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November 1996 Volume 2 Number 12 New York State’s Merchandise Export Gap Howard Howe and Mark Leary New York’s merchandise export performance has trailed the nation’s for several years. The cause of this gap is not easy to identify: the state maintains a relatively healthy mix of customer markets, remains well represented in industries with strong foreign demand, and continues to enjoy declining labor costs. A broader look at New York’s competitiveness, however, reveals that high nonlabor costs may be hurting the state’s manufacturing sector and thus its volume of exports. Since 1990, New York State’s merchandise export performance has lagged that of the United States as a whole. From 1990 to 1995, the state’s foreign exports grew only 2.9 percent per year, while the nation’s exports grew a substantial 8.3 percent per year. By 1995, New York’s share of U.S. merchandise exports had fallen to 5.6 percent, from 7.3 percent in 1990 (Chart 1). The contrasting export performances of state and nation have had significant repercussions for economic growth: while the rapid acceleration in U.S. exports added momentum to the nation’s economic recovery in the first half of the 1990s, the slow growth in New York’s exports has done little to spur the more tentative comeback in the state.1 This edition of Current Issues seeks an explanation for the troubling slippage in New York’s merchandise exports. We look first at the state’s customer markets and the mix of goods it sends abroad—two factors that can influence demand. We then consider whether the area’s labor costs could be driving up the price of New York’s exports. Surprisingly, we find that none of these factors can satisfactorily explain the gap in export performance. As a result, we look for evidence of more fundamental competitive problems affecting New York’s manufacturing sector as a whole. We conclude that the state’s nonlabor costs—including high energy prices and burdensome taxes—may be hurting production for both domestic and foreign markets. Are New York’s Customer Markets and Export Composition the Problem? The most obvious explanation for deteriorating export performance is weak customer markets. If New York catered to low-growth economies, we would expect its export performance to flag. Fast-growing economies, however, are as well represented in the state’s export markets as they are in the nation’s. New York’s export share to Canada—the largest contributor to U.S. export growth over the past five years—is even greater than the U.S. average (Table 1).2 In addition, 11 percent of both New York’s and the nation’s exports are sold to high-growth markets in Asia. A significant portion of the state’s merchandise exports goes to the established markets of Europe and Japan, although New York does trail the nation in the proportion of goods it exports to fast-growing Mexico (3 percent as opposed to 9 percent for the United States). Overall, the geographic breakdown of New York’s export markets explains only a small part of the state’s overall lag in export performance. Indeed, differences in the geographic composition of the state and national export markets can account for a mere 0.1 percentage CURRENT ISSUES IN ECONOMICS AND FINANCE Chart 1 only 1.1 percent per year, while for the United States as a whole exports rose at a healthy 14.2 percent rate. New York’s exports of instruments—which represent 11 percent of total exports in the state, or more than twice the national level—grew at less than half the U.S. pace. For chemical exports, the difference in the two growth rates was a sizable 3.8 percentage points. New York State’s Share of U.S. Exports Percent 10 8 7.3 6.5 6.2 5.8 6 5.8 5.6 1994 1995 In two categories—industrial machinery and transportation equipment—exports broke from the general pattern of slower growth in New York. The state’s exports of industrial machinery (including computers) grew 11.6 percent per year, 2.5 percentage points faster 4 2 0 1990 1991 1992 1993 The geographic breakdown of New York’s export markets explains only a small part of the state’s overall lag in export performance. Sources: MISER (1996); authors’ calculations. point decline in New York’s relative export performance from 1990 to 1995. The industrial composition of New York’s merchandise exports also fails to explain the state’s export gap. Electrical machinery, industrial machinery, chemicals, transportation equipment, and instruments led U.S. export growth from 1990 to 1995. In New York, the export concentration in these top five categories, 62 percent, corresponds