Western New York Economic News Canisius College Richard J. Wehle School of Business

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1 Western New York Economic News Canisius College Richard J. Wehle School of Business Volume 14, Number 1 January 2011 The U.S. economy has continued to recover from the Great Recession. The extension of the Bush tax cuts has removed much of the concern about a double-dip recession. Given the high national unemployment rate of 9.8% in November 2010, the length of time it will take to replace the more than 7 million jobs that were lost during the downturn is the main focus of most recovery conversations. While the regional economy did not suffer the rapid decline that was commonplace throughout the country, local employment levels still have never recovered to their pre-2001 recession levels. Earnings per worker continue to fall compared to the national average, and the impending state fiscal crisis might force a dramatic restructuring of local government activities. The full text and internet links for this and all prior newsletters are available at The National Economic Outlook The U.S. economy has continued its recovery from the Great Recession as real GDP grew by 2.6% during 2010:Q3 (see Figure 1). Congressional negotiations that extended the Bush tax cuts along with the Federal Reserve s Quantitative Easing II program have removed much of the uncertainty that in our view was preventing a more robust recovery and have put to rest talk of a double-dip recession. Regardless of political leanings, the notion of increasing taxes in the early stages of economic recovery would have been detrimental to the economy s future performance. Although the burgeoning fiscal deficits and national debt must eventually be dealt with, a better time for the implementation of more restrictive fiscal policies is when the economic recovery becomes more robust. There is an ongoing debate concerning the efficacy of the FED s QE II policy which involves planned purchases of $600 billion of Treasury securities with maturities ranging from two to ten years in $75 billion monthly increments through the second quarter of Among analysts concerns are the potential for acceleration of inflation as a result of this monetization of the debt and a more basic concern that the FED has been operating outside of its mandate to provide liquidity in times of need and is acting as an unelected fiscal authority (see G.P. O Driscoll, Jr., Why Do We Have a Central Bank?, Wall Street Journal, December 3, 2010). The Wehle School of Business at Canisius College publishes the Western New York Economic News as a public service to the Western New York community with research and analysis performed by faculty members: George Palumbo, Ph.D. - Professor of Economics & Finance palumbo@canisius.edu Mark P. Zaporowski, Ph.D. - Professor of Economics & Finance zaporowm@canisius.edu

2 Percent Change 8.0 Figure 1. Real GDP Growth Rates: 2006:Q1-2010:Q How has the present recovery compared so far with the recoveries from the past four recessions (1973, 1980, 1990, and 2001) that the U.S. economy has experienced? An answer to this question can shed light on what can be expected in 2011 and In the five quarters of recovery that we have experienced since the trough in June 2009, real GDP growth has averaged 2.9%. The same average growth rate was experienced during recovery from the 1990 recession. Recovery from the 2001 recession was slower, averaging 1.7% while recovery from the 1973 and 1980 recessions was much faster, with GDP growth rates averaging 5.5% and 7.8% respectively. Given the high unemployment rate of 9.8% in November 2010, much of the present focus is on job creation and how long it will take to replace the more than 7 million jobs that were lost during the downturn. Table 1 shows the number of jobs lost during each of the past five recessions. In terms of magnitude of job losses (7.311 million) and in percentage of peak jobs lost (5.3%), the recession was much more severe than the previous four recessions. It is interesting to note the change in employment from the troughs in the past four recessions. Job recovery from the 1973 and 1980 recessions were quite robust both 12 and 24 months after the troughs. Employment recovery from the 1990 and 2001 recessions were much slower and the present recovery is likely to mimic these. Figure 2 shows the monthly changes to private sector and total non-agricultural employment since the onset of the recession in January Private sector employment has continued to grow since reaching its nadir in December Figure 2 also shows that the private sector has added 1,171,000 jobs since December 2009,

3 Thousands of Workers while total non-agricultural employment has grown by 951,000 jobs over the same period. Table 1. Labor Market Dynamics during Recovery from Previous Recessions Jobs Lost Peak to Trough (millions) % Job Loss From Peak to Trough Employment Change 12 Months Post Trough (millions) Employment Change 24 Months Post Trough (millions) Peak Trough Nov-73 Mar % Jan-80 Nov % Jul-90 Mar % Mar-01 Nov % Dec-07 Jun % ?? Months to Return to Peak Employment 600 Figure 2. Monthly Change in Total Non-Agricultural Employment & Private Employment ( ) Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct Total Employment Private Employment

