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Moving a moving Long Island economy

BY PEARL M. KAMER | Pearl M. Kamer is chief economist at the Long Island Association, a business organization. She also serves as an economic adviser to the Ways and Means Committee of the New York State Assembly.

January 4, 2009

As 2009 begins with employment declining, home values falling, foreclosures increasing, retirement funds depleted and consumer and business credit virtually frozen, it's hard for Long Islanders to feel hopeful about their economic futures.

Given the uncharted territory in which national policymakers find themselves, it is difficult to project when a rebound will occur. Even the most optimistic prognosticators expect a weak and gradual recovery.

Until lenders can ascertain their overall loan losses, they will be reluctant to make new loans, and credit tightness could persist. Employers are likely to wait for confirmation that a sustainable recovery is under way before resuming hiring. Consumers may be so traumatized by today's economic turmoil and its impact on their net worth that they will save rather than spend any future earnings. This is good for the economy in the long run but does not augur well for a prompt economic recovery.

With credit markets dysfunctional, even a massive government stimulus by the Federal Reserve, combined with the public works program promised by the Obama administration, may take longer to work than anticipated.

All of these factors will make 2009 a challenging year for the Long Island economy. The Island slipped into recession in October, almost a year later than the U.S. economy. It lost 7,100 private-sector jobs in the 12 months ended in November, with losses spread across most industries.

Taking into account coming business failures, layoffs delayed until after the holiday season, and cost controlling in the growing health care and government sectors, Nassau-Suffolk could lose another 20,000 to 35,000 payroll jobs before losses abate late this year or next. This is in addition to potential job losses among the 20 percent of Long Islanders who commute to New York City jobs. These losses could push Long Island's unemployment rate from the current 5.2 percent to as much as 6.8 percent by year end.

As severe as this is, the projected job losses are in no way comparable to the more than 86,000 payroll jobs lost on Long Island between 1990 and 1992. At that time, the Island lost much of its defense industry and endured a relatively deep national recession. Its 1992 unemployment rate peaked at 7.7 percent.

But that may be small solace. Consumer spending is likely to remain weak for the foreseeable future. November sales-tax revenues accruing to Nassau and Suffolk county governments, a barometer of consumer spending, were 7.1 percent below year-ago levels, and retailers did not appear to fare much better in December. This could lead to a rash of failures in consumer-related businesses early this year.

The loss of sales-tax revenues, which I estimate at 3 to 5 percent this year as consumers replenish savings and pay down debt, will be a fiscal blow to the county governments, which are heavily dependent on sales taxes for their funding. Home-price declines on Long Island have also begun to accelerate. The median price of newly sold Nassau homes fell from a peak of $502,500 in August 2007 to $410,000 in November 2008, a drop of more than 18 percent. Comparable Suffolk prices peaked at $420,000 in June 2007 and declined to $335,000 in November 2008. This is equivalent to a 20 percent decline.

The price of homes in contract but not yet closed continues to fall, indicating that further home-price declines lie ahead. Median home prices on Long Island could fall by another 15 percent before the Long Island housing market bottoms out, probably in 2010. This assumes that the market settles back to its long-term ratio of home prices being 15 times annual rents.

The one bright spot is the recent decline in mortgage interest rates caused by federal purchases of mortgage-backed securities. Lower mortgage interest rates could bring buyers to the housing market and mitigate the slide in home prices. In effect, the Federal Reserve has decided to print as much money as necessary to unfreeze credit markets by buying quantities of mortgage-related securities, long-term Treasury bonds, corporate debt and consumer loans in an effort to ease the credit crunch.

The incoming Obama administration will complement this massive monetary stimulus with an equally massive fiscal stimulus package, estimated at $800 billion over two years. Much of this money will be spent on infrastructure, including mass transit, schools, roads and water systems.

There is general agreement that such aggressive federal intervention will ultimately break the negative feedback loop in which the economy is mired and cause a turnaround.

Until that happens, though, the crisis presents Long Island with unprecedented opportunities to begin removing impediments to the region's economic competitiveness. Most young people can no longer afford to live here, and persons between the ages 25 and 44 declined by more than 157,000 between 2000 and 2007. A more diverse housing mix, including affordable condominiums and rental units, would help end this brain drain.

Even in a recession, many developers are willing to build smaller, more affordable housing units if given the incentive to do so. This could come in the form of zoning changes that permit higher residential densities, or government funding or loan guarantees for sewer construction and other infrastructure requirements, likely to be available from the new administration.

The crisis also could prompt consolidation of special districts, even schools, as recommended by the Suozzi committee and others. This will be a transition year for the Long Island economy. The bloated financial and consumer sectors will be whittled down to size, ultimately freeing up resources for education, technology and infrastructure. These are the underpinning of a productive economy for Long Island and the nation.

The right policy decisions today can lead to a period of sustainable economic growth similar to that during the 1990s, when Long Island diversified its economy following the implosion of its defense sector.

Although there was concern at the time that the regional economy would never recover from the loss of defense jobs, the layoffs actually set the stage for an entrepreneurial economy in which technology would be one of the principal engines of growth. Many laid-off engineers and technicians had on-the-shelf technology that could be reoriented to civilian markets.

The Long Island economy moved from reliance on one engine of growth, the defense sector, to multiple engines. This gave added stability in recessions: When one sector faltered, there was a greater possibility that another sector could pick up the slack.

This formula worked well in the 2001 national recession, when Long Island lost only 2,800 payroll jobs before job growth resumed. That growth was relatively anemic relative to national figures, as impediments such as unaffordable housing, high taxes and transportation bottlenecks began to get in the way. But the important point is that Long Island gained almost 98,000 payroll jobs between 1998 and 2000 as a result of the policy decisions made in the early 1990s.

There is light at the end of the dark tunnel.