SECTION ONE
ECONOMY

ECONOMIC OVERVIEW

Introduction

Following seven years of uninterrupted expansion, the national economy is expected to continue on its moderate but steady growth path, at least through the end of 1997. The New York economy has just entered its fifth year of growth, although State employment continues to grow at less than half the national rate. In this report, we examine the most recent data available to determine whether a recession may be looming just over the horizon. We compare the characteristics of the current expansion with those of the eight other expansions the nation has experienced during the post-war era, with particular focus on the expansion of the 1980's, the second longest of the period as well as the most recent. From these data, we determine that the current times cannot be characterized as the ending phase of an expansion.

The national economy's moderate pace of growth has nurtured only sluggish employment growth in New York. After peaking in 1994, the State's rate of job growth continues to lag well behind the national average. However, in contrast to lackluster growth on Main Street, Wall Street's performance has been nothing short of remarkable. Financing corporate restructuring in an environment of interest rate stability promoted by low inflation and modest growth has proven to be beneficial for financial markets and, hence, for New York, home state of the world's financial capital, New York City.

The process of corporate restructuring continues as both global and domestic market competition forces firms to find new ways of maintaining and increasing market share. However, corporate restructuring has entered a new phase, particularly in relation to its impact on the New York economy. The impact of the earlier phase was primarily the loss of large numbers of jobs as firms sought to streamline their workforces in order to increase profitability. Tens of thousands of jobs were lost in New York alone, resulting in slow wage growth and increased worker insecurity. It is now believed that the bulk of this employee downsizing is behind us.

However, corporate restructuring continues apace. Big ticket mergers in aircraft manufacturing, defense, banking, health care, utilities, and telecommunications have become common. This phase of the restructuring process has proven to be a boon to those Wall Street investment banking firms which are brokering these mammoth deals. Hence, in contrast to the earlier phase which cost the State jobs, this phase has produced benefits to the State economy. Record-breaking profits for financial sector firms have resulted in large bonuses for Wall Street employees, making a significant contribution to State income growth. A large volume of financial activity on Wall Street should produce another year of strong profits for the State's finance sector in 1997. The outlook for corporate profits more generally is also favorable due to an expanding economy, the rewards of technological investments, as well as the absence of significant wage pressure. Healthy corporate profit growth should translate into increases in stock prices, which, in turn, are expected to produce returns to investors in the form of capital gains. These conditions will allow New York to experience strong income growth despite slow growth in employment.

Record financial market growth, continued corporate restructuring, and strong corporate profit growth exert their impact upon State incomes in the form of bonus pay. Yearly bonuses have become an increasingly popular form of employee compensation in the world of downsized and restructured corporations. Moreover, they remain a very sizable fraction of the total compensation package for those who work on Wall Street. However, unlike non-bonus income, which tends to rise and fall with the level of employment, bonus income tends to vary with the level of private sector profits. We find that in order to truly understand the underlying causes of State income growth, it is vital to distinguish between bonus and non-bonus income.

Corporate restructuring and the interest rate stability which has characterized the period since the Federal Reserve's adoption of a looser monetary policy in early 1995, explain only part of Wall Street's success over the last two years. The flourishing of the financial markets must also be credited to the willingness of large numbers of U.S. households to entrust their money to Wall Street. In both 1995 and 1996, stock market indices succeeded in breaking record after record. However, we find that because of more long-term demographic trends, we can expect to continue to see solid growth in securities markets into the twenty-first century. In this report, we analyze these trends, as well as the institutional factors which are at the foundation of this optimism.

Despite strong income growth, New York's rate of job growth continues to significantly lag that of the nation overall. In 1996, the State ranked thirty-eighth in the rate of private sector job creation among the fifty states and Washington, D.C. New York's loss of manufacturing employment has been well documented. Here we further examine the State's transformation from a manufacturing economy to an economy dominated by service production. In particular, we focus on the impact of this transformation on wages. This examination leads us to consider the State economy's potential for absorbing the wave of new labor market entrants which will be created by federal welfare reform.

Whether through bonus pay or financial market gain, much of the increment to State income in 1997 will be earned by those already in the very top income brackets. Although this phenomenon bodes well for the generation of income tax revenue, the widening of the State's already unequal distribution of income cannot be ignored. In examining the social and economic factors which underlie these disparities, we note the rising long-term importance of education to workers' incomes as manufacturing jobs are replaced by service sector jobs. Census data indicate that many of the service sector jobs which have been created over the past 20 years require high levels of skill and pay high wages, while others require a very low level of skill and pay wages which are significantly lower than the average manufacturing job being lost. We investigate whether opportunities to earn a "livable wage" may be disappearing for those who have not been able to attain a solid education.

The Current Expansion: How Long?

Since the Second World War, there have been nine periods of economic expansion, including the current one. The average length of the previous eight expansions is 52 months. The current expansion started in March 1991 and has now completed 72 months. Even if it were to end tomorrow, the current expansion would go on record as the third longest of the post-war era. How long can it continue? What can we learn from recent history about the progress of the current expansion?

The current economic environment can be characterized as one of low inflation and low interest rates. However, these conditions are unusual for a late stage in the expansionary phase of the business cycle. As an expansion matures, it is typical for the rate of price growth to accelerate. Because the economy is operating at a high level of production capacity, it requires ever higher prices to induce increases in production. Production bottlenecks tend to result in higher producer prices, discouraging the purchase of new investment goods. Moreover, labor market conditions typically become very tight as the level of full employment is reached. As competition for workers increases, firms must raise wages in order to keep its best employees and induce new workers to enter the labor force. These developments increase the cost of doing business and are reflected as an increase in consumer prices. The expectation of higher prices induces long-term interest rates to rise as investors seek to protect themselves from the decline in the value of the dollar. The resulting increase in the cost of borrowing further discourages private sector investment.

Interestingly, these conditions have failed to materialize, even after 72 months of uninterrupted growth. Consumer price inflation, as measured by the rate of growth of the Consumer Price Index (CPI), has remained low. Figure 1 compares the growth in the CPI during the final 12 months of the average expansion with that of the most recent 12 months of the current expansion. Recent growth in the CPI has been consistently slower than during the final 12 months of the average expansion. In 1996, neither CPI growth nor Producer Price Index (PPI) growth reached levels that can be seen as typical for the closing months of an economic boom. The relatively slow growth in producer prices, in particular, indicates the absence of inflationary pressure.

Labor market indicators also indicate an absence of the degree of wage pressure normally found during the latter phase of an expansion. The Civilian Employees Employment Cost Index demonstrated growth of 9.2 percent during the last eight quarters of the 1982-1990 expansion, while rising only 5.1 percent during the most recent eight quarters (see Figure 2). Relatively slow growth in labor costs is consistent with the significantly slower job growth experienced during the early stages of the current expansion compared to the average postwar economic expansion.

Figure 1

Figure 2

Several factors help to explain the absence of inflationary pressure in the national economy. Foremost may be the economy's lackluster growth performance relative to past expansions. By this point in the 1982-1990 expansion the twenty-fourth quarter, real U.S. Gross Domestic Product (GDP) had grown to be 27.1 percent higher than the first quarter's level. In contrast, real GDP has expanded by only 15.6 percent since the first quarter of 1991, which was the first quarter of the current expansion (see Figure 3). The early phases of the expansion were characterized by particularly slow job growth, due in part to the extensive corporate downsizing which was occurring during the early 1990's, as well as the downsizing of the defense industry after the cold war. In addition, sluggish growth among the nation's leading trading partners may also be a factor restraining the pace of national economic growth. The last two years have seen slow growth in Canada, Japan, and the European Union, depressing the demand for U.S. exports.