4 The Economic Outlook for Western New York The national economic contraction negatively impacted the Western New York economy. Employment growth during the decade of the 1990 s was slower in Buffalo than in the rest of the nation. Total employment in WNY did not recover to its pre-1991 recession level until 1998 and reached its peak in 2000 prior to the onset of the 2001 recession. Similarly, Buffalo s recovery from the 2001 recession peaked in 2008 at employment levels that were lower than the pre-recession level. Thus, while it seems that the latest national recession impacted the region less severely than the rest of the country, there has been little but a brief respite in a decade long recession. Plotting the trend from 1990 to 2000 reveals an average annual increase in employment of 2,136 employees. From the peak employment in 2000 through 2008 there was an average decline of 614 employees per year Figure 3. Total Non-Farm Employment Buffalo MSA E m p l o y m e n t Average employment increase 2136 per annum ( ' s ) Average employment decrease 614 per annum Year

5 The impact of the relatively slow growth of employment in WNY compared to the rest of the nation can be most clearly seen by comparing average annual pay in Erie County to the national average (see Table 2). The failure of the WNY region to fully partake in the recovery from the 2001 recession is apparent when one examines earnings per worker in Erie County compared to the U.S. The Erie County data is taken from the Quarterly Census of Employment and Wages while BEA data is used for the U.S. average. In 2002, average earnings per worker in the U.S. were 11.8% higher than the Erie County average. By 2009, this difference had increased to 15%. Table 2. Erie County Average Annual Earnings per Employee versus National Average Earnings per Worker: Year Average Annual Pay Erie County (QCEW) Percent Change from Previous Year Erie County Average Annual Pay U.S. (BEA basis) Percent Change from Previous Year Percentage by which National Average Exceeds Erie County Earnings per Worker 2002 $32, % $36, % 11.7% 2003 $33, % $37, % 11.8% 2004 $35, % $39, % 11.8% 2005 $35, % $40, % 14.7% 2006 $37, % $42, % 14.6% 2007 $38, % $44, % 15.6% 2008 $39, % $45, % 15.9% 2009 $39, % $45, % 15.0% Though the data sources differ, since the BEA measure includes employment that is covered by unemployment insurance as well as employment not covered, while the QCEW data is only for employees covered by unemployment insurance, the pattern is clear. The gap between local and national earnings per worker has continued to increase. The low growth rate of annual earnings has and will continue to have an impact on state and local tax bases. State and local government tax revenues, which are generally based on income or consumer spending, tend to decline during economic contractions. This is especially problematic since those governments generally have higher expenditure requirements during recessions. Table 3 presents U.S. Bureau of the Census, Governments Division data identifying the current trends in state tax collections for New York State, its neighbors, and the most populous state in the Union, California.

6 Table 3. Tax Collections in New York State, Neighboring States and California 2008 & Total Tax Receipts (thousands) 2009 Total Tax Receipts (thousands) Percent Change 2008 to Tax Receipts Per Capita U.S. Total $781,647,244 $715,170, % $2,546 New York $65,370,654 $65,029, % $7,739 New Jersey $27,186,553 $30,616, % $4,965 Connecticut $14,597,970 $12,927, % $4,149 Massachusetts $21,908,599 $19,482, % $3,323 Pennsylvania $32,123,740 $30,071, % $2,549 Vermont $2,544,163 $2,505, % $4,092 California $117,361,976 $101,007, % $3,175 What is obvious from this data is that during the Great Recession, New York s tax revenues were more stable than in any of its neighboring states. It is also clear that New York s taxes per capita are at least 55% higher that its neighbors and three times higher than the national average. Per capita state taxes in New York are more than double the per capita taxes in California, a state often cited for its impending fiscal crisis. One can only wonder how long New York State residents will continue to tax themselves at such levels. If state revenues flatten, or even fall, it is possible that intergovernmental transfers from the state to local governments could decline. Using Governments Division data released in the 2007 Census of Governments, Table 4a shows the local governments in Erie County that have the highest state aid to direct general expenditure ratio. They are all school districts, with the exception of the City of Buffalo, which has a fiscally dependent school district, and the Town of Newstead. Table 4b shows the local governments within Erie County that have the lowest aid to expenditure ratios. This list is mostly composed of suburban towns and villages. If state aid is decreased, or if the state government shifts more of the financing responsibility for state mandated programs to local governments, then the current patterns of government activity must change. There is little evidence that further governmental reorganization in the form of consolidation and elimination of governments would lead to substantial cost savings. Therefore, the reaction to a reduction in state aid, or an increase in mandated expenditures, will result in some combination of the following: an increase in local taxes, a decrease in local services delivered, or a reduction in the compensation of local government employees.

