New York Region Worries About Effect of Rate Hikes on Recovery
Steps to slow growth may spell bad news for fragile economy
THE greater New York area continues to lag behind the rest of the United States in the rate of economic recovery. Now there is a new concern here: whether the recent string of short-term interest rate increases by the Federal Reserve Board will take the wind out of the sails of an already-tepid regional recovery. Some analysts here fret that it may.
Earlier this week, the Fed announced another small, quarter-point increase in the federal funds rate, the interest rate that banks charge each other on overnight loans.
The hike, the third increase since Feb. 4, pushes the federal funds rate up to 3.75 percent. But many economists say they expect to see additional hikes in short-term rates in the months ahead.
Based on its past history, the Fed is likely to continue to gradually tighten short-term rates during the remainder of 1994 and perhaps well into 1995, says James Stack, editor and publisher of InvesTech, an investment newsletter.
The Fed's announced intention is to boost short-term rates to ward off future increases in inflation that could flare up in late 1994 or 1995. But any steps to slow economic growth - which is what the Fed is seeking to achieve by boosting rates - is not good news for the still economically fragile New York area.
``As higher interest rates slow down the national economy, there cannot help but be some impact here on the New York area recovery,'' says Samuel Ehrenhalt, regional commissioner for the US Bureau of Labor Statistics in New York. ``The recovery has been lagging here because wave after wave of economic restructuring has not yet run its course in most industries that define this region.''
``The strength of the national recovery has been helping to pull this region into the black,'' Mr. Ehrenhalt adds. ``Many of [New York's] industries are tied to national and international'' companies. The uncertainty is to what extent national firms will now slow their job growth - or development plans - in the New York region.
During the recent recession, New York City alone lost about 375,000 jobs. New jobs are now being created - though at a snail's pace. The new jobs are hardly enough to keep up with continued growth in population, largely a result of sustained levels of immigrants coming from Latin America, the former Soviet Union, and Asia. The unemployment rate in both New York and New Jersey is hovering around 8 percent and is not expected to fall sharply soon.
``This has been a very fragmentary recovery'' in the New York City region, Ehrenhalt says. In a ``typical post-war recovery, we would have made up most of the job losses within a two-year period.''
But for New Jersey, ``only about one-third of the lost jobs have been restored,'' he says. In New York's case, only 10 percent of the jobs have been restored, Ehrenhalt adds.
``Any increase in interest rates does tighten economic activity,'' says Amos Ilan, manager of economic trends for the Port Authority of New York and New Jersey. So far, the interest rate hikes have been relatively minor, but ``can be expected to have an effect on the local economy,'' he says. Any additional rate increases would only further tighten local economic activity.
Slow job growth
To date, the recovery has been gradual but sustained, Mr. Ilan says. Two sectors have done particularly well: financial services and the professional business sector. Manufacturing and construction continue to lag, he says.
Ilan predicts that the rate of increase in job growth will be about 1 percent for both 1994 and 1995 - not much, but still on the plus side, he says.
Many key industries - some of which are interest-rate sensitive - continue to undergo restructuring, including the banking, insurance, real estate, and defense sectors. This week Fleet Bank, which has offices throughout the region, announced it was laying off 225 workers on Long Island and in New York City. Other banks cutting or relocating employees outside the region include Citibank, Chemical Bank, Key Corp., Society Corp., and National Westminster Bank.