closely to the U.S. average of 60 percent (Table 2). Clearly, New York manufacturers have a presence in industries experiencing strong foreign demand. than the U.S. average. In the transportation equipment category, New York’s exports advanced 4.4 percent per year, while the nation’s exports grew 3.8 percent per year. Superior performance in these two industries, however, was not enough to offset the state’s lagging performance in the other major export sectors. Moreover, New York’s slightly faster growth in transportation equipment stemmed entirely from a spurt in 1995 and may not prove sustainable. Although the state and national concentrations in these industries are similar, New York’s exports grew at a slower pace than the U.S. average in three of the five categories (Table 2). The most notable gap between New York’s and the nation’s growth rates was in electrical machinery. In this category, the state’s exports grew Table 2 Composition of Exports, New York and the United States Percent of Total Exports, 1990-95 Average Industry Category New York State Manufacturing Industrial machinery 17 (11.6) Transportation equipment 14 (4.4) Electrical machinery 14 (1.1) Instruments 11 (3.7) Miscellaneous (excluding jewelry) 9 (4.6) Chemicals 6 (5.0) Other manufactures 27 (-2.9) Nonmanufacturing Agriculture 1 (5.6) Mining, oil, and gas 0 (-9.0) Total 100 (2.9) Table 1 Major Export Markets, New York and the United States Percent of Total Exports, 1990-95 Average Market Canada Asia United Kingdom Japan Switzerland Germany Mexico Total New York State 24 11 9 8 7 4 3 65 United States 21 11 5 11 1 4 9 63 United States 16 17 12 5 1 10 32 (9.1) (3.8) (14.2) (8.4) (9.7) (8.8) (8.7) 6 1 100 (5.3) (0.7) (8.3) Sources: MISER (1996); authors’ calculations. Sources: MISER (1996); authors’ calculations. Notes: Asia comprises Hong Kong, Taiwan, South Korea, and Singapore. Figures may not sum to totals because of rounding. Notes: Annual growth rates appear in parentheses. Figures may not sum to totals because of rounding. FRBNY 2 New York’s Labor Costs Are Competitive Another factor that can contribute to declining export performance is high labor costs. Although not the only production cost, labor is the largest input cost and a commonly used indicator of competitiveness. In this section, we compare manufacturers’ unit labor costs,3 export performance, and output in New York State and the nation. U.S. merchandise exports has continued to widen despite the state’s unit labor cost advantage. What Other Factors Can Explain the Gap? Our review of New York’s customer markets, export composition, and labor costs leaves the slow growth of the state’s exports largely unexplained. We do know, however, that the slippage in the state’s export performance has coincided with a general falloff in the state’s manufacturing output. These parallel developments raise the question, What other factors could be creating a negative business environment and discouraging manufacturers from producing goods in New York for both foreign and domestic markets? Although the evidence is thin, some studies indicate that manufacturers encounter high nonlabor costs when operating in New York. For manufacturing as a whole, and for most major industries, New York’s unit labor costs relative to the nation’s have declined markedly since the mid-1980s For manufacturing as a whole, and for most major industries, New York’s unit labor costs relative to the nation’s have declined markedly since the mid-1980s. To evaluate New York’s nonlabor costs, we consult an annual benchmark study that compares business costs across states and assesses the fifty states’ over- (Chart 2). This cost advantage has not, however, produced an overall acceleration in manufacturing output or merchandise exports. In fact, as Chart 2 shows, New York’s manufacturing output has slipped progressively behind U.S. manufacturing output since 1982. New York has the highest unit energy costs of all the states and ranks among the highest in urban housing costs. In one sector, industrial machinery, New York’s export performance appears consistent with the sector’s relative unit labor cost trend (Chart 3). New York’s unit labor costs in industrial machinery have been declining relative to the U.S. average since 1985, and New York’s exports of industrial machinery have outperformed U.S. exports in this category since 1990, even though state output has lagged U.S. output since 1986. In the other major export sectors, however, the gap in New York– all business climates (Corporation for Enterprise Development 1995).4 Using a set of twenty-four indicators, 5 the