7 Table 4a. Erie County Governments Most Dependent on State Aid RATIO OF STATE AID TO DIRECT GENERAL EXPENDITURES GOVERNMENT 77.95% LACKAWANNA CITY SCH DIST 76.60% AKRON CENTRAL SCH DIST 73.58% TONAWANDA CITY SCH DIST 72.68% EVANS BRANT CENTRAL SCH DIST 69.76% NORTH COLLINS CENTRAL SCHOOL DISTRICT 65.10% BUFFALO CITY 65.06% ALDEN CENTRAL SCH DIST 64.39% CLEVELAND HILLS U F SCH DIST 62.91% SPRINGVILLE-GRIFFITH INST CENTRAL SCH DIST 62.02% DEPEW UNION FREE SCH DIST 61.17% HOLLAND CENTRAL SCH DIST 59.76% NEWSTEAD TOWN 58.38% CHEEKTOWAGA-MARYVALE UNION FREE SCH DIST 53.47% FRONTIER CENTRAL SCH DIST 51.48% WEST SENECA CTL SCHOOL DIST 50.46% HAMBURG CENTRAL SCH DIST 50.14% KENMORE-TONAWANDA UF SCHOOL DIST Table 4b. Erie County Governments Least Dependent on State Aid RATIO OF STATE AID TO DIRECT GENERAL EXPENDITURES GOVERNMENT 4.07% AMHERST TOWN 4.01% HOLLAND TOWN 3.62% NORTH COLLINS TOWN 3.61% ORCHARD PARK TOWN 3.40% CHEEKTOWAGA TOWN 3.36% MARILLA TOWN 3.34% GRAND ISLAND TOWN 3.19% TONAWANDA TOWN 3.14% EDEN TOWN 3.06% EAST AURORA VILLAGE 3.04% AURORA TOWN 2.94% HAMBURG VILLAGE 2.65% EVANS TOWN 2.53% LANCASTER TOWN 2.49% WEST SENECA TOWN 2.16% HAMBURG TOWN 2.13% SARDINIA TOWN

8 NATIONAL, STATE & LOCAL BUSINESS INDICATORS % change NATIONAL INDICATORS 2009:III :III 2010:I 2010:II 2010:III 2010:III Real GDP (billions of chained 2005$) (1)(a) 12, , , , US Personal Income (billions of $) 12, , , , % change Nov-09 - Nov-09 Sep-10 Oct-10 Nov-10 Nov-10 Consumer Price Index ( =100) (2) Exchange Rate Canadian cents/us $ (3) (b) Year Treasury Note Yield (%) (3) (b) Month Treasury Bill Yield (%) (3) (b) S&P 500 Stock Index (3) (b) 1, , , , Dow-Jones Industrial Average (3) (b) 10, , , , LABOR MARKET TRENDS (2) Nonag Civilian Employment US (1000's)(a) 129, , , , NY State (1000's)(a) 8, , , , WNY (1000's) Unemployment Rate (%) US (a) NY State (a) WNY Ave. Weekly Hours in Mfg. US (a) Ave. Weekly. Earnings in Mfg. US ($)(a) WNY EMPLOYMENT BY SECTOR (1000's) (2) Natural Resources, Mining & Construction Manufacturing Trade, Transportation & Utilities Durable Goods Finance Activities Service Providing Government (1) US Dept. of Commerce (a) Seasonally Adjusted (2) US Dept. of Labor (b) End of month data (3) Wall Street Journal