New York City Office of the Comptroller
Alan G. Hevesi, Comptroller
Vol. VIII, No. 3
1 Centre Street, NY, NY 10007 May 2000

NYC’S ECONOMY REMAINS STRONG IN 1Q00

SUMMARY: The New York City (NYC) economy in 1Q00 was not far behind the overall U.S. growth rate. The quarter was slower than 4Q99, but still very strong. However, looking ahead, the growth rate of the U.S. economy, the tight labor market, signs of inflation in the consumer price index and the employment cost index, make higher interest rates likely. This, along with slower money-supply growth, is likely to lead to slower economic growth during the second half of 2000.

• Gross City Product (GCP) in 1Q00 grew at a real annual rate of 4.8 percent, which is a rapid growth rate but slower than the real GDP growth of 5.4 percent, and slower than the 6.5 percent in 4Q99. (See Summary Table below.)

• Payroll Jobs, seasonally adjusted, were up by 23,200 in 1Q00, as a result of a 22,500-job increase in the private sector and a 700-job increase in the public sector. The 29 consecutive quarters’ growth is the longest on record. The City’s 1Q00 job growth of 2.6 percent was slightly below the nation’s growth rate of 2.7 percent.

• Personal-Income-Tax (PIT) Revenues, a proxy for personal incomes, rose 6.4 percent in 1Q00 over 1Q99. The City’s PIT growth was above the nation’s 4.4 percent PIT growth rate.

• The Inflation Rate for the NYC metro area was 2.9 percent, below the average U.S. rate of 3.2 percent.

• The Unemployment Rate in NYC in 1Q00 fell to 6.0 percent, compared with 4Q99’s 6.2 percent, the lowest since 1Q89’s 5.8 percent. U.S. unemployment fell to 4.1 percent. (In April, it dropped to 3.9 percent.) The City’s 1Q00 labor-force-participation rate rose to 58.4 percent, above 4Q99’s 58.0 percent, but well below the 1Q00 67.5 percent U.S. average. NYC’s 1Q00 employment-population ratio rose to a record 54.9 percent, from 4Q99’s 54.4 percent, but was still well below the record-high U.S. average of 64.7 percent.

Summary Table. Five Key Economic Indicators, NYC and U.S., 1Q00*

4. * B=Better than prior period. N=No change. W=Worse. Indicators 1, 2, and 5 compare 1Q00 with 4Q99; 3-4 with 1Q99.
5. Sources: See Charts 1, 2, 4, 6, 8.

• Other Indicators were favorable. All three predictive indicators improved in 1Q00. Also, Manhattan commercial vacancy rates declined, while rental rates grew.

The national economy continued to grow strongly in the first quarter. As in the past, consumer spending fueled this growth, while net exports were a drag on the economy. Recent rises in the consumer price index (CPI) and employment cost index (ECI) make it likely that the Fed will favor more monetary tightening, which may dampen growth. There have already been six interest-rate hikes by the Federal Reserve since June 1999, the latest of which was an increase of 50 basis points on May 16th.

The New York City (NYC) economy is also growing strongly. Growth in jobs, incomes, real estate and construction activity, and tourism continue to fuel the City’s economic boom. Risks to the City’s economy include the impact of higher interest rates on the City’s securities industry, and the general sustainability of stock prices.

1. Gross City Product

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   Gross domestic product (GDP)—a measure of the total production of U.S. goods and services—rose 5.4 percent in the first quarter. While this was below the 7.3 percent growth in the fourth quarter of 1999, it was still above the widely accepted non-inflationary economic growth limit of 3.5 percent, which is composed of productivity growth of 2.4 percent and a labor force increase of 1.0 percent. As in the past, personal consumption expenditures, which grew 8.3 percent, fueled the growth, followed by gross private domestic investment, which grew 8.0 percent. Meanwhile, the net export deficit was again a major drag on the economy, reaching a record level of $377.1 billion in the first quarter.

   Interestingly, the rise in first-quarter GDP came in the teeth of five 25-basis-point Fed interest-rate increases since June 1999. The Treasury buy-back program (funded by huge budget surpluses) and the rise in short-term interest rates have led to an inverted yield curve since mid-January. Still, no signs of recession have emerged. The tight labor market, and rise in CPI and ECI suggest more Fed interest-rate increases are in store. At its May 16^th meeting, the Federal Open Market Committee (FOMC) raised the Fed Funds rate a sixth time, to 6.50 percent. Furthermore, Fed-watchers were not left with the expectation that the hikes were over; the Fed might raise the rate by another 25 basis points on June 28^th.

