NY, NJ and the Economic Storm: Why the Greater Metropolitan Area Will Weather it Well
October 13, 2008 by Gil MedinaFrench poet Paul Valery once wrote, “The problem with our present times is that our future isn’t what it used to be.” Valery understood that our perception of present conditions is forged by how we perceive our future.
Today, our perception of our future is made uncertain by turmoil in the financial markets, an economic slowdown and rising unemployment. And because we live in a region where the financial services sector is so concentrated, it is natural for us to be less optimistic about our economic prospects than we were two years ago.
Under these circumstances it has become commonplace for analysts to question whether the Finance Insurance and Real Estate (FIRE) sectors in the New York Metropolitan Area will emerge in tact after the current financial storm. Because of a number of important demographic, historical and economic reasons, we believe that the New York Metro economy and FIRE sector will prove to be more resilient than they may appear to be from today’s vantage point.
While we all have been intently focused on the turmoil in the financial markets, of greater concern are the underpinnings of the economy. Job creation is considered to be a major indicator of economic health. We need to add about 100,000 new jobs a month to keep pace with population growth. However, the US economy has lost an average of 84,000 jobs every month since December 2007.
For the 12-month period ending August 2008, private sector employment in New York City rose by 31,000, or 1.0 percent, to 3,196,100 total jobs. The manufacturing (-6,700) and financial activities (-5,300) sectors lost the most jobs over the year. Although the crises at Lehman Brothers and AIG appear to be working out so as to avoid immediate large-scale layoffs, the continued financial sector turmoil guarantees that job losses on Wall Street will climb rapidly over the next few months.
For the 12-month period ending August 2008, New Jersey private sector employment declined by 12,100 private sector jobs, to 3,455,900 total private sector jobs. The state saw its largest declines in construction (-4,800), manufacturing (-10,500) and financial services (-9,500).
What is striking about these numbers is that New York City and New Jersey employ about the same number of people (New Jersey employs about 300,000 more). An important point that we tend to overlook is the extent to which New Jersey’s and New York City’s economies – and commercial real estate markets – are intertwined.
Through the third quarter of 2008, the commercial and industrial real estate markets have appeared to show signs of weakening but not of breaking. In New York City, 2008 leasing activity reached 15.7 million square feet at the end of September, as compared to 18.3 million square feet at that time last year. The overall vacancy rate has risen during the past 12 months, to 7.4 percent from 5.7 percent. Still, the number of large deals (100,000+ square feet) through the first three quarters of 2008 was up compared to last year, from 17 to 28, and Class A rents continue to climb – up to $92.57 per square foot in Midtown.
In New Jersey, office leasing in the state’s northern and central counties totaled 6.8 million square feet at the end of the third quarter, as compared to 7.6 million square feet at that time last year. The overall vacancy rate was up, from 16.4 percent to 17.8 percent. In Northern & Central New Jersey combined, the number of large deals (100,000+ square feet) through the first three quarters of 2008 was down compared to last year, from 27 to 14. Class A rents have held steady, registering at $30.02 per square foot at the end of September 2007 and at $30.09 per square foot today.
AGGLOMERATION ECONOMIES AND URBANIZATION
For 200 years, New York City has been the largest city in the U.S. and continues to outperform most cities in the world. New York is one of the few major cities in the United States with a larger population today than it had fifty years ago. And its economy remains robust.
In absolute terms, NYC’s $1.13 trillion is second only to Tokyo’s (GDP of $1.19 trillion) among all cities. There are only 14 countries in the world with bigger economies than New York City’s. And though the city has a reputation for a high cost of living, the average New Yorker can buy more than counterparts in London, Paris, Tokyo and Hong Kong.
The basic concept of “agglomeration economies” is that production is facilitated when there is a clustering of economic activity. The existence of agglomeration economies is central to the explanation of how cities increase in size and population. This concentration of economic activity in urban centers is the reason for their existence.
They can persist and grow throughout time, only if their advantages outweigh the disadvantages.
The tendency of a critical mass of people to attract more people to a region is the central idea of urban economics, and nowhere is that idea more obvious than in New York. Its initial advantage as a port attracted manufacturing and services to cater to the mercantile firms and to take advantage of low shipping costs. Scale matters because it allows producers to save on the costs of supplying goods and services.
Stock markets tend to be few in each country, often unique, and located in the largest cities. Typically, much of the economic activity relating to the stock market takes place in large cities. These facts suggest that agglomeration economies are as important in the financial markets as they are in manufacturing. In other words, productivity is enhanced for stock market workers and firms located in a large city.
The attraction of finance and business services to New York reflects the city’s advantages in facilitating interaction and in spreading information and innovation. By some estimates, transportation costs for goods have declined by as much as 95 percent over the 20th century; but there has been no comparable reduction in the cost of moving people.
Another factor that will serve to sustain New York and densely populated New Jersey is the global trend toward urbanization. This trend is as old as civilization itself but has accelerated with the industrial revolution of the 19th century and has further accelerated during the last 50 years. Within the next five years, half the population of the world will, for the first time, live in cities.
While cities can generate concentrations of poverty, crime, pollution and congestion, on balance, people lead more successful lives in cities. Cities are important not only as economic centers, but also as centers of culture, art, information and innovation. Cities prosper and grow because, on balance, their advantages outweigh their disadvantages.
At times, citizens and policy-makers in New Jersey tend to underestimate the importance of New York City to our state’s prosperity and well-being. We often view New York as a competitor. It is important that we behave as if the future of NJ is inextricably bound to that of NYC, because it is.
The good news is that with a $1.13 trillion economy, significant agglomeration economies, and critical mass, New York will thrive in the 21st Century and beyond. It behooves the region to harness the forces that have allowed New York City be a dominant actor in the world’s urban and financial stage.
October 13th, 2008 at 9:55 am
I think you are right. New York will thrive regardless of the short term pain the economy is feeling. My concern is what does the short term look like and how long does it last. How many more jobs get cut, how much more does the stock market singk and how long does it take for the economy to recover?
I didn’t think that the condition of the economy was affecting my attitude toward spending, until I took this survey. . ‘
http://www.friendsoftheuschamber.com/takeaction/index.cfm?ID=33
And, I realized that I really have changed my spending habits and I am preparing for the worst. There is no doubt the economy will recover. The question is when?
October 21st, 2008 at 8:34 pm
Regarding the lack of jobs to keep up with population growth, as it is well known, many are going overseas and the ones here now are in jeopardy of also leaving to foreign countries. I have always believed that labor unions are the main reason for this phenomena. With their strangle hold on the many vital industries, which in turn create other jobs to smaller companies and so on down the line, their absurd demands on the employers causes many of those companies to ship those jobs to foreign manufacturers.
Granted the labor unions do not have as many members as years ago, however, those companies that are unionized create a chain of jobs down the line for other manufacturers. Should those vital and very large industries, such as the auto and aircraft industries were to close or sent their work overseas, not only would the immediate employees of those respective industries suffer, but a chain reaction down the line of other sub-contractors would also have to shut down, thus creating a downward economic spiral for most of the country.
During the “robber barons” era, unions were vital to stop the abuses and harsh working condition visited upon the workers. Today, however, those conditions no longer exist in this country due to the many laws that are there to protect all employees.
In the final analisys, people should not join labor unions because they are a hindrance and a threat to the economy and the job market overall. Since we live in a democracy, they can not be outlawed, but should the present and future generations not participate in labor unions, there exist a wonderful opportunity to bring back many, if not most of the jobs that were lost to the overseas manufacturers and other industries ( think computer tech support, among many others.)