Brooklyn's Progress
August/September 2007

BY MARIA FIORINI RAMIREZ, BOARD OF DIRECTORS, SOVEREIGN BANK

Overall, U.S. economic growth appears to be trending at about a 2.5% rate so far in 2007, with activity in the First Quarter suppressed by an inventory adjustment and a temporary pause in export growth. The pace of growth picked up in the Second Quarter to about 3% as these two factors turned around and contributed to growth, which went a long way toward blunting the impact of weaker consumer spending than had been seen earlier.

Employment has continued to expand and the unemployment rate has been hovering around a low 4.5%. This has supported solid income growth, which in turn has enabled consumer spending to keep moving ahead in spite of numerous headwinds. These impediments to growth include the increasing cost of energy, food, and healthcare premiums, along with weakness in real estate values in many regions, which has been exacerbated by an enormous supply of new and existing homes on the market that will take many months to digest. For the year as a whole, it appears as if U.S. real GDP will grow at a little over a 2% pace (q4/q4), which would be about one percentage-point lower than in 2006. Globally, growth has been expanding by more than that of the U.S., led by China, and also aided by better results in Europe and Japan.

The Coming Months
Looking ahead, on the global front we anticipate more of the same. Europe is enjoying the fruits of deregulation that has sparked a renewal of consumer and business growth after many years of disappointing performance. As a result, interest rates have increased quite a bit and may rise further. This has also been accompanied by a much weaker dollar against the Euro this year (which makes the United States in general and New York in particular a very attractive tourist destination for Europeans). China is likely to continue to grow at a rapid pace, although efforts will be made to slow the economy somewhat due to overheating concerns.

As for the medium-term U.S. outlook, while housing weakness will continue to weigh on the economy, the direct downward influence on GDP growth from the housing sector has probably seen its worst. While some regions will continue to feel much pain, particularly those which saw the most speculative activity during the boom, the overall picture is likely to be one of a prolonged bottoming rather than continued sharp declines. We look for overall U.S. real GDP growth of somewhere in the neighborhood of 2.5% over the medium term. This is below trend, but only fractionally so, which in turn ought to allow core inflation to continue to inch lower. A combination of moderate growth and small declines in core inflation ought to permit the Federal Reserve to keep monetary policy on a steady keel, just as has been the case for the past year. Indeed, we look for the prevailing Fed funds target to 5.25% to endure for as far as the eye can reasonably see.

Brooklyn Stands Out
In Brooklyn, however, the outlook is more robust than that of the nation as a whole. Led by many years of planning for accommodating increasing demand for commercial and residential needs, Brooklyn is undergoing its own renaissance regardless of what restructuring may be taking place in other parts of the country.

Small Businesses Role
However, with a large percentage of Brooklyn’s economic growth being driven by small business, the major concerns will remain the cost of healthcare and energy. There are no quick or easy solutions, but with the lobbying effort being quite visible, there is some hope that the right decisions to help small businesses will be made.

Brooklyn’s building and construction industry appears to be looking at several years of solid growth based on trends already in place and projects that are just reaching fruition. Demand for real estate in Brooklyn remains robust, driven in part by those seeking better value than available in the Manhattan market. Moreover, as Brooklyn’s economy becomes more diverse in the years ahead, it should be even more resilient and less tied to broader national and global trends.

Maria Fiorini Ramirez is a member of the Board of Directors of Sovereign Bank as well as President and CEO of Maria Fiorini Ramirez, Inc, an independent global economic and financial consulting firm that was ranked the third best forecast for economics and interest rates out of more than 50 economists all over the U.S. for the first half of 2006.