study measures each state’s development capacity, that is, its potential for future growth and recovery from economic adversity. Significantly, the study assigns a grade of “C” to New York State’s development capacity in three of the past five years. Several of the development indicators cited in the study may Chart 2 Exports, Output, and Unit Labor Costs in New York and the United States Index 1990 = 100 160 Merchandise Exports Index 1980 = 100 160 Manufacturing Output 140 140 New York State/United States 0.98 Relative Unit Labor Costs in Manufacturing 0.96 0.94 United States United States 120 0.92 120 0.90 100 New York State 80 1990 91 92 93 94 95 100 New York State 0.88 80 1977 80 85 Sources: MISER (1996); Bureau of Labor Statistics; Bureau of Economic Analysis; authors’ calculations. 3 90 92 0.86 1975 80 85 90 92 CURRENT ISSUES IN ECONOMICS AND FINANCE Conclusion We set out to uncover factors that could explain New York’s declining share of manufactured exports. We find that export composition and labor costs compare favorably with those of the United States as a whole and therefore cannot account for the gap between the state’s export performance and the nation’s. New York’s exports have been well represented in high-growth markets, and the five fastest growing export categories represent the same share of total exports for New York as for the United States. Finally, New York’s manufacturing labor costs are below the U.S. average and declining relative to that average. help explain the deteriorating trends in manufacturing exports and output. New York has the highest unit energy costs of all the states and ranks among the highest in urban housing costs. Additionally, New York scores poorly in bridge adequacy and sewage treatment needs. The state’s heavy tax burden may also discourage business activity. A study by M&T Bank compares state and local tax levels in New York with those in seven similar states—California, Texas, Florida, Ohio, Pennsylvania, Michigan, and Illinois (M&T Bank 1995). In 1992, New York’s combined state and local taxes were the second highest per capita among these states. The local component of these taxes was the highest in the nation and more than twice the U.S. average. Even excluding New York City’s high taxes, New York State’s per capita local taxes were still 75 percent above the U.S. average and more than 50 percent higher than those in the next highest taxed state in the study, Illinois.6 The M&T study finds that state-mandated services and spending as well as multiple layers of local government contribute to New York State’s heavy tax burdens. Why, then, have New York’s merchandise exports failed to keep pace with U.S. merchandise exports? The relatively harsh business climate for New York’s manufacturing sector may be the answer. New York is saddled with the nation’s highest energy costs. Moreover, infrastructure indicators point to key deficiencies relative to other states. Finally, New York’s state and local tax burdens rank high compared with those of similar states. Although none of these factors alone can explain the decline in New York’s manufacturing performance, together they add up to burdensome costs for manufacturers. These nonlabor factors together can inhibit manufacturing activity in several ways. Companies facing higher energy costs and higher taxes cannot price their goods competitively. Steep urban housing costs mean that companies will find it difficult to recruit and retain workers. Infrastructure problems can increase construction costs and complicate the shipping of both supplies and finished goods. Although such effects are not easily quantified, these nonlabor factors would very likely discourage companies from locating in New York—or from expanding their existing operations in the state— and hence dampen production for export. Notes 1. A rise in exports can stimulate the domestic economy through increased demand for intermediate inputs, higher incomes, and economies of scale. See, for example, Bauer and Eberts (1990). 2. Export data are from the Massachusetts Institute for Social and Economic Research (MISER) of the University of Massachusetts. MISER makes adjustments to state export data compiled by the U.S. Census Bureau. See MISER (1996). Chart 3 Exports, Output, and Unit Labor Costs in the Industrial Machinery Sector, New York and the United States Index 1990 = 100 200 Exports 180 160 Index 1980 = 100 140 Output 130 120 New York State New York State/United States 1.10 Relative Unit Labor Costs United States 1.05 New York State 110 1.00 100 0.95 140 120 90 United States 0.90 100 80 80 1990 91 92 93 94 95 70 1977 80 85 90 92 0.85 1975 80 85 90 92 Sources: MISER (1996); Bureau of Labor Statistics; Bureau of Economic Analysis; authors’ calculations. 