Queens County Economic Forecast
Speech to the Long Island City Business Development Corporation
March 18, 2010
While the focus of the Queens Economic Development Corporation and Long Island City Business Development Corporation is the Borough of Queens, my remarks will seek to put local economic conditions in a larger context and to offer a few thoughts about how our understanding of the challenges facing the global and national economy might inform our strategy for local business and economic development.
Globally, the economic forecast is good. We have come through the world's first ever, global recession. Thanks to actions taken by governments and central banks around the world, a Great Depression was avoided. On the other hand, the U.S. is experiencing a jobless recovery and it is uncertain where the jobs of the future will come from. We are in better shape than Europe, but the U.S. is more dependent than ever on trade and business relationships with developing countries - especially China and India - where future economic growth will come from.
You have probably heard this recovery described as "L-shaped" - an economy that has leveled off and is bumping along the bottom. The GDP in the US is projected to grow by over 3% this year, but it has to grow a lot more than that to make a dent in unemployment. (China GDP growth will probably hit 11%). Our GDP gains are largely due to increased productivity, with American workers and businesses generating more economic output with fewer employees. Large and mid size businesses in most sectors have money available to invest and are cranking up for increased business activity. But they are not rehiring many of the people laid off over the past two years, and it is not expected that they will in the near future.
As a result, both nationally and locally, our first challenge is doing something about long term unemployment. Jobs of the future in America will likely come from new startup companies, emerging industries in the Cleantech sector, foreign companies setting up operations in the U.S., and increased export of goods and services to new markets. But none of these are sources that will generate large numbers of jobs quickly and all will require a workforce with higher skill levels than most unemployed Americans have today.
The second challenge is that typical American consumers have lost 15-20 percent of their wealth in the past two years - with home values down and savings eroded. These consumers are financially insecure and will not soon resume 2007 levels of spending. As a consequence, retail sales that went down 20 -30 % in 2008 remain depressed.
This leads to a third big problem for our economy, which is that small businesses in the U.S. are still caught in a credit crunch. One problem is that their recovery depends on renewed consumer spending. In addition, small businesses tend to be at the tail end of a supply chain that is still waiting for big business investment to kick in. While financing for growth is available to larger companies, small businesses tend to use their credit cards, and those lending standards are tighter than ever.
So what are the solutions to our national jobs problem? Congress has passed a jobs bill that will provide funds for infrastructure, aid to small business and a $6600 tax credit for employers that rehire laid off workers. These are good things, but probably not enough to bring hiring levels back to where they were in 2007. Beyond the jobs bill, we need:
•Immigration reform to insure that our businesses and universities can compete for top talent from around the world.
•Financial regulatory reform to restore the credibility of our financial industry.
•Solid intellectual property protections at home and abroad so that our media and technology industries thrive.
•Sane tax policy that attracts talent and allows our businesses to compete internationally. We should take a lesson from London, where a 50% tax on bonuses has moved that city out of front place status as a world financial capital.
Turning to the economic picture in New York City, we are doing better than most of the country. In part, that is because about 20% of our jobs are in the health and education sectors, which are pretty recession-proof. More important, New York City benefited from a special federal stimulus that most of the country did not receive, thanks to the billions of dollars that the government and the Federal Reserve put into the financial system.
To put this in perspective, one can compare the 2008 financial crisis with the economic consequences of the terrorist attack of 9/11/2001. That attack put an $83B hole in our local economy, which seemed like a huge loss. Recovery took about two years and $22B in federal aid. Over the past two years, the federal government put more than $180 billion into just one company - AIG. The total investment by the Treasury and the Fed in the rescue of the financial system involved pumping more than $1 trillion into the economy, most of it coming into or through New York. The next time you hear a New Yorker complain about the bank bailout, remind them of this.
The city lost 237,000 jobs in the past two years, putting total job count today at about 3.6 million. Among Queens residents, unemployment peaked at 9.6% in January, 2010 -- more than double where it was in April 2008. Today, about 6% fewer Queens residents have jobs than at peak employment in July 2008. This January the job situation in New York began to turn around, while the country is still losing jobs. Unemployment in the city went from a 16 year high of 10.5% down to 10.4%. More evidence of recovery is that New York State saw 25,500 new jobs created in January of this year, with 100% of the growth coming from the private sector, while government was down about 5,000 jobs.
New York's local housing market never got as bad as other places around the country and is recovering faster. After losing about 9.7% of home price values and suffering a nearly 20% drop in sales activity in 2008, we saw a recovery over the course of 2009. While home prices today are only 80% of what they were at the peak of the market, the pace of sales in Queens has surpassed pre-recession levels by over 7%, proving that New Yorkers cannot resist a bargain.
Unfortunately, the commercial real estate market is the last shoe to drop in the financial crisis and that will be a drag on New York's real estate and construction industries and on tax revenues. Midtown Class A office building rents are down 45-50% from their peak. There are more than 70,000 units of multifamily housing that are "under water", with mortgages greater than their value, and hundreds of construction projects are stopped in midstream.
The biggest challenge facing New York City, however, is the fiscal condition of New York State. The state budget deficit for 2010-11 looks to be $10B, out of about $85B in locally funded items. The legislature and governor have to solve this problem before the state literally runs out of cash in June. The Tea Party Movement seems to have discouraged tax increases, even on business and high earners. This means that education and health care, which represent 60% of the budget expenditures, will have to be cut substantially, creating both economic losses and labor strife that hurt the city. Lieutenant Governor Dick Ravitch has come forward with a plan to provide fiscal discipline and manage a reduction in expenditures over the next five years. We should all support its enactment.
The fiscal crisis goes beyond the state budget. It includes the MTA, which is running $750M in revenue shortfalls this year. And, of particular importance to Queens, the Port Authority is suffering reduced revenues and increasing demands on its resources, ranging for the $11B it is spending on the world trade center site to $3 billion pledged to the new train tunnel under the Hudson, Little is left for needed upgrading of the airports.
At the city and state level, the ultimate solution to our fiscal challenges is the growth of private sector jobs and a new, more strategic approach to economic development. The Partnership has worked with Governor Paterson to develop a new program to replace Empire Zones. Known as Excelsior Jobs, it is modeled on New Jersey's job tax credits and Connnecticut's R&D credits, which have allowed those states to pirate jobs and business from NYS over the past decade. Hopefully, the legislature will act to adopt this new program as part of the 2010 budget.
The Bloomberg Administration has dramatically expanded the city's economic development strategy beyond real estate projects. Today, the city has numerous initiatives that encourage entrepreneurs, remove barriers to small business, and support industry clusters in media, tourism, fashion, technology and the nonprofit sector.
New York City has all the assets necessary to remain a leading world economic power, but it requires coordination and connecting the dots. It has been said that New York City's economy is far less than the sum of its parts. For example, our many fine colleges and universities historically have been ivory towers, with an anti-commercial culture and making little contribution to building the city economy. That is changing, with no better example than LaGuardia Community College and the partnership it recently announced with Goldman Sachs to support small business entrepreneurs.
Going back to the big picture, the global financial crisis of 2008 accelerated a long term shift in economic power and wealth from developed nations of America and Europe to the emerging economies, most particularly China and India. The future of the US economy depends on how effectively we can serve and sell into these markets. New York City businesses are well positioned to lead the pack in these efforts, beginning right here in Queens. Despite the challenges, we can be optimistic about the future of our city.