LIA Monthly Economic Report

Transcription

1 This publication is made possible through the support of: LIA Monthly Economic Report A Research Report for Directors and Members of the Long Island Association, Inc. June, 2017 Prepared by Dr. John A. Rizzo, LIA Chief Economist Nationally, the labor market remained quite strong, with some 211,000 jobs added in April and very low readings for jobless claims. Consumers remained optimistic about current and future economic conditions and spending was solid. The manufacturing sector performed well overall. But in a reversal of last month s pattern, the real estate sector was weak, with new and existing home sales posting declines. First quarter GDP growth was revised upward to 1.2 percent, helped by strength in consumer spending. On Long island, the labor market and business sectors also performed well. But, as with national trends, there appeared to be a pullback in the real estate market.

2 The National Economy Some 211,000 jobs were added in April, well in excess of expectations. The unemployment rate was at a lowerthan-expected 4.4 percent. And there were just 234,000 jobless claims for the week of May 20, which is quite low. But year-over-year wage gains were fairly modest, rising by 2.5 percent. Consumer sentiment was down slightly in April, but remained at a high level that is consistent with optimism about economic conditions overall. And the expectations component of consumer sentiment rose. Consumer spending and retail sales both grew at a respectable monthly rate of 0.4 percent in April. Manufacturing was strong as well the Industrial Production Index rose by a full percentage point in April, more than twice the expected growth of 0.4 percent. But durable goods orders fell by 0.7 percent in April. Some 211,000 jobs were added in April, well in excess of expectations. The unemployment rate was at a lower-thanexpected 4.4 percent. And there were just 234,000 jobless claims for the week of May 20, which is quite low. In a reversal of recent trends, the housing market has pulled back. Existing home sales fell by 2.3 percent in April, and new home sales dropped by even more 11.4 percent. Supply remains tight, which restricts consumer choice and demand. There was about 4.2 months worth of available inventory in April. Although this represents an improvement over February and March, a 6-month supply is considered a balance between supply and demand. The Long Island Economy Labor Market The labor market remained strong. Private sector jobs increased by 17,500 between March and April, well in excess of the usual gain of 12,700 jobs during this time period. Leisure and hospitality saw monthly gains of 6,400 jobs, compared to the usual growth of 3,900. This is a good sign for the upcoming tourist season. The service sector once again led private sector jobs growth. Year-overyear gains in April were strongest for: The labor market remained strong. Private sector jobs increased by 17,500 between March and April, well in excess of the usual gain of 12,700 jobs during this time period. Leisure and hospitality saw monthly gains of 6,400 jobs, compared to the usual growth of 3,900. This is a good sign for the upcoming tourist season. Educational and health services (+8,100) Trade, transportation and utilities (+3,200) Business and professional services (+2,500) The government sector also grew significantly, adding jobs over-the-year. April s unemployment rate stood at 3.9 percent, the same as in 2016, and the lowest rate since A stable unemployment rate below 4 percent is consistent with full employment. Low unemployment is translating into

3 stronger wage gains. Average hourly earnings for April in New York State rose by 4.2 percent over-the-year. Wage gains were largest in the following industries: Information (+8.6%) Financial activities (+6.5%) Business and professional services (+5.7%) In contrast, wage gains were just 0.9 percent in goods-producing industries and fell by 1.2 percent in construction. Business Conditions With small business comprising nearly 90 percent of business establishments on Long Island, the outlook for small business is a key indicator for Long Island s economy. Although the National Federation of Independent Business s (NFIB) Small Business Optimism Index fell slightly in April, it remained at an historically high level for the sixth straight month. This is the longest streak of continued optimism since Manufacturing activity leveled off in May, but also remained at a high level consistent with improving economic conditions, according to the Empire State Manufacturing Index. Components of that index indicate that orders and hiring remain strong and pricing pressures are increasing as well. Consumer Sector Consumer spending as indicated by sales tax collections has yet to follow the sharp rise in consumer confidence. Year-over-year sales tax collections grew by just 0.44 percent in Nassau County and fell by 1.97 percent in Suffolk. Given the increase in Internet sales over time, these year-over-year sales tax revenue comparisons may understate actual consumer spending, because proportionately fewer purchases incur local sales taxes in later years. Adjusting for this change, estimated year-over-year spending may have risen by even more 1.39 percent in Nassau County, and may have fallen by just

4 over one percent in Suffolk. Internet sales trends, and the methodology used to adjust for increasing Internet sales over time, are discussed in the Focus section of the February, 2016 newsletter. The Real Estate Market Private Homes Home sales prices were again strong in April, rising by 8.0 percent year-overyear in Nassau County, from $440,000 to $475,000. Prices rose by even more in Suffolk, growing by 9.0 percent, from $312,000 to $340,000. But unit sales were considerably less favorable, falling by 10.1 percent in Nassau County, from 838 to 753 units. Sales were flat in Suffolk, growing from 1,039 to 1,045 units sold, an increase of just 0.6 percent. Source: MLSLI.com Source: MLSLI.com

