The Long Island economy starts the new year with a head of steam, but uncertainty over the impact of the federal tax overhaul on consumer spending and real estate could limit growth, local economists said.
Long Island’s gross domestic product, the sum of all goods and services produced here, increased about 2 percent in 2017, the experts said.
Unemployment is low, and the number of people employed is at a record high. Consumers are confident. And the stock market is soaring.
“The economy right now is strong, and that will carry through somewhat into 2018,” said John A. Rizzo, chief economist for the Long Island Association business group and a Stony Brook University professor. “But the growth rate certainly won’t be bigger than this year and could be less because of tax reform.”
One big issue for Long Islanders is the impact of the new federal tax law on deductions for state and local taxes, which are high here, and large mortgages.
“Homes are the biggest asset that most consumers have, so the tax changes could damage consumer confidence and spending,” Rizzo said. “As goes the real estate sector so goes consumer spending,” which accounts for 70 percent of economic activity, he said.
“The changes in the mortgage interest and local property tax deductions are going to effectively make owning a home more costly,” he said.
The federal tax overhaul reduces the corporate tax rate from 35 percent to 21 percent, which proponents say will spill over into higher wages and more hiring by companies. Many economists say they are skeptical that workers will get much benefit.
“I don’t think the corporate tax cuts are going to have any big effect on investment [by companies], which is important for hiring and wages,” Rizzo said. Tax cuts tilted more to middle-class consumers, rather than corporations and the wealthy, would stimulate demand that would increase investments and wage growth, he said.
As for the region’s growth, economist Richard Vogel, dean of Farmingdale State College’s business school, predicted the Long Island economy won’t expand faster than 2 percent in 2018.
Local construction projects could boost growth, most notably a third track for the Long Island Rail Road from Floral Park to Hicksville, improvements to more than a dozen passenger stations and the Ronkonkoma Hub transit-oriented development.
Vogel also said export sales could be dampened by uncertainty about free trade agreements under President Donald Trump, who has vowed to scrap NAFTA.
Vogel said, “There’s a lot of uncertainty because of the changes being proposed in Washington.”
— James T. Madore and Tory N. Parrish
Employment in Long Island’s health care industry climbed 3.4 percent in October from a year earlier to 231,200, according to state data. That total is expected to keep rising as the region ages and large regional health systems expand services in Nassau and Suffolk counties.
New Hyde Park-based Northwell Health, the largest private employer in the state, with 63,500 employees, adds “about 130 to 140 employees per week, and the bulk of them are on Long Island,” said Michael J. Dowling, president and chief executive at Northwell.
Northwell continues to expand its outpatient services as well as its hospital network, most recently taking control of John T. Mather Memorial Hospital in Port Jefferson. Mather became Northwell’s fifth hospital in Suffolk County.
Other health systems are also expanding. For example, Memorial Sloan Kettering is building a 114,000-square-foot cancer facility at the Hub in Uniondale. It is on track to open in 2019. MSK also recently expanded its Commack cancer center.
Also, Southampton Hospital officially joined the Stony Brook Medicine health system, about five years after it signed a letter of intent to merge. The deal required multiple state regulatory approvals. The hospital is now called Stony Brook Southampton Hospital.
— David Reich-Hale
One year into the Trump administration, local bankers are waiting for banking regulations to be relaxed.
But executives at some smaller banks hope a friendlier environment is coming soon.
Douglas C. Manditch, chairman and chief executive of Islandia-based Empire National Bank, said his bank spends around 12 percent of its revenue on compliance, the same as in 2016. The bank had $23 million in revenue through the first nine months of 2017.
“We are talking about hiring another person and buying equipment in our compliance department, so it hasn’t let up yet,” Manditch said.
Bridge Bancorp spends about 10 percent of its $120 million in annual revenue on regulatory hurdles, said Kevin O’Connor, the chief executive at Bridge, the Bridgehampton-based parent company of BNB Bank.
“The tone of the regulators has changed, so I’m optimistic that they are recognizing that banks are valuable in driving economic growth,” O’Connor said. “The goal for the time being is to grow revenue and keep compliance costs flat.”
— David Reich-Hale
Workers shouldn’t expect much in the way of wage increases in 2018, said economist Rizzo, sounding a more pessimistic note than last year. One of the chief reasons, he said, is that businesses are reluctant to try to recoup the cost of increased wages through price hikes.
“Higher wage growth is more feasible when firms are able to pass on these higher costs, at least in part, by charging higher prices,” Rizzo said. “But consumers in the wake of the Great Recession have become more cautious and perhaps more resistant to price increases.”
Though Long Island has the economic ingredients for stronger wage growth, such as low unemployment and a record number of jobs, the growth of low-wage jobs continues to put downward pressure on wages, said Martin Melkonian, an adjunct professor of economics at Hofstra University. Workers’ pay won’t rebound here or nationwide until significant investments are made in higher-paying industries such as alternative energy and transportation, he said. “These are the types of industries that would create middle-income jobs.”
— Carrie Mason-Draffen
Local manufacturers of generic prescription drugs face increased competition, which means smaller profits.
Aceto Corp. in Port Washington is facing “greater headwinds in terms of both competitive intensity and the impact from ongoing customer consolidations,” said CEO William C. Kennally III. He added the company faces “a prolonged generics industry downturn.”
