Westchester's business outlook for 2003

The Westchester economy has held up quite well during the. current period of subpar nationwide economic activity and the special 9/11 trauma. However, the economic outlook for Westchester business sectors is more dependent on the nationwide trends for these respective industries than on uniquely local

The nationwide recession of 2001 provided the necessary cleansing of prior excessive commercial and financial enthusiasm and the resulting productive overcapacity, especially in, but not limited to, the new electronic and telecom businesses.

The resulting weak demand for business investment products beginning in the year 2000 combined with solid increases in productivity in many sectors created fierce competition in most areas of the economy, downward price pressures in some and profit squeezes throughout. Manufacturing, as usual, carried the brunt of declines in demand during the recession, together with travel and vacation sectors in response to 9/11.

However, the recession was shallow, as the Federal Reserve dropped interest rates sharply, thereby stimulating purchases of interestsensitive consumer products, espe cially housing and autos.

WHIPLASH

Over the past two years, investors and employees in information technology, telecom products and other businesses dependent on advertising have been put through a ringer. Participants in the. financial industries as well as related business services, important in the New York area, have been whip-lashed. Some benefited from a high level of trading activity and some benefited from the impact of business turmoil (such as the legal profession). Others in the financial and related services suffered setbacks due to the decline in asset values and business profitability after the year 2000.

The travel and vacation-related services suffered from the shock of 9/11 and other acts of terrorism. Producers of business equipment and owners of commercial real properties have seen better days. Those in automobiles and some consumer durable products, retail sales and consumer and some business services largely stumbled along. However, the residential construction industries have done well.

Personal incomes hold up and supported consumer expenditures, despite the dampening effects of declines in shareholder asset values and the adverse impact of low interest rates on holders of fixed-rate paper assets.

Total corporate profits fell from the high (and sometimes inappropriately reported) levels of three years ago, but have now recovered somewhat. Profitability in respective industries has depended on the degree of competition as much or more than on the level of output. For example, the, automobile industry suffered financial losses for the past two years despite a relatively stable level of output and sales. Credit has been amply available for creditworthy businesses, although lenders are cautious about providing funds to businesses with less than a sterling credit rating.

SHIFTING FORTUNES

The mix of positives and negatives for respective sectors of the economy was changing in late 2002. Corporate, investment in equipment, had stabilized after prior declines.

In contrast, both the new construction of commercial properties and valuations on existing commercial properties are just now reacting to prior investor exuberance and. resultant excess capacity. Commercial vacancies are rising and leasing rates are falling.

The residential real estate market also appears to have passed its peak. Finally, both revolving consumer debt and real estate mortgage debtservicing requirements are near historically high levels relative to personal incomes, and will constrain future consumer expenditures.

After having declined from their overbought position of two years ago, sharp dayto-day volatility in the securities markets is overlaying a basic neutral trend. Yet, the impact of the prior erosion of asset values may yet have its full impact on consumer outlays and on the year-end balance sheets of corporations that have assets tied up in market securities.

THE OUTLOOK

In 2003, a moderate growth of orders and of business spending on equipment is expected. A partial rebound in the manufacturing sector will occur, as some inventories will be rebuilt. But investment in commercial real estate may decline further.

The biggest question mark is that of consumer expenditures and consequently retail sales, production of consumer products, and activity in consumer service businesses. Although personal incomes from wages and salaries will continue to rise, consumer enthusiasm may dampen in response to pressures from existing debt, a moderately difficult job market, and increases in municipal taxes. Furthermore, a delayed response to the erosion of asset values of the past two years may yet occur.

The near-term business impact of possible hostilities in Iraq is likely to be limited. Should hostilities be of a short period, then the past and present anticipatory buildup of the military will have been more significant than the business impact of the conflict itself. The potential for a disruption in oil supplies is real. But the most likely impact of hostilities on oil supplies would be a short-term cutback in the availability of Iraqi oil and an increase in the pumping of Saudi oil.

Employment has been fairly stable overall in Westchester. Declines in manufacturing employment have been neutralized by increases in services and construction. The decline in manufacturing and increase in service employment that has gone on for decades in Westchester as well as in the New York area and, indeed, nationwide, is likely to continue. Westchester, as the New York City suburbs in general, has had a very strong residential real estate market but relative softness in commercial real estate. Unemployment of area residents is higher than in recent years, yet moderate.

It is reasonable to expect a mixed to weak market in commercial properties in the nearterm and also a softening market in residential real estate. Slow overall growth is expected in retail sales. Severe competitive conditions are expected to exist for individual retail businesses and also for consumer service providers. Consumer durable goods providers could face a difficult market if delayed consumer reaction to declines in paper asset values, job uncertainty and an end to buying induced by declining interest rates. The financial industry and business services that support it in the New York area will struggle with the delayed impact of the prior decline in asset values and business scandals.