Figure 3

Finally, the Federal Reserve Board is also responsible for the slow pace of growth of the current expansion as it continues to vigilantly scrutinize the economy's rate of expansion and price growth, ready to act on any signs of inflationary pressure. The Federal Reserve successfully engineered a soft landing for the national economy by raising short-term interest rates seven times between February 1994 and February 1995. These actions effectively turned the clock back, giving the current expansion more of the characteristics of a young rather than mature expansion.

The data cited above indicate that current conditions do not presage an end to the current expansion. Slow growth in consumer and producer prices distinguish the current period from the latter phase of the last expansion. These conditions have been associated with the increasing globalization of the world economy, a prolonged period of corporate downsizing, declining computer prices, advancing technology, as well as continued fiscal policy restraint due to the federal government's apparent commitment to reducing the deficit. Conditions of moderate growth and low inflation reduce the inclination of the Federal Reserve to increase interest rates in order to slow down the economy. The Index of Leading Economic Indicators, published by the Conference Board, also suggests continuing growth. By combining information on ten significant economic factors, the index gauges whether the economy is likely to be expanding or contracting six to nine months down the road. As indicated in Figure 4, the index was on a downward path toward the end of the 1980's. In contrast, the index has clearly been heading upward during the most recent period. Today, all signs are pointing toward continued moderate but steady economic growth.

Figure 4

A Tale of Two States

The relatively slow pace of the national expansion has been barely sufficient to keep New York's recovery alive. The State's continued loss of manufacturing jobs has caused the State's rate of job growth to be consistently lower than the nation's. This trend is a fundamental feature of the State's unique business cycle pattern relative to the nation. This unique pattern is easily identifiable in Figure 5, which compares the overall performance of the State economy (as measured by the Ways and Means New York State Index of Current Economic Conditions) with the overall performance of the national economy (as measured by the comparable U.S. Department of Commerce Composite Index of Coincident Indicators for the U.S.). As can be seen, prior to the stock market crash in 1987, the New York economy outperformed the national economy. In the period after 1987, New York endured a protracted recession, which was much more severe than that of the nation.

The State finally emerged from its recession in 1992, more than one year after the end of the national downturn (see Figure 5). However, the New York economy was growing from a much weakened base, experiencing much slower employment growth than the country overall. By 1995, the State had returned to a pattern of only sluggish improvement in overall economic conditions. While the national economy was improving at a modest pace during 1995, State economic conditions were actually deteriorating. During the first ten months of 1996, the State economy improved but lagged well behind the nation. While the nation's employment was growing at a healthy 2.0 percent in 1996, New York State's employment was struggling along at an anemic 0.6 percent (see Table 1).

Figure 5

In contrast to the outlook on Main Street, the good fortune experienced on Wall Street, as reflected on the income statements of private corporations, has enabled State income growth to keep up with and even outpace that of the nation. In 1997, State personal income is expected to grow faster than the nation's (see Table 1). The unique role of the finance, insurance, and real estate (FIRE) sector in the State's economy is essential to understanding the divergent paths which State employment and State personal income have taken in the recent past. The strong performance of FIRE sector bonus income has enabled the State to experience healthy personal income growth and weak employment gains, at the same time.

Source: DRI/ McGraw-Hill, Ways and Means Committee staff estimates.

The Importance of Bonus Income

Bonus payments are becoming an increasingly widespread form of employee compensation for U.S. businesses. More and more companies, both large and small, are offering bonus plans to their employees. Moreover, bonus payments are no longer only reserved for a company's top executives and sales staff, as they once were. Now, hourly-wage production line workers are also earning some share of their income in the form of bonus pay. According to a privately conducted annual survey, the portion of Fortune 1000 companies planning to offer bonus pay for hourly workers rose from 26 percent in 1993 to 37 percent in 1997.

Bonuses are also growing as a proportion of total wages and salaries. For hourly workers, bonuses as a share of total wages increased from 4.5 percent in 1993 to 7.8 percent in 1997 (see Table 2). Of course, company chief executive officers still receive the largest bonuses. Buck Consultants estimates that hourly workers receive three to eight percent of their base salaries as bonuses, while middle managers receive 10 to 17 percent. Executives can receive 100 percent or more of their total salary in the form of bonus pay.

Bonus Pay and Corporate Restructuring

Bonuses are beginning to replace annual merit raises for many companies. Whether referred to as variable pay or incentive pay, the idea behind bonus pay is simple: paying employees for performance. However, the increasing popularity of bonuses is also associated with corporate restructuring. Under the increasing pressure of global competition, corporate America has become more cost conscious and risk averse. Hence, it was logical for firms to seek

alternatives to merit raises which become a part of an employee's permanent salary base and factored into pensions, in a manner unrelated to the economic fortunes of the company. In contrast, bonus pay rises and falls with corporate profits, thus permitting the firm to share the risk of doing business with its workers. For this reason, bonus payments experience a very different growth pattern from non-bonus wages. Bonus pay can be as volatile as corporate profits, while non-bonus wages are more closely related to changes in total employment. While non-bonus wages tend to exhibit smooth growth, bonus payments can vary from zero to millions of dollars (see Figure 6).

Figure 6

Bonus Pay in New York State

In some areas of the State, it is not unusual for retail merchants to plan their inventories based upon the timing of the receipt of bonus checks by their customers. This behavior highlights the rising importance of bonus pay to the New York economy. However, because so large a portion of total State income is paid in the form of bonuses -- senior executives receive hundreds of millions of dollars in bonus pay every year -- State income growth has become less closely tied to employment growth. State employment growth has consistently lagged the nation as a whole since the end of the national recession in 1991. In contrast, State income growth has occasionally outperformed the nation in recent years.

Bonus estimation is crucial to forecasting the State's personal income tax for two reasons. First, because of the progressive nature of the tax code, it is not only total income but also the distribution of income which determines the size of tax collections. Since bonuses tend to be concentrated among high-income taxpayers, they tend to be taxable at the maximum marginal tax rate. Second, the timing of bonus pay-outs affects the State's cash flow. Tax collections from wages usually peak during December, January, and February, corresponding to the timing of bonus pay-outs which, in turn, produce a rise in non-seasonally adjusted wages, including bonuses, for the first and fourth quarters of the calendar year.

Unfortunately, there are no publicly available data on statewide bonus income. However, the bonus component of total State wages can be estimated based on data available from the New York State Department of Labor. Fundamentally, growth in total wages is determined by the growth in total employment, hours worked as well as growth in the average wage per worker. Total wages display a definite seasonal pattern, caused by either the seasonal change of employment, the seasonal payments of bonuses, or both. Seasonality due to periodic changes in employment can be eliminated by focusing on the average wage per worker, rather than on total wages.

It then remains to distinguish the bonus component from the non-bonus component of the average wage. To accomplish this, we assume that the non-bonus component of the average wage stays flat over the course of the year. Since bonus payments tend to be made during the fourth and first quarters of the calendar year, the average wage for either the second or third quarter can be used as an estimate for the average non-bonus quarterly wage. The deviations from the average non-bonus wages found in fourth and first quarters can be interpreted as average bonus payments for the corresponding quarters. Total bonuses are calculated as the product of the average bonus and total employment.