Pharmaceuticals has been a bright spot in local manufacturing with many companies adding buildings and employees in recent years.
A&Z Pharmaceutical Inc., which produces vitamins and generic prescription drugs, continues to expand its factory, warehouse and office space in Hauppauge, nearly quadrupling planned investments there, to $12.2 million.
A&Z CFO Stephen Latuso said the company anticipates further growth.
Local drugmakers hope to benefit from a new $5 million drug development center at Stony Brook University.
— James T. Madore
Tourism revenues on Long Island are likely to increase up to 5 percent in 2018, said Kristen Jarnagin, president and CEO of Discover Long Island, a nonprofit that promotes tourism here.
Tourism is a $5.6 billion industry that supports more than 100,000 local jobs and generates more than $700 million in state and local tax revenue, according to the most recent available data from 2016’s New York State Traveler Spending Report. Traveler spending grew 3 percent from 2015 to 2016.
Robert Lipper, a tourism industry consultant and former Newsday advertising executive who has tracked the hotel industry for more than 20 years, said two new hotels opened on Long Island in 2017, and two more will open in January. “No additional hotels are currently slated to open during the remainder of the year,” although some new projects may start construction next year.
— Daysi Calavia-Robertson
Aerospace and defense
The Trump administration’s planned defense buildup has yet to filter down to Long Island companies, the head of a regional trade group said.
“Funding in real dollars has not changed much,” said Robert Botticelli, chairman and executive director of ADDAPT, which advocates for Long Island aerospace and defense contractors. Though Long Island is no longer the aerospace and defense hub it was in the mid-1980s when Grumman Corp. employed more than 25,000 here, the industry remains a mainstay of the economy, experts say.
Rizzo said a conservative estimate is that Long Island aerospace and defense companies produce goods and services worth about $964 million annually, while companies that indirectly support that industry produce an additional $581 million.
He forecast that 2018 should be a “relatively” strong year for the industry.
— Ken Schachter
Commercial real estate
Commercial real estate is expected to be strong, with lower vacancy rates in industrial space and slightly stronger leasing rates in offices, local commercial real estate professionals said.
“The Long Island market, in general, is doing very well,” said David Pennetta, executive director of Cushman & Wakefield’s Melville office. “The new norm will be higher rents.”
The average office vacancy was 12.9 percent, according to third-quarter figures from brokerage Jones Lang LaSalle. Average asking rents were $26.04 per square foot locally. Overall vacancy rates for industrial were at 6.5 percent in the third quarter, according to Cushman. The average asking rent across all industrial types was $9.21 per square foot in the same period.
While the industrial sector has traditionally outperformed office properties in occupancy, brokers say the office market is expected to be strong.
“There’s a lack of new office construction, so tenants tend to gravitate toward class A buildings,” said Ellen Rudin, managing director of CBRE’s Long Island office.
The industrial market is tight due to increased demand from distribution businesses, which could lead to the creation of more industrial space, said Gus Nuzzolese, president of Colliers International’s local brokerage office.
— Victor Ocasio
Residential real estate
Long Island’s housing market could cool off a bit as home buyers adjust to new limits on the tax advantages of homeownership, real estate and tax experts said.
The federal tax overhaul enacted this month nearly doubles the standard deduction to $12,000 for single filers and $24,000 for couples, and it caps deductions for state and local taxes at $10,000. It also sets a $750,000 limit on mortgage debt eligible for interest deductions.
With fewer deductions for state and local taxes, “people are going to look at how much they’re paying in real estate taxes and say it’s too much,” said Jude Coard, a partner with Berdon LLP.
The overhaul could provide “more incentive for people to move to low tax jurisdictions” outside of New York, said Stephen Breitstone, vice chairman of the Meltzer, Lippe, Goldstein & Breitstone law firm in Mineola.
It’s possible home prices could fall by a few percentage points as home buyers adjust to the new tax rules, said Gary Baumann, an associate broker with Douglas Elliman in Dix Hills and Port Washington.
But, he said, the local housing market should remain fairly stable, since mortgage interest rates are near historic lows, the economy is strong and housing inventory is limited.
— Maura McDermott
Stores on Long Island, like those nationwide, can compete with online retailers only if they make their in-store shopping experience more personalized and engaging for customers.
“If they don’t, 2018 might be their last year,” said retail expert Marshal Cohen, a chief industry adviser for the NPD Group Inc. market research firm in Port Washington.
Long Island’s retail industry is strong, but the area’s brick-and-mortar stores still are feeling the effects of the online shopping industry’s growing dominance, industry experts said.
In the coming year, Long Island retailers need to work harder to give customers a good reason to walk through the doors, industry experts said.
“Convenience is probably the hot button for 2018,” said Joel Evans, a professor of marketing and international business at Hofstra.
Brick-and-mortar stores’ offering knowledgeable employees in sufficient numbers, convenient parking, multiple payment options, including cash, and inviting decor is a start, he said.
A bigger concern for retailers in 2018, however, will be the new federal tax reform’s effect on real estate prices, which will trickle down to retail spending, said economist Rizzo.
Cohen, however, said the tax overhaul will help retail because Long Island has a large share of wealthy shoppers, who will see increases in their paychecks.
— Tory N. Parrish