5 Commercial Real Estate: Flex/R&D* The average vacancy rate for Flex/R&D space in April was 9.7 percent. This is among the 20 lowest vacancy rates for metropolitan areas nationally. There is substantial variation in vacancy rates for Flex/R&D space, however. The median vacancy rate was 0.0 percent, meaning that half of these establishments have no vacancies. Vacancy rates ranged from 0.0 to 86.4 percent. The median asking rent was $9.77 per square foot, with a range of $5.19 to $ Vacancy rates also vary considerably by the age of the establishment. As the table below indicates, average vacancy rates are lowest for Flex/R&D space built between But vacancy rates are very high 41.3 percent for space built after However, the much higher vacancy rates for new Flex/R&D space do not appear to reflect higher asking rents. As the table also shows, asking rents are lowest for new Flex/R&D space. This suggests that the demand for more Flex R&D space is not strong. Vacancy Rates and Asking Rents for Flex/R&D Space, by Age YEAR VACANCY RATE ASKING RENT Before % $ % $ % $ % $ % $10.23 After % $9.00 As of April, Source: Reis Reports * Flex/R&D: An industrial building with a minimum total office percentage of 25% and consisting of either Warehouse/ Distribution and/or specialty industrial space; such as Research & Development and High-Tech space. Long Island s Economic Outlook The labor market remains strong and wages are gaining more traction. Strong hiring in leisure and hospitality bode well for the fast-approaching summer tourist season. These factors, coupled with strong consumer confidence, point to greater spending. Yet, actual consumer spending appears to have been tepid. The complex relationship between consumer confidence and spending is discussed in more detail in the Focus section below. The business sector continues to perform well. But home sales declined sharply in Nassau County and were sluggish in Suffolk. So, while the overall economic picture is more positive than not, a few question marks remain. And with consumption accounting for more than twothirds of GDP, an uptick in spending will be important for stronger growth going forward.

6 FOCUS ON Consumer Optimism: Does it Predict Spending? Consumer confidence is an often-cited indicator for spending. When a survey reports that confidence is high, strong spending is expected to ensue. But this doesn t always happen. Indeed, the relationship between consumer confidence and spending is a somewhat tenuous one. As the chart below indicates, this relationship is indeed imperfect. Note in particular the rise in consumer confidence from accompanied by a general decline in retail sales over the same time period. Empirical research (Dees and Brinca 2011*) does find a statistically significant relationship between consumer confidence and spending: greater confidence is associated with more spending. But not by much. Consumer confidence explains less than 10 percent of the variation in actual spending. Moreover, it does not appear to be an important independent predictor of spending. In other words, if two individuals have the same incomes, jobs, and are identical in every other respect, the one with greater confidence will not spend more. Consumer confidence only appears to be associated with more consumption when it is accompanied by other changes that have a more direct bearing on spending like higher incomes and better labor market conditions. Other factors such as prices, interest rates, wealth, and demographic characteristics also affect changes in spending. Because consumer confidence correlates with incomes, jobs, and some of these other variables, it is a proxy measure for them, albeit an imperfect one. And that appears to be the source of its ability to predict spending. On Long Island, consumer confidence is currently running very high. According to a recent survey by the Siena Research Institute, consumer confidence about current and future economic conditions has risen sharply from a year ago. And it is at a 16-year high for the state overall. This is clearly good news, as it indicates that economic conditions are improving and that spending may increase as well. But it is far from a guarantee, and will not translate into greater spending unless factors like incomes and jobs are improving. With an unemployment rate of 3.9 percent, Long Island s labor market is strong in fact, at levels consistent with full employment. And this should exert upward pressure on earnings and incomes. So, we have a situation where consumer confidence is high and jobs and earnings prospects are favorable. And that is why, despite sluggish current spending, one may anticipate greater spending going forward.

7 It is also interesting to note that the two main indices of consumer optimism the University of Michigan s Consumer Sentiment Index and the Conference Board s Consumer Confidence Index-- correlate imperfectly. As the chart below illustrates, the Consumer Confidence Index appears to be somewhat more volatile having generally higher highs and lower lows, compared to the Consumer Sentiment Index. The study by Dees and Brinca (2011) discussed above reported the University of Michigan measure. The authors note that these two optimism indices have somewhat different foci--the Michigan survey focusses on consumer expenditures and changes in financial situation, while the Conference Board index emphasizes job availability and business conditions. Hence, they can give somewhat different readings depending upon the relative performance of these factors. * The full report may be accessed at: file:///c:/users/owner/desktop/comfidence%20and%20consumption.pdf