Because of the variability in the timing of bonus pay-outs across industries, and the fact that the factors determining profit levels also vary by industry, bonus forecasting is done by individual industry. On the other hand, the forecast must also take into account that the State's industrial sectors are related. For example, high profits in the manufacturing industry will lead to higher stock prices, which in turn will lead to higher financial market profits. Under these circumstances, we might expect large bonuses for both manufacturing and Wall Street executives. The major findings can be summarized as follows:

• New York private sector bonuses for the last quarter of 1996 and first quarter of 1997 are estimated to total $19 billion, representing growth of 19 percent over the 1995-96 total of $16 billion. Over the last ten years, bonus income is estimated to have grown at an average annual rate of 8.2 percent.
• For the fourth quarter of 1997 and the first quarter of 1998 combined, FIRE sector bonuses are expected to top $12 billion, representing growth of 5.1 percent (see Figure 7). Bonus income for all other industries combined is expected to total $7.3 billion, representing 1.4 percent growth over the previous year.
• While aggregate bonus payments fluctuate over time, the overall level has increased substantially in recent years. Bonus payments accounted for between 4 to 7 percent of total wage earnings in New York State's private sector over the past 5 years.
• The amount of and the timing of bonus pay-outs vary across industries. FIRE sector bonuses tend to be paid during the first quarter, although a change in this pattern can be observed in 1992 and 1993. For other sectors such as manufacturing and services, bonuses tend to be paid during the fourth quarter.
• Bonuses as a percentage of total wages also vary from industry to industry. The percentage for the FIRE sector reached as high as 17 percent in 1992. Within the FIRE sector that year, the security industry's bonuses were the highest at 22 percent. In contrast, for the construction, utilities and communication, and services sectors, the ratio of bonuses to total wages has never reached 4 percent.
• In 1995, FIRE sector bonuses accounted for 56 percent of the State bonus total, while its employment share accounted for only 11.2 percent of the State total.
• In 1995, the average wage for the entire private sector was $34,670, of which 6.6 percent is accounted for by bonus income. In the securities industry, bonuses accounted for $35,000, or 27.4 percent of the total average wage.

Figure 7

The Re-emergence of Wall Street

In 1994, the Federal Reserve Board's restrictive monetary policy contributed to an extremely sour year for financial market profits. However, by early 1995, the stabilization of interest rates set the stage for two record-setting years on Wall Street. Corporate restructuring, fostered by intense domestic and global market competition, has produced a significant number of billion-dollar mergers and acquisitions in many industries. The large volume of corporate underwriting activity associated with the finance of these mega-deals, in turn, produces billions in profits for the investment banking firms managing the transaction. As strong a year as was 1995 for these activities, 1996 was stronger still. Industry pre-tax profits reached a record $11.5 billion in 1996, about a third higher than the previous record 1993 level, and more than ten times as high as the disappointing 1994 level. The total value of corporate underwriting activity in 1996 was $953 billion, 36.1 percent higher than the 1995 level. The large volume of this activity explains the large increase in bonus income estimated for 1996 (see Figure 7).

Corporate restructuring and interest rate stability explain only part of Wall Street's success over the last two years. This level of success could not have occurred had there not been a strong market for stocks. Although less than half of all industry revenues are derived directly from the trading of securities in the stock market (see Figure 8), rising stock prices create an environment in which all other forms of financial market activity can flourish. On the New York Stock Exchange, the average daily volume of transactions grew from below 300 million shares in 1994 to 346 million shares in 1995. The average daily volume rose further still in 1996 to above 400 million. Even more impressive growth was seen on the National Association of Securities Dealers Automated Quotation system (NASDAQ) exchange, where the average daily trading

Figure 8

volume rose by over 100 million shares to 401 million shares in 1995, and by almost another 150 shares to 545 million in 1996. The value of the total volume of transactions on the two markets combined approximately doubled between 1993 and 1996. Values on the New York Stock Exchange have risen by over 50 percent since the end of 1995.

Why were 1995 and 1996 such good years? The economic environment, characterized by low inflation and low interest rates, has been a healthy one for stock and bond market growth (see Figure 9). Moreover, there is little doubt that a significant increase in inflationary expectations resulting in higher interest rates would have a negative impact on the current bull market. However, there are a number of long-term underlying trends which suggest reasons for continuing strong stock market growth over the long-run. The primary force behind these trends is demographic.

Figure 9

The Maturation of the Baby Boom Generation

The ages from 45 to 64 are not only prime earning years, but also those years when the typical individual is planning for retirement. It is therefore not surprising that members of this age group are more likely to own stock than members of any other adult age group. Representing 27.1 percent of the U.S. population over the age of 21, this age group accounted for fully 36.9 percent of stock owners in 1992, the most recent year for which data are available. It is estimated that more than one adult in three owns corporate stock either directly or indirectly through a stock mutual fund, a corporate thrift plan, or contributions to a pension plan. The number of individual stock owners reached 51.3 million in 1992, compared with 42.9 million in 1989, an increase of 19.6 percent in just three years. As the 45 to 64 age group becomes larger with the aging of the baby-boomers, the demand for stocks can be expected to rise as well.

As the workforce has aged and become increasingly concerned with retirement over the last twenty years, the total volume of savings by U.S. households has grown significantly. Total household financial assets grew from $3.2 trillion in 1975 to $19.0 trillion in 1995. However, U.S. households are not only saving more, they are also changing the way they save in ways that have favored the stock market. Figure 10 illustrates the shift away from non-corporate business equity and bank deposits, toward pension funds, individual corporate stocks, and mutual funds. Of course, both pension funds and mutual funds are themselves major investors in corporate equities.

Figure 10

As household funds shift toward pension funds and mutual funds, institutional investors have become increasingly important players in the stock market. By the end of 1995, the total stock of pension funds was valued at $2.6 trillion, representing growth of almost 1,000 percent since 1975, or average growth 12.6 percent per year. Like the savings portfolio of the typical U.S. household, pension fund portfolios have shifted in the direction of mutual funds as well.

Mutual funds have provided both institutional and individual investors with a less risky way of participating in the market than purchasing individual stocks, and, consequently, have experienced tremendous growth over the last twenty years. In 1975, the total value of mutual fund holdings was $43 billion. By the end of 1995, their value had grown to $1.9 trillion, producing an average annual growth rate of 20.7 percent, and that volume continues to grow. Individual corporate equities accounted for over half of total mutual fund holdings in 1995. The current environment of low inflation and low interest rates should prove very favorable to Wall Street over the short run. However, the fundamental market characteristics described above create the potential for very strong market growth into the next century.

New York's Changing Industrial Structure

New York has experienced a dramatic transformation since World War II from a manufacturing economy toward a more services-oriented economy. Although national manufacturing employment has also been on the decline since peaking in 1979, the loss has been much more dramatic for the State than the nation. Between 1958 and 1985, the national economy actually added almost 3.3 million manufacturing jobs, while New York lost 573,700. This represents a loss of over 30 percent of total State manufacturing employment. During the period from 1985 to 1995, which includes the 1990-91 recession, the national economy lost 890,000 manufacturing jobs. New York State, for which the recession was much longer and more severe, accounted for 359,300 of these lost jobs.