   NYC’s economy continued to grow at an above-average pace of 4.8 percent. Although first-quarter growth was below the City’s 6.5 percent growth in the fourth quarter of 1999, it was significantly above the average of U.S. cities. Strong job growth, income growth (as reflected in growth in NYC personal income taxes, PIT), a high-priced real estate market, increase in construction activity (as measured by the number of building permits authorized), and the thriving tourist industry contributed to the City’s economic boom. (See Chart 1, next page.)

2. Jobs

The first quarter of 2000 marked the 29^th consecutive quarter of job gains for the City. This is the longest string of increases on record, i.e., since 1969, when the seasonally adjusted data first became available. The next-longest previous job expansion lasted 20 quarters and occurred between 2Q83 and 1Q88.

The City added 23,200 jobs, 22,500 in the private sector and 700 in the public sector, after adjusting for seasonal fluctuations. The job gains were across the board. Services added the most number of jobs, 16,200, of which 4,400 were in business services, 3,700 in health services, and 1,800 in social services. Construction added 2,300 jobs followed by wholesale and retail trades, with 2,000 jobs, and transportation and utility, with 800 jobs. Finance, insurance, and real estate (FIRE) added 500 jobs as a result of 1,400-jobs gained in securities and 400-jobs gained in real estate. But banking lost 700 jobs and insurance lost 600. Manufacturing gained 700 jobs after two years of losing jobs.

Chart 1. Real GCP and Real GDP, Percent Change, Annual Rate, Quarterly, 96Q1-00Q1

Source: GDP data from the Bureau of Economic Analysis of the U.S. Department of Commerce; NYC GCP estimates by the NYC Comptroller’s Office, preliminary for the latest quarter. GCP numbers through 4Q97 are not entirely comparable with those after 4Q97 because the Department of Commerce has not yet released sufficient revised regional data from the pre-1998 period to permit comparable estimates of GCP.

Within government, the Federal government added 1,900 jobs while local government lost 1,100 jobs and the state lost 100. (See Chart 2.)

Chart 2. NYC Job Growth, ’000, and Annualized Percent Change, Seas. Adjusted, 1Q00/4Q99 and 4Q99/3Q99

Source: NYS Department of Labor; quarterly seasonal adjustments by the NYC Comptroller’s Office. The 1999 numbers are preliminary.

While the City’s seasonally adjusted, first-quarter annualized job growth of 2.6 percent was slightly below the nation’s 2.7 percent, on a year-over-year basis it surpassed the nation’s growth. Compared with 1Q99, the City’s jobs in 1Q00 grew 2.0 percent, 0.2 percentage point above the national rate of 2.2 percent. The City’s job growth was the twelfth-highest growth among the 20 largest metro areas. Atlanta had the highest job growth rate, 5.1 percent, and Cleveland had the lowest job growth rate, 1.0 percent. (See Chart 3.)

Chart 3. Job Growth, 20 Largest Metro Areas and U.S. Average, Percent Change, 1Q00 over 1Q99

Source: U.S. Bureau of Labor Statistics (BLS). Where available, data are for the entire metro areas (MSAs or PMSAs). In three cases (Baltimore, NYC, and Philadelphia), metro data are unavailable and city data are used.

3. Incomes

Personal income taxes (PIT) and average hourly wages are used as a proxy for income. The reason is that personal-income data are published only annually by the Bureau of Economic Analysis of the Department of Commerce, and have a publishing lag of at least two years.

During the first quarter of 2000, PIT and withholding increased more than in the first quarter of 1999, but estimated taxes increased less than in the first quarter of 1999. PIT rose 6.4 percent in the first quarter of 2000 compared with 5.3 percent in the first quarter of 1999. Withholding grew 11.2 percent, and estimated taxes rose 4.3 percent. (See Chart 4.)

On a year-over-year basis, average hourly wages rose for all the sectors published by the NYS Department of Labor during the first quarter of 2000. Depository institutions and construction had the highest rate of growth, 3.8 percent, followed by trade, 3.6 percent. Manufacturing had the lowest gain, 2.2 percent. (See Chart 5.)

