Brooklyn's Progress
April/May 2005

By Maria Fiorini Ramirez

In the last five years the U.S. economy has gone from boom to recession and in the last three and a half years to a nice and healthy recovery.  The current economic expansion, which started in November 2001, is on solid footings.  Indeed, after only a few quarters of negative growth in 2001, the U.S. economy enjoyed lean and healthy growth. 

Of course, not every city or business has rebounded evenly; indeed many are still trying to heal from the economic wounds.  This is the case as some industries and cities that had been more severely affected are still working on rebuilding their balance sheet or economic base.

Let’s focus on what is going on closer to home.  The New York City economy has gone through a miraculous turnaround.  The severe impact from the downsizing after the burst of the Dot.com’s (which were growing by 15 percent per year in the 1990’s) has been replaced by a broader reliance in the financial services industry, travel, real estate and entertainment.  Indeed, in the fourth quarter of 2004, Real Gross City Product, that is an inflation- adjusted measure of the city’s economy, rose by an annual rate of 4.5 percent, even better than the 3.8percent national growth rate.

EXPANSION IN BOTH PUBLIC & PRIVATE SECTORS
Driving economic growth is income and job growth.  While the latter is lagging the national market, the fact that there is expansion in both the private and public sector, is good news.  When one combines the improvement in personal income tax revenues, other revenues such as rental income, capital gains and payments on interest income it is no wonder that the financial position for the city has improved considerably. As a result, contrary to the deficit and to the necessary drastic increase in real estate taxes only two years ago, the City of New York is widely expected to run a fiscal surplus this year.  Will we see a reversal of the double-digit real estate tax increase?  I doubt it.

Looking ahead, New York City’s economic base is more diversified than it was five years ago and this broader base of economic growth will make it more resilient to any one sector in particular during the next economic retrenchment.

At this juncture one might worry about what can go wrong to turn this economy around and into a downward spiral.  While we do not foresee this happening, it is nevertheless important to keep close eye on some of the factors that have helped on the upside in case there is some reversal in them.

DOLLAR’S WEAKNESS IS POSITIVE FOR NYC ECONOMY
One of the factors that has helped the city’s economy has been the weakness of the dollar.  Indeed, it has created a significant improvement in tourism as fewer U.S. residents go overseas on vacation and more foreigners come to the U.S. on vacation. In addition, foreigners have also been buyers of U.S. real estate as it is relatively cheaper than it is in Europe, in particular. 

Exactly what has the dollar done? Lets look at it in comparison with the Euro. In Oct. 26, 2000 $1 was worth 82.30 Euros.  This was the absolute low since the advent of the Euro. On July 6, 2001 it was 83.52 Euros as we were in the midst of the US recession.  While the volatility of the currency markets may not mean a lot to individuals not involved in the markets, they do have an impact on our local economy and businesses.

Indeed with at 57percent drop in the dollar against the Euro over the last four years, the U.S. looks pretty cheap to any Euro-based investor who finds the U.S. an attractive place to be spending time, vacationing or buying property either for investment or future use.  It isn’t just New York City that has seen a lot of foreign money coming into the real estate market; other cities such as Miami are also getting a substantial portion of foreign money into their real estate market. 

Whenever it gets to a point where the contracts are being traded and the actual buyers are moving into the properties, some price pullback cannot be so far away. A concern on the real estate front has been the rising interest rates. This phenomena should continue for the next year, but the Federal Reserve Bank has done such a good job in advertising this it that, by itself, the incremental increases should not have a severe impact on the real estate market.

ENTERTAINMENT, TOURISM ARE ALSO IMPROVING
The entertainment industry has improved and most aspects of tourism are doing better.  Hotels I am told are close to being fully occupied and the restaurants business is also doing better.  In the fourth quarter, the hotel occupancy rate was 86.8percent, the best quarterly number since 1996 and it is probably even higher right now; additionally, the  $257 daily room rate is the highest since 2000.

Commercial real estate vacancies are also down as more space is being absorbed by growing businesses and conversions to residential space.

In conclusion, while one can always find enough indicators to make a case for the glass being half empty, it seems to us that barring any unforeseen events in the months ahead the glass should remain more than half full for the city’s economy as well as the national economy.

The Independence Community Bank Economic Outlook is a periodic report on the regional economy. Maria Fiorini Ramirez is President and CEO of Maria Fiorini Ramirez, Inc., a global economic and financial consulting firm that is widely respected for analysis of economic trends and issues that affect world markets. A member of the Board of Directors of Independence Community Bank, Ms. Ramirez is a regular guest on CNN, CNBC, ABC, Fox News, Bloomberg Financial, PBS and CBS and contributor to domestic and foreign business publications. Ms. Ramirez and her colleagues at MFR are frequently cited by various publications including The Wall Street Journal.