Figure 11

The service sector is coming to compose an increasing portion of the State's jobs. In 1965, the service sector accounted for just over one million jobs or 17.5 percent of total State employment (see Figure 11). The three largest service sector industries --health, business, and educational services --alone accounted for fully 15.0 percent of State employment, or 867,000 jobs. By 1995, the service sector was supporting 2.4 million jobs, almost a third of State employment.

The shift of the economy away from manufacturing toward services may be having a detrimental impact on the State's distribution of income, as the industries which have come to dominate the State's employment picture tend to pay relatively low wages. Of the ten industries employing the largest numbers of the State's workers, nine are among the bottom half of the State's industries that pay the lowest wages. Only depository institutions, a FIRE sector industry, both employs a significant number of workers and offers relatively high wages. However, because of the extensive restructuring occurring in the banking industry, the industry's workforce has been shrinking. While four of the ten highest-paying industries in the State are located in the FIRE sector, together they account for only 5.3 percent of the State workforce, or 405,000 workers. Meanwhile, the continued loss of manufacturing jobs is further reinforcing the trend toward increasing income inequality. In those regions where manufacturing industries still constitute an important source of employment, they are among the highest paying industries as well. Data based on the 1990 Census indicate that, on average, an occupation in the manufacturing sector pays a higher wage than a similar occupation in the service sector (see Figure 12).

Figure 12

The ranking of the ten highest-paying industries in the State is characterized most notably by the increasing dominance of FIRE sector industries. In 1975, two of the ten highest-paying industries in the State were in the FIRE sector. Twenty years later, there were four. Average FIRE sector wages grew by an impressive 432 percent between 1975 and 1995, while overall sector employment grew by 25.7 percent during the period. However, the FIRE sector accounted for only 9.4 percent of total State employment in 1995, while accounting for fully 17.6 percent of total wages. In contrast, service sector industries accounted for 31.7 percent of State employment, while commanding only 27.6 percent of State wages.

The welfare reforms initiated at the national level have brought new challenges to State policy makers. Every state in the union is faced with the problem of moving Aid to Families with Dependent Children (AFDC) beneficiaries into the labor force within a specified period of time. New York's encounter with this challenge promises to be even tougher given the State's below-average job growth performance. Of major concern is whether welfare recipients possess skills which match well with the needs of employers across the State.

An overwhelming proportion of adult AFDC recipients are female. According to Current Population Survey data for New York State for the years 1992 through 1995, about 80 percent of the women receiving benefits report having never worked. This puts these individuals at a distinct disadvantage when competing with more experienced unemployed workers in the labor market. The good news is that the occupations of those beneficiaries who report some work experience are not ill-matched to the occupational profile of the State's two fastest growing industrial sectors, services and trade. However, the bad news is that these occupations also represent some of the lowest paying jobs in the State, paying well below the statewide average wage. Hence, they provide less inducement to enter the labor market, particularly for those experiencing additional constraints related to transportation and child care costs.

Figure 13

Although many of the new jobs generated by the State economy may closely match the skill level of those currently on welfare, there may simply not be enough of them to go around. Under the recently enacted Federal law, by the end of 1998, all parents or caretakers of children who have been receiving assistance continuously for two years must engage in work. Based upon the most recent data made available by the State Department of Social Services, approximately 60 percent of adult AFDC beneficiaries will be expected to find employment of some kind by the end of 1998. However, only about 63,000 new jobs are expected to be added to the State economy in 1997 (see Figure 13). Moreover, as of September 1996 almost 70 percent of the State's welfare recipients resided in New York City. The City experienced a net loss of jobs in 1995, with the modest growth in four of the boroughs unable to compensate for the losses experienced in Manhattan. However, during the first two quarters of 1996 the City managed to generate 31,913 jobs with the largest gains occurring in Manhattan (see Table 3).

If current trends continue, the economy will have the capacity to produce only a small fraction of the jobs needed to provide work for adult welfare mothers seeking employment by early 1999. Moreover, we can expect there to be about 500,000 unemployed New Yorkers at the same time that these welfare mothers will be expected to enter the workforce. This implies there will be only one job for every twelve New Yorkers seeking employment.

On Income Inequality and its Causes

The pattern of the growing income inequality, particularly among families, has been well documented for both the U.S. and New York. The academic literature identifies a number of factors as the fundamental causes of this growing disparity. First we consider two important factors influencing individual earnings, education and hours worked. We then examine changes in family structure, as well as changes in the distribution of work within families. Third, we consider the relationship between family earnings and other sources of family income. Finally, we relate New York's distribution of income to the State's unique industrial structure, in particular, to the relative importance of the securities industry. In this report we analyze information based on both the 1970 and 1990 Census reports, as well as the 1992, 1993, and 1994 samples of State resident personal tax returns, in order to confirm the importance of these factors as the underlying causes of the increase in inequality among families in New York State.

Census data reveal that the State workforce was better educated in 1990 than it was in 1970. In 1970, 70 percent of the workforce had no college education whatsoever, while by 1990 that proportion had fallen to 45 percent. The pursuit of higher levels of education was a rational response to labor market realities, as there are significant gaps in earnings based on educational attainment (see Figure 14). For example, 1990 Census data indicate that by age 50, the average college graduate was earning $44,400 in 1989. This level is about $20,000 more than the $24,400 earned by the average worker having only a high school diploma. However, there is evidence that this gap has been increasing over time. While those with at least some college education have seen their earnings rise significantly since 1970, those with no college have seen barely any increase at all, producing an increase in the degree of income inequality between the well and not-so-well educated. Moreover, it has been discovered on the national level, that all of the increased college attendance...has been among middle- and upper-income families. The proportion attending college from families in the bottom quarter of the income distribution is stuck at very low levels.

Figure 14

Changes in the pattern of hours worked may also be affecting the distribution of income among New York's families. Between 1969 and 1989 there was a significant increase in the number of individuals living in families who worked for only part of the year rather than the full year. In 1969, 87 percent of working individuals between the ages of 18 and 65 who lived in families worked a full year, but by 1989, that proportion had fallen to 78 percent. Moreover, that decline tended to be greater among lower income families. For example, in 1969, 74 percent of the workers who lived in families in the bottom 20 percent income group worked all year. By 1989, that number had fallen to 61 percent. The decline was less among workers in the top 20 percent. In 1969, 90 percent of workers were employed all year, whereas by 1989 that percentage had only fallen seven points to 83 percent. Since the degree of educational attainment also rises with income level, the decline in full-year employment may to some extent represent a decrease in employment opportunities for the least educated.

Change in the structure of the State's families appears also to have had an impact on the degree of income inequality. In 1970, 83 percent of families included a married couple. However, by 1990, that percentage had fallen to 74 percent. This decline is even more dramatic when analyzed by income class. For the top income quintile, the proportion of such families changed only marginally from 93 percent in 1970, to 92 percent in 1990. In contrast, for the bottom 20 percent, the proportion of families which included a married couple decreased from 63 percent in 1970, to 46 percent in 1990. Of course single-head families do not have the option of sending a second adult into the workforce. Moreover, since the vast majority of families headed by a single person are headed by women, who, on average, earn less than men, the trend toward single-head families is bound to be associated with an increase in income inequality.