Chart 4. PIT, Year-over-Year Percent Change, 1Q00 over 1Q99

Source: NYC Comptroller’s Office, based on data from the NYS Department of Taxation and Finance and NYC OMB.
PIT = Personal Income Taxes.

Chart 5. Average Hourly Wages for Selected Industries, NYC, 1Q00 over 1Q99

Source: NYS Department of Labor, which does not publish comparable data for higher-level salaried staff.

4. Inflation

In the first quarter, the inflation rate, measured as a year-over-year change in the consumer price index, was 2.9 percent in NYC metro area, which covers New York-Northern New Jersey-Long Island, Connecticut, and Pennsylvania. This is the highest rate since 2.9 percent in fourth quarter of 1996. (See Chart 6.)

Chart 6. Inflation Rates, NYC, U.S., and NYC Less U.S., Monthly, Year-over-Year, 1987-2000

Source: BLS. Computation of differences by the NYC Comptroller’s Office. Inflation data for NYC are collected on a metropolitan-wide basis.

The core rate, which is all items less food and energy, was 2.2 percent, the highest since 2.3 percent in third quarter of 1998. A smaller core rate compared with the inflation rate implies a rise in energy and food prices. While food prices rose only 1.4 percent, energy prices rose 16.6 percent. Higher energy prices pushed transportation prices up 5.1 percent. Except apparel and upkeep¾ the price of which did not change compared with last year¾ all the other components of consumer price index rose. Housing and shelter prices, both, rose 3.2 percent, medical care rose 3.1 percent, and services rose 2.5 percent.

Compared with 14 largest metro areas and the U.S. urban average, New York City had the fifth lowest rate of inflation. San Francisco had the highest price increase, 4.2 percent, and Chicago had the lowest price increase, 2.7 percent. The U.S. urban average inflation was 3.2 percent and the core rate was 2.1 percent. (See Chart 7.)

Chart 7. Inflation Rate, 14 Metro Areas and U.S. Urban Average, 1Q00

Source: BLS. Quarterly inflation rates are computed by the NYC Comptroller’s Office as averages of monthly BLS data.

5. Unemployment

Civilian employment improved significantly in the first quarter. The number of the City residents with jobs rose by 33,900, the biggest gain since 38,600 in first-quarter 1989. As a result, the employment/ population ratio (the number of City residents employed as a share of the total population, 16 and over) rose to a record level of 54.9 percent. The number of City residents looking for a job (the unemployed) declined by 700, leading to a seasonally adjusted first-quarter unemployment rate of 6.0 percent, the lowest rate since 5.8 percent in the first quarter of 1989.

The City’s labor force increased by 26,800, the highest gain since 39,200 in first quarter of 1997. As a result, the labor-force-participation rate (the total number of City residents employed or looking for a job as a portion of total population, 16 years and over) rose to 58.4 percent.

However, the City’s unemployment rate was 1.9 percentage points above the U.S. average unemployment rate of 4.1 percent. (See Chart 8.)

Chart 8. Unemployment Rate, NYC, U.S. and NYC Less U.S., Monthly (SA), 1988-2000

Source: Seasonally adjusted (SA) series and differences computed by the NYC Comptroller’s Office, based on monthly data from the NYS Department of Labor and BLS.

The U.S. unemployment rate was not the only variable that improved. The U.S. labor force grew at an annualized rate of 3.2 percent, the highest since 3.6 percent in first quarter of 1984. As a result, the labor-force-participation rate rose to 67.5 percent, the highest in at least four decades. Also, the employment/ population ratio grew to 64.7 percent, again a record.

A comparison of the first-quarter 2000 unemployment rates (not seasonally adjusted) for the top 20 largest metro areas and the U.S. urban average shows that the City’s 6.4 percent was still the highest, significantly higher than the NYC metro area unemployment rate of 5.9 percent. Los Angeles had the next-highest unemployment rate, 5.6 percent, and San Francisco had the lowest unemployment rate, 2.0 percent. (See Chart 9.)

Chart 9. Unemployment Rate, 20 Largest Metro Areas and U.S. Urban Average, Not Seasonally Adjusted, Percent, 1Q00

Source: BLS. All data are for metro areas (MSAs or PMSAs); the NYC metro area is the PMSA. The NYC number is higher than the number for NYC in the Summary Table and Chart 8, which show unemployment data that are seasonally adjusted.

