by E.J. McMahon
A drop in Wall Street earnings brought personal income growth in New York State to a shuddering halt in the second quarter of this year, according topreliminary data released today by the U.S. Commerce Department’s Bureau of Economic Affairs (BEA).
Personal income in New York State declined by 0.1 percent on a seasonally adjusted, annual basis during the three months ended June 30, the BEA estimates show. Coming on the heels of 17 consecutive quarters of income growth, it was the first quarterly decline in personal income in New York since the fourth quarter of 2002, as shown in the following chart.
New York was the only state to suffer a decline in income in the second quarter, qualifying for a ranking of dead last among the 50 states. Nationally, personal income growth in the second quarter slowed to 1.2 percent from a growth rate of 2.5 percent in the first quarter.
The finance and insurance sector has been responsible for the lion’s share of increases in New York’s personal income since 2005 (as discussed here), reflecting record Wall Street bonuses generated by rising profits, capital gains and strong merger and acquisition activity by firms based in Manhattan. But in the second quarter, income in the finance and insurance sector went into reverse, decreasing by the equivalent of 1.78 percent of total earnings by all industries in New York. Net earnings gains in almost all other sectors–including construction and professional and technical services, where New York’s growth actually exceeded national averages–wasn’t enough to pull the Empire State’s overall personal income growth into positive territory.
The new personal income data underscore the fiscal challenges facing both Governor Eliot Spitzer and Mayor Michael Bloomberg, whose budgets are inordinately dependent on tax revenues generated by participants in the finance sector.
Even as the new personal income numbers were being released, state Budget Director Paul Francis sounded a warning at an Albany conference sponsored by the Citizens Budget Commission. Noting that “the windfall of added revenues has largely absolved the legislature from having to make hard decisions when it comes to the budget” in recent years, the governor’s budget director said “all indications are that next year will be different.”
Picking up from the text of Francis’ speech:
“At the time of our update for the quarter that ended June 30, we estimated that the State faced a budget gap of $3.6 billion in the 2008-09 year. However, we expect that when we reevaluate that number for our Mid-Year financial update in October, there is a significant risk that we will have to increase the expected gap.
“In New York, our budget is uniquely sensitive to certain segments of the economy such as the financial services and real estate industries. In good years, Wall Street accounts for up to 20 percent of our revenues. Unfortunately, the summer saw a number of events that are very concerning in these very areas.
“The crisis in subprime mortgage lending and the virtual shutdown of the market for highly leveraged financings has had a serious impact on the performance of some of our most important sectors in terms of tax revenue: financial services, private equity and hedge funds.”
Meanwhile, in his own speech on Wednesday night to the annual meeting of The Business Council of New York State, Governor Spitzer renewed a pledge he made to the same group during last year’s election campaign: “next year, we must not, we cannot, and we will not raise taxes.”
The governor and Francis have both identified personal income growth–projected at 5.3 percent for the current fiscal year — as the most appropriate benchmark for growth in the state’s operating budget. But on the heels of 8 percent growth in the Spitzer Administration’s first budget (including 7 percent in operations spending), if the weakness in financial sector earnings in New York persists into the second half of 2007, spending could need to shrink next year for the governor to live up to his tax pledge.
ADDENDUM: Measured on a year-to-year basis, personal income in New York State in the second quarter of 2007 was 7.8 percent higher than in the second quarter of 2006. That was still ahead of the national average year-over-year change of 6.4 percent. The latest figures reflect the slowdown in the seasonally adjusted rate of growth–which was supercharged by financial sector bonuses in the first quarter.