As discussed above, New York has undergone a dramatic transformation from a manufacturing to a service economy. The implications of this transformation for the State's distribution of income are striking. Average income for each major occupational category is significantly higher within manufacturing than in services. This difference exists because the service industry includes both low-skill/low-wage occupations and high-skill/high-wage occupations. In 1970, almost 450,000 workers without high school diplomas were able to find work in manufacturing. By 1990, that number had fallen to about 200,000. The job opportunities lost from manufacturing were to some extent replaced by new opportunities in the services sector, but almost certainly at lower wages for the less educated. In the service sector, 80.0 percent of all employees in 1970 had at least some college education. That percentage had dropped to 66.7 percent by 1990, indicating that the service sector is absorbing an increasing share of the State's less educated workforce.

An analysis of the distribution of non-labor sources of family income indicates it to be even more unequal than labor earnings. As illustrated in Figure 15, 67 percent of capital gains income earned during the period 1992-94 was claimed by the top 20 percent of State income earners. Even within this top 20 percent of income earners, the bulk of capital gains income accrues to the wealthiest taxpayers. Fully, 56 percent of capital gains income goes to the top 10 percent. Given that the distribution of capital gains income became much less skewed in 1994, due to the large losses claimed by wealthy investors, it can be safely concluded that the strong stock market performance of the last two years has further exacerbated the State's growing income inequality.

Figure 15

U.S. ECONOMIC FORECAST

The U.S. economy is expected to continue to grow in 1997 at the same pace experienced in 1996, as the national expansion matures into its seventh year. However, the continuation of slow but steady growth may help the current expansion to last longer. As discussed earlier, at this late stage of an expansion, it is very rare for inflationary pressures to remain under control, particularly with an unemployment rate as low as five percent. The Federal Reserve Bank's monetary policy stance is expected to contribute to the slow pace by increasing its short term interest rate target. As a result, the main drag on the national economy is expected to come from the consumption side, due to lower demand for interest-sensitive durable goods. Job uncertainty, as well as the accumulation of debt, especially among lower income households, will also exert additional pressures on consumption. On the other hand strong foreign demand for domestic goods is expected to continue. Fixed investment is also expected to continue to grow at a robust pace. Inflation is expected to remain under control keeping long-term rates from rising significantly, and productivity is expected to grow at a healthy rate.

Real Gross Domestic Product

The Committee staff predicts that the national economy, measured by real GDP, will grow by 2.4 percent during 1997, following 2.4 percent growth in 1996. These relatively modest growth rates are associated with the soft landing successfully engineered by the Federal Reserve Board with seven interest rate hikes in 1994 and early 1995. This sustained policy of raising interest rates on the part of the Federal Reserve was intended to slow economic growth in order to head off inflationary pressure. Based on the experience of the last eleven business cycles, the economy tends to peak about one year after short-term rates begin to rise.

The continued absence of a significant degree of inflationary pressure may be related to the fact that the economy seems not to be operating at full capacity. Two good indicators of the degree of slack capacity relate to orders for durable goods. Over the past 24 months, filled orders for durable goods have grown at a brisk 15.0 percent, indicating there is still some slack capacity in the economy. In contrast, filled orders grew only 4.8 percent during the last two years of the 1982-1990 expansion. On the other hand, unfilled orders grew by 15.6 percent during the last two years of the previous expansion compared to 9.6 percent during the most recent 24 months (see Figure 16). This finding indicates there is more room for growth in the economy at the present time than there was in the middle of 1990.

Figure 16

Consumption

Consumption spending is the largest component of GDP, accounting for about 68 percent in 1996. Overall consumer spending is predicted to grow by 2.2 percent in 1997, slightly less than the 2.5 percent growth rate of 1996 (see Table 4). However, durable goods consumption is expected to grow at a more moderate 3.3 percent in 1997, down from a robust 5.4 percent in 1996. The slowdown in durable goods consumption should not be interpreted as lack of consumer confidence in the economy. The Conference Board’s consumer confidence index has been consistently strong during 1996. Rather, the anticipated slowdown in durable goods consumption is a response to rising interest rates among consumers who are already overburdened with debt, leading to a decline in large, interest-rate sensitive purchases.

Investment

The Committee staff is estimating investment growth of 4.7 percent for 1996, followed by stronger growth of 5.7 percent in 1997. As Table 4 shows, real investment during the current expansion has been stronger than the average since 1976. Business investment is expected to be the main driving force, growing by a robust 5.9 percent in 1997.

Net Exports

The Committee staff predicts export growth of 6.5 percent for 1996, followed by growth of 6.9 percent during 1997 (see Table 4). Although export growth has been strong, domestic demand for foreign goods has been growing even faster. This finding reflects the superior condition of the U.S. economy relative to the nation’s major trading partners, among whom growth has been sluggish, particularly when compared to the 1980's (see Figure 17). Imports for 1996 are estimated to grow by 6.4 percent, followed by 6.7 percent growth in 1997, implying a slight improvement in the U.S. trade balance.

Figure 17

Government Spending

The Committee staff estimates real government spending for 1996 to grow by 0.9 percent, with the decline in federal government spending partially offsetting an increase in spending by state and local government spending. For 1997, we anticipate 0.3 percent growth in federal government spending, while state and local government spending are expected to grow by 1.3 percent, resulting in growth of 1.0 percent for the government sector overall. The two major private forecasting firms, DRI and WEFA, are predicting overall government spending to grow by 0.8 percent in 1997, following 0.9 percent growth in 1996. The Congressional Budget Office (CBO) also anticipates modest growth in discretionary and nondiscretionary spending in the federal fiscal year 1997.

Employment

National employment is expected to grow by 1.8 percent in 1997, following 2.0 percent growth for 1996. The services sector is expected to lead with the most job gains in 1997 and grow at a 3.6 percent rate, following 3.8 percent growth rate for 1996 (see Table 5). Growth in retail trade employment is expected to remain stable at 1.9 percent in 1997, as in 1996. The transportation, communication, and utility industry is forecasted to experience growth of 1.6 percent in 1997, down from 2.5 percent in 1996. The construction industry is expected to experience a growth rate of 3.0 percent in 1997, down from a 4.7 percent growth in 1996, due to an anticipated decline in the demand for housing. Manufacturing employment is predicted to decline by 0.5 percent for 1997, following a 1.0 percent decline in 1996. Government sector employment is expected to grow by a mere 0.6 percent in 1997, following a 0.8 percent increase in 1996. Overall, these employment trends reflect the shift towards those sectors with predominantly lower-paying jobs.

Personal Income and Wages

The Committee staff anticipates personal income growth of 5.5 percent for 1996, with its largest component, wages and salaries, expected to grow by 5.8 percent. This performance will be followed by growth of 5.5 percent and 5.6 percent, respectively, for 1997. During the current recovery, personal income and wages and salaries have grown only modestly by historical standards. Wages and salaries have grown at an average annual rate of 4.9 percent during the current expansion, far below the 7.6 percent average for the period since 1976 (see Table 4). Moreover, the strongest job gains are expected to occur in low average wage sectors. With only the retail trade sector expected to experience growth as strong in 1997 as in 1996, and with the services sector expected to outperform all other sectors in 1997, personal income growth should continue to lag the average of past expansionary periods. The recent increase in the federal minimum wage to $5.15 per hour will become fully effective as of October 1997. However, the extent of its impact on wage growth is thought to be modest.

Inflation

The Ways and Means Committee staff forecast for inflation, as measured by growth in the U.S. Consumer Price Index, is 2.9 percent for 1996 and 3.0 percent for 1997. Inflationary pressures have continued to remain in check during 1996. Indeed, many economists believe that the CPI may be overstating the actual rate of price growth by about one percentage point. However, anticipated wage pressure associated with a relatively low unemployment rate point to a slight increase in prices in 1997. On the other hand, these pressures might be mitigated by the historically slow rise in employment costs associated with intensified international competition.

