Given New York City's status as an international financial center, the current credit crisis could have an especially deleterious impact on the New York State economy. Though the Division of the Budget is not forecasting a recession at this time, the risk of a recession is substantial.
THE NATIONAL ECONOMY
* The national economic slowdown is expected to continue through the first half of 2008. Real U.S. GDP is projected to grow 2.2 percent for 2008, following growth of about the same magnitude for 2007. This forecast is consistent with major professional forecast vendors.
* The subprime mortgage debacle is still unfolding and the housing market is still searching for a bottom. Corporate profits are soft; financial sector profits are falling. Growth in U.S. corporate profits is projected to slow further to 3.1 percent in 2008, following growth of 3.7 percent in 2007. These growth rates represent a significant decline from average growth of more than 15 percent over the five preceding years. Equity markets have responded accordingly: the S&P 500 has experienced a correction of more than ten percent since its most recent October peak.
* The national labor market has continued to lose momentum, underscored by the December increase in the unemployment rate to 5.0 percent. The Division of the Budget projects nonfarm job growth to slow to 1.0 percent for 2008, following growth of 1.3 percent for 2007. The unemployment rate is projected to rise from 4.6 percent in 2007 to 5.0 percent in 2008.
* Although there has been some improvement in credit market liquidity in recent weeks, markets remain tight, generating a significant drag on both household and business spending. Real household spending is projected to grow only 1.5 percent in the current quarter and 1.9 percent for all of 2008, well below its long-term trend of about 3.0 percent.
* The Division of the Budget projects inflation of 2.7 percent for 2008, roughly equal to its 2007 level of 2.8 percent; however, excessive energy price volatility could push overall price growth still higher, putting downward pressure on household spending and tying the Federal Reserve's hand as it tries to stimulate the economy with lower interest rates.
* Cushioning the current slowdown are solid growth in the global economy and an activist stance on the part of the Federal Reserve, which has already cut its policy target rate by 100 basis points with a further reduction likely, and is taking other action to inject liquidity into credit markets. The Federal government is also likely to take stimulative action.
THE NEW YORK STATE ECONOMY
* Consistent with the slowing of both the national and New York economies, the Division of the Budget projects a decline in State employment growth from 1.1 percent for 2007 to 0.6 percent for 2008.
* As a result of the mortgage-backed security debacle, the Division of the Budget projects a 5.5 percent decline in financial services and insurance sector bonuses for the first quarter of 2008, representing a loss of about $2.1 billion in wages relative to the same period in 2007.
* Wage growth is similarly projected to fall from 7.6 percent in 2007 to 3.3 percent in 2008. Slower growth in both the wage and nonwage components of income will result in total personal income growth of 4.3 percent for 2008, following 7.4 percent growth for 2007.
* The State's housing and commercial real estate markets are in better shape than the nation's but significant risks exist. The dollar volume of New York City commercial real estate transactions appears to have peaked in the first quarter of 2007.
[Source: The New York State Budget website (Click Here For New York State Budget's Website's Home Page). Italics added.