Prepared by Dr. John A. Rizzo, LIA Chief Economist

The labor market rebounded strongly in June, with jobs gains far in excess of

expectations. And while some other economic news remains mixed, another big

positive recently has been the resurgent consumer. Consumer confidence remains

solid and this is translating into more spending. Retail sales rose sharply in June.

And while overall GDP growth was sluggish in the second quarter, growing by

just 1.2 percent, consumer spending rose by 4.2 percent. This was more than

double the growth in consumer spending during the first quarter of this year.

The business sector is also reporting solid results, especially with respect to the

non-manufacturing sector. Exports appear to be doing better as well. And while earnings and real estate

prices remain fairly flat, both jobs and home sales are on the rise.

LIA Monthly Economic Report A Research Report for Directors and Members of the Long Island Association, Inc.

August, 2016

This publication is made possible through the support of:

1

The National Economy

The U.S. Labor Market

The labor market rebounded strongly in June, with 287,000 jobs added—far in

excess of the expected 180,000 jobs. Unemployment stood at 4.9 percent. While this

was an increase in the unemployment rate from the prior month’s reading of 4.7

percent, the increase reflects not fewer jobs, but greater labor force participation,

which means more people reentering the labor market in search of work.

Jobless claims remained low, with 266,000 claims during the week of July 23rd

. But

earnings were sluggish, increasing by just 0.1 percent in June.

The U.S. Business Sector

The non-manufacturing sector reported strong

results in June. The Institute for Supply

Management’s (ISM) Non-Manufacturing Index

was at its highest level of the year in June, well in

excess of expectations. New orders and orders for

exports both rose sharply. But as the chart below

indicates, the current level for this index is

still below those seen in 2015.

The labor market

rebounded strongly

in June, with

287,000 jobs

added—far in excess

of the expected

180,000 jobs.

Unemployment stood

at 4.9 percent.

The non-manufacturing sector

reported strong results in

June. The Institute for Supply

Management’s Non-

Manufacturing Index was at

its highest level of the year,

well in excess of expectations.

2

The manufacturing sector also posted gains. The ISM Manufacturing Index rose in June, exceeding

expectations and at levels consistent with expansion. New orders and exports both gained. And this was the

fourth consecutive month of export growth, suggesting that manufacturing sector weakness tied to sluggish

global demand and a strong dollar has subsided. On a less positive note, durable goods orders declined by 4

percent in June. Unfilled orders declined, which some observers have argued means that factories are keeping

production up by working off backlogs rather than responding to new business.

The Energy Sector

Crude oil inventories fell once again, by 2.3 million barrels during the week of July 15th

. Although crude oil

stocks have fallen by about 24 million barrels since their April highs, they are still up by 12 percent year-over-

year.

The supply of natural gas is also quite high. Gas stocks are some 22.1% higher than the 5-year average for this

time of year and are up 18.5 percent year-over-year. As the chart below indicates, stocks of natural gas have

been rising since February of this year.

The U.S. Consumer Sector

There is some evidence that consumer optimism declined in July. The University of Michigan’s Index of

Consumer Sentiment fell to 90%, down 3.5 points from June. This decline largely reflected less optimism about

future economic conditions. Consumers remain strongly positive regarding current conditions. But the

Conference Board’s Index of Consumer Confidence was more positive. That index showed a high level of

confidence in July and little decline from June levels.

3

Retail sales suggest that consumers remain confident. Retail sales were very strong in June, rising by 0.6

percent, far above expectations of a 0.1 percent increase. Both e-commerce sales (+1.1 percent) and department

store sales (+0.9 percent) showed particularly strong gains.

The U.S. Housing Market

Home sales are rising but prices remain quite sluggish according to the Case-Shiller

20-city housing index. That index declined by 0.1 percent in May, well below

expectations that called for a gain of 0.4 percent. In contrast, sales rose by 0.9 percent

over the month in May, and by 5.2 percent year-over-year.

The news for existing home sales was somewhat more favorable. Home sales rose by

1.1 percent in June compared to the previous month, and by 3.0 percent year-over-

year. Prices also showed modest gains, rising by 3.7 percent over the month in June and by 4.7 percent year-

over-year. As indicated in the chart below, existing home sales have been trending upward since about

February of this year.

4

Inflation

Inflation remains low. The Consumer Price Index rose by 0.2 percent in June

compared to the previous month and was up by just 0.1 percent year-over-year.

Monthly prices rose faster for services -- up by 0.3 percent-- than for commodities,

which increased by only 0.1 percent.

U.S. Economic Outlook

Strong consumer spending and jobs growth bode well for the U.S. economy going

forward. The weak 2nd

quarter GDP results are somewhat misleading as slow

inventory accumulation alone caused a 1.2 percentage point drop in GDP. But

sparse inventories indicate greater inventory accumulation going forward which is a

favorable sign for GDP in the coming months. The Federal Reserve Bank’s

decision to hold off on rate increases is another factor that should be favorable for

economic growth going forward. Concerns over Brexit—discussed more fully in

the Focus section on page 7—appear to have abated as well.

The Long Island Economy

Labor Market

The labor market remained strong on Long Island. The June unemployment rate was

3.8 percent, the lowest for June since 2007. The unemployment rate has been below

4 percent for three consecutive months, a pattern that last occurred in 2007.

Private sector jobs grew by 20,800 on Long Island between May and June, compared

to the usual gain of 13,400 jobs during this time period. Hiring was particularly

strong in construction, which added 3,000 jobs—far above the more typical 1,200

jobs.