6. Tourism and the Hotel Industry

The hotel industry had a good season in the winter of 1999-2000 because of the warm weather and the millennial celebrations. Survey data by Pannell, Kerr, Forster Consulting (PKF) show hotel-occupancy rates and average daily room rates, compared on a year-over-year basis because the data are not seasonally adjusted. The hotel-occupancy rate hit a record of 78.4 percent in the first quarter of 2000, the best first-quarter occupancy rate since 1980, when data were first available. The average daily room rate rose to $216.60 in the first quarter of 2000. (See Chart 10.)

By comparison, in the first quarter of 1999 the hotel-occupancy rate was 74.2 percent and the average daily room rate was $202.00.

7. Real Estate

The combination of a strong economy and birth of new high-tech industries, such as the Internet and telecommunications industries, has created a strong demand for commercial rental space. According to a report published by Cushman and Wakefield, more than 25 percent of all leasing in the first quarter involved high-tech tenants. Since the real estate needs of high-tech companies are growing, they are quick to lease available space. For instance, more than 15 high-tech tenants have signed leases for over 80,000 square feet each in the first quarter of 2000. In the first quarter of 2000, commercial vacancy rates declined all over the City to about half of what they were in first quarter of 1999.

Chart 10. Daily Room and Occupancy Rates, NYC Hotels, Monthly Averages, 1994-1999

Source: PKF Consulting.

The overall direct vacancy level is space actually available from a landlord (not properties under construction or renovation) within the next six months. The vacancy rate is this level divided by total space inventory. This vacancy rate for commercial office space in Manhattan dropped in the first quarter to 4.7 percent, the lowest rate since 1985, when Cushman and Wakefield started collecting data. The rate was 8.7 percent in the first quarter of 1999. (See Chart 11.)

Chart 11. Vacancy Rates, Manhattan, Overall Direct Commercial, 1Q00 and 1Q99
Source: Cushman and Wakefield.

The strong demand for commercial space boosts rental rates. The biggest price increase was in Midtown South followed by Downtown and then Midtown. Rental rates jumped about $9 in Midtown South, $5 in Downtown, and more than $4 in Midtown. (See Chart 12.)

Chart 12. Rental Rates per Sq. Ft., Manhattan, Commercial, Average, 1Q00 and 1Q99

Source: Cushman and Wakefield. The average is weighted by square footage; only "direct" rentals are included, i.e., space that is immediately available, not space under construction.

8. Leading Economic Indicators

The City’s three leading economic indicators improved in the first quarter. (See Table 1.)

Table 1. Three Leading Economic Indicators, NYC, 1Q00 vs. 1Q99 and 4Q99*

* B=Better than prior period; N=No change; W=Worse.   SA=Seasonallyadjusted;NSA=Not seasonally adjusted.

Source: Conference Board (help-wanted ads), NYS Department of Labor (unemployment insurance claims), and NYC Dept. of Buildings (permits). Averages are computed by the NYC Comptroller’s Office.

The help-wanted advertising index was up 12.3 percent compared with 2.6 percent in fourth quarter of 1999, the highest since 13.4 percent in third quarter of 1997. This index is sensitive to labor-market conditions and provides a gauge to measure change in the demand for workers. The Conference Board publishes the help-wanted advertising index for 51 cities, and the nation, every month. The national help-wanted advertising index average was 89 in the first quarter, significantly above the City’s 58. In fact, the City’s advertising index is above only Hartford (34). San Antonio had the highest advertising index (201).

The number of initial unemployment claims dropped 344 per month to 30,278 in the first quarter. This variable measures the number of first-time applicants for unemployment insurance.

The number of building permits issued rose to 20,543 in the first quarter, 1,554 or 10.3 percent more than first-quarter 1999. The number of building permits authorized is an indicator of the level of construction activity in the City; this number is sensitive to economic conditions.

Prepared by John Tepper Marlin, Chief Economist; Farid Heydarpour, Senior Economist; Michael F. Zhang and Urvashi Kaul, Economists; Hope Lendzian, Report Coordinator · NYC Comptroller’s Office, Fiscal and Budget Studies Steven Newman, First Deputy Comptroller · Jacques Jiha, Deputy Comptroller for Budget · Call: (212) 669-3901, or visit www.comptroller.nyc.gov.