4 FRBNY Note 2 continued We exclude gold, jewelry and precious gems, and works of art and antiques from total exports. A disproportionately high share of these goods is shipped out of New York City, but only a small portion of their value is produced in New York State. (See Howe and Leary [1995] for details on excluding these categories from the data.) References Bauer, Paul W., and Randall W. Eberts. 1990. “Exports and Regional Economic Restructuring.” Regional Science Perspectives 20. Corporation for Enterprise Development. 1995. The 1995 Development Report Card for the States. Washington, D.C. 3. The unit labor cost for each industry equals the average hourly earnings of each worker divided by productivity. Productivity is measured by the ratio of industry output to industry employee-hours (industry output / (employment x average weekly hours)). Industry output is based on nominal gross state product. Employment, hours, and earnings data are from the Bureau of Labor Statistics. Gross state product data (available only through 1992) are from the Bureau of Economic Analysis. Edison Electric Institute. 1994. Statistical Yearbook of the Electric Utility Industry, 1993. Washington, D.C., December. Howe, Howard, and Mark Leary. 1995. “New York Merchandise Exports.” Federal Reserve Bank of New York Research Paper no. 9529, December. M&T Bank. First Empire State Corporation. 1995. “Analysis of Local Government Tax Burden and Expenditure Trends.” 4. The study draws on data from the Edison Electric Institute (1994), the Department of Housing and Urban Development (1994), and the Environmental Protection Agency (1993), among other sources. Massachusetts Institute for Social and Economic Research (MISER). 1996. U.S. Foreign Trade Reports. U.S. Department of Housing and Urban Development. 1994. “Section 8 Housing Assistance Payments Program; Fair Market Rents Final Rule.” Federal Register, September 28. 5. Not all of the twenty-four indicators apply to the manufacturing sector directly. 6. The M&T Bank study also compares the tax structure of Wyoming County, a small rural county in New York State, with that of similar counties in the peer states. Although Wyoming County’s tax burden is 28 percent below the state average, its per capita tax revenues and local government expenditures are still 20 percent and 27 percent, respectively, above the average for similar counties in the other states. U.S. Environmental Protection Agency. Office of Water. 1993. 1992 Needs Survey Report to Congress. EPA 832-R-93-002. Washington, D.C., September. About the Authors Howard Howe is a research officer and senior economist in the International Research Function of the Research and Market Analysis Group; Mark Leary, formerly an assistant economist in the Function, is currently an MBA candidate at New York University’s Stern School of Business. The views expressed in this article are those of the authors and do not necessarily reflect the position of the Federal Reserve Bank of New York or the Federal Reserve System. 5 FRBNY CURRENT ISSUES IN ECONOMICS AND FINANCE Recent Current Issues Date Vol./No. Title Author(s) 1/96 2/1 Coping with the Rising Yen: Japan’s Recent Export Experience Klitgaard 2/96 2/2 Dynamics of the Second District Economy Bram 3/96 2/3 Small Business Lending and Bank Consolidation: Is There Cause for Concern? Strahan, Weston 4/96 2/4 Core CPI: Excluding Food, Energy ... and Used Cars? Peach, Alvarez 4/96 2/5 1996 Job Outlook: The New York–New Jersey Region Orr, Rosen 5/96 2/6 Understanding Aggregate Default Rates of High Yield Bonds Helwege, Kleiman 6/96 2/7 The Yield Curve as a Predictor of U.S. Recessions Estrella, Mishkin 7/96 2/8 Consolidation and Competition in Second District Banking Markets Jayaratne, Hall 8/96 2/9 Securitizing Property Catastrophe Risk Borden, Sarkar 9/96 2/10 Repo Rate Patterns for New Treasury Notes Keane 10/96 2/11 Has the Stock Market Grown More Volatile? Laster, Cole Readers interested in obtaining copies of Current Issues in Economics and Finance through the Internet can visit our site on the World Wide Web (http://www.ny.frb.org). From the Bank’s research publications page, you can view, download, and print any edition in the Current Issues series, as well as articles from the Economic Policy Review. You can also view abstracts for Staff Reports and Research Papers and order the full-length, hard-copy versions of them electronically. 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