Substantial jobs growth was also seen in:

Education and health services (+8,300)

Leisure and hospitality (+3,500)

Natural resources, mining and construction (+3,200)

5

Business Conditions

The outlook for small business showed continued, albeit modest, improvement. The Small Business Optimism

Index increased for the third consecutive month in June, to 94.5%. As may be seen in the chart below, while

the index has been on the increase of late, it is below highs achieved in late 2014/early 2015.

The June Empire State Manufacturing Survey results point to very modest expansion that is below expectations.

Consumer Sector

Consumer spending, as evidenced by sales tax collection data, rose modestly in

Nassau County while remaining essentially flat in Suffolk. Year-over-year sales

tax collections rose by 1.96 percent in Nassau County while declining by 0.77

percent in Suffolk. Given the increase in Internet sales over time, these year-over-

year sales tax revenue comparisons may understate actual consumer spending

because proportionately fewer purchases incur local sales taxes in later years.

Adjusting for this change, estimated year-over-year spending may have risen by

2.92 percent in Nassau County and increased by 0.2 percent in Suffolk. Internet sales trends, and the

methodology used to adjust for increasing Internet sales over time, are discussed in the Focus section of the

February, 2016 newsletter.

6

The Real Estate Market

Residential Real Estate

The real estate market is showing renewed strength

on Long Island. Year-over-year sales grew by 17.6

percent in Nassau County in June, from 1,047 to

1,231 units. Home sales grew even more rapidly in

Suffolk County, increasing by 22.9 percent, from

1,219 to 1,498 units.

While home prices have been sluggish for some

time, Nassau County saw a sharp increase in year-over-year median home

price sales in June, from $440,000 to $480,000. But despite the large increase in home sales in Suffolk County,

prices remained flat, increasing by just 1 percent in June, from $340,000 to $343,500.

Commercial Real Estate: Office Space

Vacancy rates for office space is relatively low on Long Island. The average vacancy rate was 14.2 percent in

June. This is among the 20 lowest vacancy rates for office space in metropolitan areas nationally. Vacancy

rates vary widely, however, from a low of 0.0 percent to a high of 61.2 percent. Vacancy rates are much lower

for office space built after 2009 (8.1 percent) compared to older office space, which have average vacancy rates

of 15 percent or more. Office space is fairly old, with some 84 percent of available office space having been

built prior to 1990.

The average asking rent was $27.34 per square foot. Asking rents varied more than two-fold, from a low of

$16.34 to a high of $37.10. Asking rents are up by 1.2 percent year-over-year.

Long Island’s Economic Outlook

Long Island’s low unemployment rate and high rate of labor force participation are positive signs for continued

growth. Strong hiring in construction and leisure and hospitality bode well for Long Island’s real estate and

leisure and tourism sectors.

At the same time, business conditions and consumer spending appear to be sluggish. And while home sales

have been brisk, prices remain flat in Suffolk County. Sharp increases in home prices in Nassau County hint at

a stronger real estate market going forward. But the overall economic outlook is somewhat mixed.

The real estate market is

showing renewed strength on

Long Island. Year-over-year

sales grew by 17.6 percent in

Nassau County in June, from

1,047 to 1,231 units. Home

sales grew even more rapidly in

Suffolk County, increasing by

22.9 percent, from 1,219 to

1,498 units.

1

Focus On… Brexit—How Will It Affect the Real Economy?

Great Britain’s recent vote to exit the European Union -- the so called “Brexit” -- was initially met with

considerable concern and uncertainty in the financial markets, with the Dow Jones Industrial Average

dropping by almost 900 points in short order. But financial markets often react strongly to unfavorable

economic news— perhaps even overreacting at times. The financial markets have since recovered, with the

Dow achieving record levels.

But the most important effects of Brexit relate to the real economy-- jobs, business activity and economic

growth. What are the expected effects on these outcomes? A survey conducted by the Institute for Supply

Management (ISM) sheds some useful light on these issues. The ISM surveyed manufacturing and non-

manufacturing executives about their expectations on the economic effects of Brexit.

The results of that survey, which was conducted during the week following the June 23rd

Brexit vote, found

that business executives do not anticipate major disruptions from Brexit, but do believe it will hamper

economic growth.

Among some of the survey’s main findings:

6 percent of respondents thought that Brexit would have a negative impact on their business and 27

percent thought it would have only a slightly negative effect, with the remainder neutral and a small

percentage anticipating a positive effect.

Just 4 percent of respondents thought that Brexit would have a negative effect on their capital

spending plans; 13 percent anticipated a slightly negative impact with the remainder expecting a

negligible impact (81 percent) or positive effect (2 percent).

9 percent of respondents thought that their firms might or would reduce the size of their workforce as

a result of Brexit.

At the same time, respondents expressed concerns about the effects of Brexit on financial market uncertainty,

currency movements and global economic growth:

89 percent were somewhat or very concerned about financial market uncertainty.

71 percent were somewhat or very concerned about currency movements.

68 percent were somewhat or very concerned about global economic growth.

The results of this survey are expectations shortly after the Brexit vote, a period during which financial

markets were falling sharply and there was considerable concern about the potential fallout from Brexit

reported in the media. But as financial markets have subsequently recovered and concerns subsided, it

appears that business executives’ impressions based on this survey have proven to be largely accurate.

For the full report, see: https://www.instituteforsupplymanagement.org/ismreport/mfgrob.cfm.