Interest Rates

The Committee staff's 1996 estimate for the average short-term interest rate, as measured by the yield on three-month treasury bills, is 5.0 percent. The average long-term rate, as measured by the yield on the ten-year government bonds, is estimated at 6.4 percent. For 1997, the short-term rate is predicted to increase to 5.1 percent and the long-term rate to 6.5 percent. These interest rate increases are expected to result in a decline in demand in interest rate sensitive sectors, such as housing and durable goods.

Corporate Profits and the Stock Market

Corporate profits are estimated to grow by 7.4 percent in 1996, followed by 6.0 percent growth in 1997. Corporate profits, which have been strong since the beginning of the national recovery, will continue to grow vigorously due to an expanding economy, the rewards of technological investments, as well as the absence of significant wage pressure. Strong profit growth should also result as firms reap the benefits of corporate restructuring, driven by the need

UNITED STATES NON-AGRICULTURAL EMPLOYMENT BY SECTOR

to lower costs in the face of increased global competition. Finance industry corporate profits are predicted to grow by 13.3 percent and 6.4 percent for 1996 and 1997, respectively. The continuation of the current wave of mergers and acquisitions is expected to sustain high profit levels in this industry. Non-financial corporate profits are expected to grow by 6.2 percent and 5.1 percent for the same periods. The following table shows the corporate profits actual and forecast percentage growth for DRI and the WEFA group as well as the Ways and Means Committee staff estimates.

Stock prices, as measured by Standard and Poor's Index of 500 common stock prices, are estimated to grow 23.9 percent in 1996, followed by slower but still robust growth of 17.9 percent for 1997. Stock market growth thus far in 1997 has been so strong, that even if the market were to remain relatively flat for the remainder of the year, the Committee staff projection would be attainable. Of course, the stock market is much more volatile than the level of corporate profits which drives it. Although profits have been on a path of steady growth, the performance of the stock market can still be expected to be subject to speculative activity, as well as the news of the day, and, therefore, quite volatile.

Comparison with Other Forecasting Groups

The Ways and Means Committee staff forecast for overall economic growth is consistent with the Blue Chip Economic Consensus forecast for real U.S. GDP growth of 2.5 percent for 1997. The Blue Chip Economic Consensus is a compendium of the forecasts of 50 private sector groups. As reported in the February 1997 issue of Blue Chip Economic Indicator, 26 of the 50 forecasters are above the 1997 average while 19 are below. As of February 1997, DRI/McGraw-Hill was predicting real GDP growth of 2.5 percent for 1996 and 2.9 percent for 1997. As of February 1997, the WEFA Group was predicting real GDP to grow by 2.5 percent in 1996 followed by 2.4 percent in 1997. As of February 1997, the Federal Office of Management and Budget was predicting 2.5 percent growth for real GDP in 1996 and 2.3 percent in 1997. The New York State Division of the Budget predicts growth of 2.3 percent for 1996 and 2.4 percent for 1997 (see Table 7).

Risks to the National Forecast

The Ways and Means Committee staff forecast presumes continuing conditions of low inflation and only slighter higher interest rates. An unanticipated increase in raw material prices due to, for example, a shock to the highly volatile oil market, could increase inflationary pressures. Such a shock would alter the Federal Reserve’s monetary policy stance, resulting in steeper increases in interest rates and slower growth. However, it is unlikely that an increase in interest rates will have a significant impact until the following year. A strong stock market correction could have negative a impact on consumption producing slower than expected growth in GDP.

On the other hand, corporate profits may be higher than anticipated, as firms reap the benefits of corporate restructuring which, in turn, could produce both larger corporate bonuses, as well as higher stock market growth than expected. Higher stock market growth could, in turn, produce higher profits on Wall Street resulting in larger finance sector bonuses and, therefore, greater income growth. The reinvigoration of the economies of the nation’s primary trading partners, particularly the European Union, Canada, and Japan, could result in stronger than expected export growth, and, hence, stronger GDP growth.

U.S. FORECAST COMPARISONS

Percentage Growth Rates

NEW YORK STATE ECONOMIC FORECAST

As indicated above, the State economy is on a growth path which is quite distinct from that of the nation with employment growing at less than half the national rate. However, misfortune on Main Street has not precluded good fortune for Wall Street. Corporate restructuring in an environment of interest rate stability has spelled good times for the financial markets. Because of the importance of the financial sector to the State economy, New York has been able to experience a high rate of income growth simultaneously with a slow rate of job growth.

Short-term prospects for economic growth in New York are tied to the strength of the national economy, as well as continuing success on Wall Street. Although the national economy is expected to slow during 1997, its current level of momentum, in conjunction with only modest increases in interest rates and relatively low inflation, is expected to provide a favorable environment for State personal income growth, as well as growth in its largest component, wages and salaries. Employment growth, however, will remain well below the national average.

Employment

The New York economy is projected by the Committee staff to generate 63,400 jobs or growth of 0.8 percent in 1997, following growth of 0.6 percent in 1996 for 46,000 jobs (see Table 8). The Committee staff employment estimates are based on the Current Employment Statistics (CES) data series.

By far, the biggest employment gains have occurred in the services sector, a trend which is expected to continue. Services sector employment is predicted to grow by 2.9 percent in 1997, following 2.9 percent growth in 1996. The Committee staff is also forecasting net job gains in the trade sector for 1997 with expected growth of 0.4 percent, following 0.4 percent growth in 1996. The construction sector is predicted to grow by 2.0 percent in 1997, following an estimated increase of 1.4 percent for 1996. The utilities sector is expected to grow by 0.5 percent in 1997, following a 0.2 percent decline in 1996.

The long-term decline in the State's manufacturing sector is expected to continue. The Committee staff predicts a 1.1 percent drop in manufacturing employment for 1997, following a decline of 2.9 percent for 1996. Since 1976, manufacturing employment has been falling at an average rate of 2.0 percent per year. This trend deteriorated further since the last recession when the average annual rate of decline rose to 3.5 percent. Total manufacturing employment now stands at about 920,000 workers, compared to over 1.6 million in the mid-1970's.

