew by less than 2%, and the U.S. employment declined.

The labor force grew less rapidly, with gains for the region of only 1.5%, so that the regional unemployment rate declined. The average unemployment rate for the region was 4.3%, with only Sullivan and Greene counties exceeding 5%.

Place of Work

The growth in jobs located in the region was also rapid, an increase of 2.2% compared with one year ago. All areas in the region expanded more than 2%, except for the new combined entity, Poughkeepsie-Newburgh-Middletown, which grew by 1.6%. There were only a limited number of sizable declines by sector, such as in the information sector in Westchester, government in Columbia, education and health services in Greene, and manufacturing in Kingston and in the combined areas of Poughkeepsie-Newburgh-Middletown. Regional expansion was observed in tourism, finance, as well as in professional and business services.

Home Sales and Prices

The average number of homes sold in the first quarter, 2005, decreased from one year ago, according to the New York State Association of Realtors. The decrease for the region was 5%, with declines in all counties except for Columbia and Dutchess. The average selling price continued to rise for the region and for all counties. The rate of increase for the region was 14%. The average selling price across the region varies from $172,123 in Greene County to $ $821,860 in Westchester.

Building permits declined by one third in the first quarter, 2005, suggesting an approach of a slowdown in housing. There were large declines in all counties except for Rockland and Ulster. A similar pattern was notable in both single family homes and all residential construction. The average price per permit continued to increase in most areas, nonetheless.

Air Travel

Tonnage and passenger traffic increased dramatically at Stewart Airport, with gains of more than 40% for passengers and roughly 10% for cargo, in the first quarter. Westchester county airport also showed gains in passenger traffic as well, with increases of roughly 20% compared with one year ago.


Regional tourism continued to decline, according to evidence from the National Park Service sites. There were declines of roughly 10% in travelers taking tours at the FDR sites in Dutchess County, compared with large gains at the Martin Van Buren site in Columbia County.

Retail Sales

A proxy for retail sales, sales tax collections, showed robust gains for the region of 15%, compared with one year ago. There were gains in all counties, with the largest in Orange and the smallest in Ulster.


The rate of consumer price increase in the New York/New Jersey Metropolitan Area was considerably faster than the pace for all U.S. cities. For this region, prices increased by over 4%, while the average for all cities was only 3%. While some inflation is beneficial for businesses, providing higher margins, too much reduces consumer purchasing power and tends to slow sales. Greater expenses for transportation and health, as well as housing, may cause price inflation in the metropolitan area as a whole.

Special Focus - Local Government Finance

Share of Grants in Aid to State and Local Governments (graph)

Revenue sharing has long been a feature of the federal system in the U.S., with the federal government using its greater fiscal capacity to share funds with state and local governments. The long run trend in intergovernmental revenue sharing as a share of total federal, state, and local government expenditures shows considerable cyclical variation, reaching a peak of 10% in 1978, a low of 5.5% in 1987, to a peak of 10% again in 2003, according to data from the Economic Report of the President in 2005.

In 1989 the share of total revenue from state and federal revenue sharing for the region was 27.5%, increasing to 29% in 2000. The federal portion increased slightly from 10.5% to 10.9% over that same period. In terms of types of expenditures, the most dramatic change was the increase in economic assistance from 33.4% of total expenditures in 1989 to 38.1% in 2000. The share of direct employment of total expenditures declined from 26.2% in 1989 to 23.7% in 2000.

The fiscal capacity and expenditure patterns of local government also have considerable variation across counties in the region. Expenditures per capita vary across the region from $750 to $2000 over the period 1995 to 2002, the last year for which data is available. While the most densely developed counties such as Westchester and Rockland have higher expenditures per capita, the highest and most rapid increases are in less developed counties, such as Sullivan and Greene. Dutchess and Putnam are the lowest in expenditure per capita during this period.

The ranking of total revenue per capita has remained constant over this period, with Westchester, Ulster, and Sullivan the highest, followed by Rockland, Putnam, and Orange, and with Greene, Dutchess and Columbia the lowest, respectively.

Fiscal capacity can be partly measured by assessed and full value of taxable real property per capita. In recent years, the assessed value per capita of taxable real property was highest for Putnam, Columbia, Greene, and Sullivan, followed by Dutchess, Ulster, and Rockland, with Orange and Westchester as the lowest. The pattern is nearly reversed for per capital full valuation of taxable real property, with Westchester, Rockland, and Putnam highest, followed by Sullivan, Greene, and Columbia, with Dutchess, Ulster and Orange the lowest.

Other measures of fiscal capacity include per capita debt outstanding, which varied from $700 to less than $200 in 2002, and the constitutional debt limit per capita, which varied from over $6,000 for Westchester to just over $3000 for Orange and Ulster.

Reliance on property tax as a share of total revenue varied from 35% to 15% across the region. In 2002, the property tax reliance is greatest for Westchester, Columbia, and Sullivan, followed by Putnam and Greene, with Dutchess, Orange, Ulster, and Rockland as the lowest.

Reliance on sales tax varies from 15% to 30% of total revenue among the counties. The highest are Dutchess, Putnam, Ulster, and Greene, followed by Rockland, Orange, and Columbia, with Westchester and Sullivan as the lowest.

Per capita property tax assessment varied from near $500 for Westchester and Sullivan to the range of $200 for Dutchess, Rockland, Ulster, Putnam, and Orange.

Per capita sales tax revenue has been increasing over the period 1995 to 2002 for all counties, with a range of $400 for Greene, Rockland, and Ulster, to $300 or less for Orange, Westchester, Sullivan, and Columbia.

The share of revenue provided by New York State varied across counties and over the period. In more recent years, Dutchess was highest, followed by Rockland and Westchester, with Putnam, Orange, and Columbia the lowest.

The share of revenue from the federal government ranged from 10% to 20% over the period, and the total intergovernmental share varied from 25% to 35% across the counties. Dutchess and Greene were the highest and Putnam, Sullivan, and Columbia the lowest.

The share of total budget for direct employment has decreased for all counties, from a range of 30% - 40% in 1995 to a range of 15% - 25% in 2002. Contractual services have remained in the range of 40% - 60% over this same period. The share of county budgets for equipment varies widely by county and over the period, as this type of expenditure would be more periodic. The share of total budgets for equipment varies in a wider range in recent years, reaching as high as 18% for some counties in some years, from a maximum of 10% in 1995.

Per capita expenditures for transportation have increased for the region from less than $1000 in 1995 to more than $1300 in 2002. Per capita health expenditures have remained stable in the range of $2000 over the same period.

Sources: Economic Report of the President, U.S. Treasury Department, U.S. Department of Commerce, U.S. Department of Labor, U.S. Federal Reserve Bank, Cleveland Federal Reserve Bank, New York State Department of Labor, New York State Department of Taxation and Finance, New York State Comptroller of Currency, New York State Association of Realtors, National Park Service, Business Week, Wall Street Journal, New York Times, Stewart Airport, Westchester County Airport, and Hudson Valley Review, second quarter, 2002.