	Total		Total		Private		Private
State	Gain (000's)	Rank	Percent Growth	Rank	Gain (000's)	Rank	Percent Growth	Rank
ALABAMA	16	34	0.9	39	17	33	1.2	39
ALASKA	2	47	0.7	44	2	47	1.0	42
ARIZONA	76	7	4.3	4	62	10	4.1	6
ARKANSAS	19	32	1.7	25	17	34	1.9	30
CALIFORNIA	312	1	2.5	15	302	1	2.9	15
COLORADO	57	15	3.1	8	54	11	3.5	8
CONNECTICUT	15	35	1.0	38	13	35	1.0	43
DELAWARE	9	41	2.4	17	9	40	2.8	17
DISTRICT OF COLUMBIA	(13)	51	(2.0)	51	(1)	49	(0.2)	49
FLORIDA	178	3	3.0	10	154	3	3.0	13
GEORGIA	127	4	3.7	6	116	4	4.1	7
HAWAII	(6)	50	(1.1)	50	(4)	51	(1.0)	51
IDAHO	21	31	4.5	3	20	32	5.3	4
ILLINOIS	99	5	1.8	23	92	5	1.9	28
INDIANA	19	33	0.7	45	21	31	0.9	45
IOWA	24	30	1.8	24	24	28	2.2	21
KANSAS	31	25	2.5	13	29	25	3.0	14
KENTUCKY	27	27	1.7	30	25	27	1.9	29
LOUISIANA	29	26	1.6	33	27	26	1.9	27
MAINE	2	46	0.4	48	3	46	0.7	46
MARYLAND	10	37	0.5	47	10	37	0.6	47
MASSACHUSETTS	47	19	1.6	34	45	17	1.7	32
MICHIGAN	73	8	1.7	26	74	7	2.0	24
MINNESOTA	51	16	2.1	19	45	18	2.3	19
MISSISSIPPI	2	49	0.2	49	(3)	50	(0.4)	50
MISSOURI	42	20	1.7	29	33	22	1.5	34
MONTANA	7	42	2.1	20	7	43	2.7	18
NEBRASKA	13	36	1.6	31	12	36	1.8	31
NEVADA	58	14	7.3	1	53	13	7.6	1
NEW HAMPSHIRE	10	39	1.8	22	9	39	2.0	25
NEW JERSEY	33	23	0.9	40	34	21	1.1	40
NEW MEXICO	26	29	3.7	7	24	30	4.5	5
NEW YORK	60	10	0.8	43	82	6	1.3	38
NORTH CAROLINA	59	12	1.7	27	40	19	1.4	36
NORTH DAKOTA	7	43	2.4	18	8	41	3.3	11
OHIO	77	6	1.5	35	72	8	1.6	33
OKLAHOMA	36	21	2.7	11	35	20	3.4	10
OREGON	60	11	4.2	5	63	9	5.4	3
PENNSYLVANIA	26	28	0.5	46	24	29	0.5	48
RHODE ISLAND	4	45	0.8	41	4	45	1.1	41
SOUTH CAROLINA	31	24	1.9	21	30	24	2.2	20
SOUTH DAKOTA	9	40	2.7	12	10	38	3.5	9
TENNESSEE	63	9	2.5	14	46	16	2.1	22
TEXAS	242	2	3.0	9	213	2	3.2	12
UTAH	50	17	5.5	2	47	15	6.2	2
VERMONT	5	44	1.7	28	5	44	2.0	26
VIRGINIA	50	18	1.6	32	51	14	2.0	23
WASHINGTON	58	13	2.5	16	53	12	2.8	16
WEST VIRGINIA	10	38	1.4	36	7	42	1.3	37
WISCONSIN	34	22	1.3	37	31	23	1.4	35
WYOMING	2	48	0.8	42	2	48	1.0	44

Source: U.S. Department of Labor. New York State employment number is expected to be revised down, based on ES-202 data.

The forecast for government employment calls for a decline of 0.9 percent in 1997 following a 0.8 percent decline in 1996. The number of federal government employees in New York State has been falling since 1990 due to the downsizing of the federal government, particularly the defense department. State and local governments have also reduced their employment levels, a trend which has been accelerated by the current administration. Since January 1995, the Executive has reduced the State government workforce by over six percent.

The State continues to lag the nation in the creation of jobs. By any measure, overall job growth or private sector job growth, New York remains among the bottom thirteen states. Among all states and the District of Columbia, New York ranked forty-third in overall employment growth in 1996, (see Table 9). The third most populous state, New York ranked tenth in absolute numbers of jobs created. New York created 60,000 new jobs in 1996, compared to 53,000 jobs created in 1995. In contrast, the nation’s two largest states, California and Texas, ranked first and second, respectively. Even with respect to private sector job growth, the State is well below the national average. The State created a total of 82,000 private sector jobs in 1996, matching the number of private sector jobs created in 1995, ranking New York sixth for 1996. However, this increase ranks the State at thirty-eighth in this category.

Moreover, it appears that State job growth may have peaked in 1994. Figure 18 indicates that the substantial momentum built over the course of 1994 subsided during 1995. Although the State experienced some improvement in 1996 over 1995, the rate of job growth for 1997 is still not expected to reach what was achieved in 1994.

Figure 18

For the first eight months of 1996, growth in the employment of New York City residents over the same period in 1995 was the fourth lowest among the nation’s largest 15 cities, at 0.6 percent. Detroit experienced the highest growth rate at 3.4 percent, while the worst performer was Washington, D.C. which sustained a decline of 4.6 percent. The next lowest rate of job gain was observed in Los Angeles at 0.5 percent. The City’s average unemployment rate for the third quarter was the highest among the nation’s largest fifteen cities at 8.5 percent. Among the five boroughs, rates of unemployment varied from 7.4 in Manhattan to as high as 10.2 percent in the Bronx. Los Angeles had the second lowest rate at 8.3 percent, whereas the lowest rate of unemployment was found in Houston at 3.7 percent. The average third quarter unemployment rate for the State outside of New York City was 4.7 percent. The City’s low rate of job creation will factor into the prospects for success of whatever welfare reform package is ultimately enacted in New York.

Since December 1995, New York City has gained 25,000 jobs. Job creation was lead by the services. Within that sector, growth was led by business services and the entertainment sectors. However, health services and social services, which until recently had been the sector’s leading growth industries, show evidence of losing jobs. In the third quarter, the restructuring of the health care industry cost the City 500 jobs related to the transition to managed care, the competitive pricing of medical services, as well as government policy to contain the costs of publicly financed health care. The private family support services industry also lost jobs during the third quarter. These losses were related to policy shifts and cuts in government funding at both the City and State levels. According to the City Comptroller, the loss of health care and family support service jobs will reduce the number of entry-level opportunities for workers newly entering the labor force.

Regional Job Growth

In both 1995 and 1996, the State’s three fastest growing industries in terms of private sector job growth were services, construction, and trade. Industries such as amusement and recreation, eating and drinking establishments, and business services are some of the fastest growing industries in almost every region of the State. However, a look at job growth by region reminds us of the extreme diversity of the New York economy (see Table 10). For example, whereas manufacturing employment continues to fall on a statewide basis, small regional niches continue to thrive. Overall, regional economic activity reflects movement toward an economy which caters directly to the retail and service needs of both consumers and businesses. The State’s most significant job losses represent the continuing decline of manufacturing, along with restructuring in the banking (FIRE) and communications industries.

Long Island’s overall rate of job growth for 1995 was the highest in the State at 1.5 percent. Indeed during 1995, the region’s ten fastest growing industries of significant size all grew at rates of four percent or over. These ten industries, comprising about one quarter of the region’s economy, are dominated by retail trade and services. However, one exception to this retail and service dominance was the region’s fastest growing industry, chemicals and allied products, which grew at a rate of 7.9 percent in 1995. The region’s largest losses were in the manufacturing and the FIRE sector. For the first two quarters of 1996, Long Island’s rate of job growth fell to 0.2 percent.

The Finger Lakes region experienced the State’s second highest rate of job growth at 1.1 percent in 1995. During 1995, ten of the region’s industries of significant size grew at rates of 5.0 percent or higher. The region shows particular strength in real estate services, trucking, special construction trades, as well as in five manufacturing industries including fabricated metals, industrial machinery, transportation equipment, food processing, and electrical equipment. The Finger Lakes region’s most significant losses occurred in instruments and related products manufacturing, a major industry in the Rochester area, as well as from miscellaneous merchandising and banking. For the first two quarters of 1996, the region was growing by 0.6 percent over the same two quarters of 1995.

The Mohawk Region produced the third fastest rate of job growth at 0.9 percent in 1995. Eleven of the region’s industries grew at rates of 3.0 percent or better. Of these, seven were retail trade and service industries, with growth of well over ten percent in miscellaneous merchandising, amusement and recreation services, and business services. The region also showed specifically regional strength in three manufacturing industries: industrial machinery, fabricated metals, and textiles. The Mohawk region’s largest losses were from manufacturing, communications, and the FIRE sector. During the first two quarters of 1996, the region experienced a decline of 2.7 percent.

The Hudson Valley region experienced job growth in 1995 of 0.8 percent. During that year its ten fastest growing industries grew at rates of 2.8 percent or better. Six of these include service and retail trade industries reflective of statewide growth trends. Particular regional strength is exhibited in engineering and management services, which grew 5.7 percent, special construction trades, local transit, and electrical equipment manufacturing. The Hudson Valley’s largest job losses were from the chemicals and allied products manufacturing, communications, printing and publishing, and communications. The first two quarters of 1996 brought overall growth of 0.5 percent.

The Western New York region experienced stronger than average growth of 0.7 percent in 1995. Eleven of the region’s significant industries grew at rates above 3.0 percent during 1995. In addition to service and trade industries, the region showed particular strength in trucking, special construction trades, as well as four manufacturing industries, including industrial machinery — the region’s fastest growing industry at 7.7 percent, transportation equipment, electrical equipment, and rubber. Western New York lost jobs from the apparel, retail trade and utilities industries, as well as from FIRE and manufacturing industries. The first two quarters of 1996 witnessed slower growth of 0.1 percent.

Although the Central New York region experienced growth of only 0.2 percent overall in 1995, ten industries grew at rates of 3.7 percent or better. In addition to service and trade industries, particular regional strength lies in transportation equipment manufacturing which grew at 7.0 percent, as well as the trucking industry at 6.6 percent. Central New York experienced its most significant losses from a number of manufacturing and FIRE sector industries, as well as from utilities and apparel retail trade. During the first two quarters of 1996, the region experienced an overall decline in jobs of 0.1 percent.

The North Country experienced no net growth in employment in 1995. Nevertheless, ten industries grew at rates above 2.0 percent. Six of the top ten industries, including business services -- the fastest growing -- were retail trade or service industries. Moreover, the region experienced solid growth in chemical processing, real estate services, and special construction trades. The utility, retail apparel, hotel services, and eating and drinking establishments suffered the most losses in the North Country. During the first two quarters of 1996, it witnessed a 0.7 percent decline.

Overall, the Capital Region lost jobs in 1995 at a rate of 0.1 percent. Those industries which did experience employment growth were dominated by those service, retail, and wholesale trade which typify statewide trends. The region exhibited particular strength in the communications industry which grew at 3.7 percent in 1995. The Capital Region’s major private sector job losses occurred in manufacturing, the FIRE sector, and construction. The region’s loss of jobs continued into the first two quarters of 1996 at a rate of 1.7 percent.

Although New York City lost jobs overall in 1995, five industries of significant size experienced growth of over 3.0 percent. These industries include the motion picture industry, amusement and recreation, hotels, miscellaneous retail, and eating and drinking. Together, these industries comprise over ten percent of the regional economy and reflect both the City’s unique characteristics as well as statewide trends. New York City’s greatest losses occurred in the manufacturing of apparel and other textile products, as well as in the FIRE sector and in legal services. New York City led the State in job growth through the first half of 1996 with job growth of 1.0 percent.

The Southern Tier also experienced a net loss of jobs in 1995, losing 0.3 percent of its regional employment. However, the region experienced growth of over 2.0 percent in seven industries of significant size during 1995. These included the trucking industry — the fastest growing industry at 5.7 percent, industrial machinery manufacturing, electrical equipment manufacturing, and engineering and management services. The Southern Tier’s major losses occurred in manufacturing, communications, and construction. During the first two quarters of 1996 the region experienced a 0.7 percent loss.

Wages, Personal Income, and Inflation

Because of the unique composition of the New York economy, the State can support strong income growth, even in the absence of strong growth in employment. Over the past twenty years, personal income has grown at a substantially higher average annual rate than employment. Since 1976, employment growth has averaged 0.7 percent per year while personal income grew at an average of 7.8 percent. Even after adjusting for inflation, real personal income grew at 2.5 percent per year, over three times the rate of job growth.

Personal income is expected to grow 5.7 percent in 1996, followed by 5.7 percent growth in 1997 (see Table 11). Its largest component, wages and salaries, is estimated to grow 6.9 percent for 1996 and 5.9 percent for 1997. Much of the strong income growth expected for 1996 is due to robust finance industry bonus earnings. According to Committee staff estimates,

the economy will generate almost $19.7 billion in bonuses during the 1997-98 State fiscal year (see Figure 7), much of which was earned in the securities industry alone. As discussed above, the finance sector experienced extraordinary profit growth from a large volume of corporate underwriting activity, as well as a large volume of securities trading (see Figure 8). Although 1997 is expected to be a strong year for financial market profits as well, it will be difficult to sustain the extraordinary growth performance of 1996. Hence, a more modest growth rate is forecast for the wages and salaries component of personal income for 1997 than is estimated for 1996.

Comparison with Other Forecasting Groups

As of January 1997, the WEFA Group was predicting New York State personal income growth of 4.7 percent in 1996, followed by 3.8 percent for 1997. They predict wage and salary growth of 5.8 percent in 1996 and 3.9 percent in 1997. For nonagricultural employment, WEFA is predicting growth of 0.6 percent for 1996 and slightly weaker growth of 0.5 percent for 1997.

According to DRI/McGraw-Hill’s most recent forecast, State personal income is expected to grow 4.7 percent in 1996, followed by 4.1 percent growth in 1997. DRI is forecasting wage and salary growth of 5.7 percent in 1996, and 4.0 percent in 1997. DRI expects non-farm employment to grow 0.8 percent in 1996 and 0.6 percent in 1997. As of January 1997, the Executive was forecasting personal income growth of 5.2 percent for 1996 followed by 4.5 percent in 1997. The Executive predicts wages and salaries to grow by 6.5 percent in 1996 followed by 4.3 in 1997. It should be noted that the Executive's estimates are based on data corrected for income shifting across calendar years and are, therefore, not comparable to any other published source. The Executive predicts employment will grow by 0.7 percent in 1996, followed by 0.8 percent growth in 1997 (see Table 12).

Risks to the New York Forecast

The uncertainty that surrounds the national economy is expected to be the primary source of risk to the State forecast. If the national economy slows down more than we have predicted for 1997, then our forecast for the State will have been overly optimistic. Should unanticipated inflationary pressure emerge, the Federal Reserve is likely to adopt a more restrictive monetary policy resulting in higher interest rates. This policy change would restrain State income growth due to the pivotal role of the FIRE sector to the State economy. Again, it is unlikely that an increase in interest rates will have a significant impact until the following year. A stronger than expected stock market correction could have a similar impact. On the other hand, stronger corporate profits than expected will result in higher bonus income as well as stronger stock market growth than predicted, producing in turn, higher profits on Wall Street, and, again, higher bonus income. The possibility of a stronger world economy also creates upside risk for our forecast.