William C Dudley: US and regional economic conditions
Remarks by Mr William C Dudley, President and Chief Executive Officer of the Federal
Reserve Bank of New York, at the Economic Press Briefing on Private For-Profit Institutions
in Higher Education, New York City, 20 November 2013.
* * *
Good morning and welcome once again to the New York Fed's Regional Economic Press
Briefing. I am pleased to have this opportunity to speak with you - and, through you, to the
people in our District. I am going to discuss conditions in the national economy and then on
conditions in our region, with a focus on private, for-profit institutions, which have become
more visible in the U.S. higher education market.
As always, what I have to say reflects my own views and not necessarily those of the Federal
Open Market Committee (FOMC) or the Federal Reserve System.
National economic conditions
Let me begin by taking stock of where we are at the moment. Then I will address my
expectations for the performance of the economy in 2014 and 2015.
Since the end of what is now called the Great Recession in mid-2009, the U.S. economy has
experienced 17 consecutive calendar quarters of positive growth of real GDP (gross
domestic product). However, the compound annual rate of growth over that period has only
been around 21⁄4 percent, close to prevailing estimates of the economy's potential growth
rate. Thus, we have made limited progress in closing the substantial output gap that was
created during the recession.
A similar conclusion is drawn from an assessment of labor market conditions. Although the
unemployment rate has declined by about 2 3⁄4 percentage points since peaking at
10 percent in October of 2009, a significant portion of that decline reflects the substantial
decline of the labor force participation rate over that period. It should also be noted that since
the previous business cycle peak at the end of 2007, the decline of the labor force
participation rate has been more than accounted for by a decline in participation of people in
the prime working age of 25 to 54.
The inflation data are also consistent with this overall picture of an economy operating well
below its full potential. Total inflation, as measured by the personal consumption
expenditures (PCE) deflator, has been quite volatile in recent years due to sharp fluctuations
in energy prices. Core inflation, which excludes the volatile food and energy components and
thereby may be a better guide as to underlying inflation, slowed from around 2 percent in
early 2012 to just above 1 percent in mid-2013. In recent months it has shown signs of
stabilizing, but remains well below the FOMC's expressed goal of 2 percent for total inflation.
Fortunately, inflation expectations remain relatively stable at levels somewhat above the
current inflation rate. This stability should help prevent an undesirable further drop in inflation
relative to our 2 percent objective.
That said, there are some nascent signs that the economy may be doing better. For
example, based on the first estimate, which is subject to revision, real GDP increased at a
2.8 percent annual rate in the third quarter of 2013, above the trend of the past four years.
And the most recent payroll employment report showed a pickup in the monthly pace of job
gains. The 3-month moving average rose back above a 200,000 pace after slowing to about
150,000 as of July of this year. I hope that this marks a turning point for the economy.
But before we rush to this conclusion, a few more cautionary comments are appropriate.
With respect to GDP growth, it turns out that inventory investment contributed 3⁄4 of a
percentage point to that overall growth rate. Thus, because this impetus from inventories will
likely reverse this quarter, the real GDP growth rate is likely to slow to around a 2 percent
annual rate or a bit less in the fourth quarter. With respect to payroll employment, we have
seen such bursts in payroll growth before over the past few years and have been
disappointed when the pickups proved temporary and did not lead to a rise in the overall
growth rate.
But, I have to admit that I am getting more hopeful. Not only do we have some better data in
hand, but also the fiscal drag, which has been holding the economy back, is likely to abate
considerably over the next few years at the same time that the fundamental underpinnings of
the economy are improving.
The first thing to note is that federal fiscal policy in 2013 has been unusually contractionary.
At the beginning of the year the payroll tax cut expired while tax rates on higher income
households were raised, a series of taxes associated with the Affordable Care Act took
effect, and spending was reduced due to the sequester and the gradual winding down of
foreign military operations. According to the Congressional Budget Office, the
cyclicallyadjusted or full-employment budget balance increased by roughly 1 3⁄4 percentage points of
GDP in fiscal year 2013. Over the past 50 years there have been only two other episodes of
fiscal contraction of this order of magnitude, and both of those occurred when the
unemployment rate was substantially lower than it has been of late. Under current law, the
amount of federal fiscal restraint will decline in 2014 and then decline further in 2015. At the
same time, the sustained contraction in spending and employment by state and local
governments appears to be over.
The fact that the U.S. economy has continued to grow at around a 2 percent pace in 2013
despite this quite intense fiscal restraint provides evidence to the second key point, which is
that the private sector of the economy has largely completed its healing process and is now
poised to ramp up its level of activity. Key measures of household leverage have declined
and are now near the lowest levels they have been in well over a decade. Household net
worth, expressed as a percent of disposable income, has increased back to its average of
the previous decade, reflecting rising equity and home prices and declining debt. Recently,
banks have eased credit standards somewhat after a prolonged period of tightness. As a
result, we are now experiencing a fairly typical cyclical recovery of consumer spending on
durable goods. For example, sales of light-weight motor vehicles have increased steadily
over the past four years, reaching an annual rate of 15.7 million in the third quarter of 2013,
though sales in September and October have been somewhat below that average.
Similarly, after five years in which housing production was well below what is consistent with
underlying demographic trends and the replacement demand for houses, it now appears that
we have worked off the excess supply of housing built up during the boom years of the last
decade. Housing market activity has begun to recover, and a widely followed national home
price index is up 12 percent over the 12 months ending in September.1 Anecdotal reports
suggest that this higher-than-expected increase in home prices is due to a relatively low
number of homes for sale. Due to this shortness of supply, there is reason to expect
increases in starts going forward.
Yet another bright spot on the horizon is the fact that growth prospects among our major
trading partners have improved following a few years of lackluster performance which
induced a sharp slowing of growth of U.S. exports. In particular, the euro area appears to
have emerged from a protracted recession and is experiencing modest but positive growth.
To summarize, while growth in 2013 has been disappointing, I believe a good case can be
made that the pace of growth will pick up some in 2014 and then somewhat more in 2015.
The private sector of the economy should continue to heal, while the amount of fiscal drag
should subside. Despite near-term concerns, growth prospects among our major trading
partners will improve further next year. This combination of events is likely to create an
environment in which business investment spending will strengthen. As growth picks up, I
expect to see more substantial improvement in labor market conditions and a gradual updrift
in inflation back towards the FOMC's target rate.
However, the notion that the economy will grow more swiftly remains a forecast rather than a
reality at this point. As is always the case, there is substantial uncertainty surrounding this
forecast. Moreover, there is always the possibility of some unforeseen shock. Thus, we will
continue to monitor U.S. and global economic conditions very carefully and will adjust our
views on the likely path for growth, inflation and the unemployment rate accordingly.
Regional economic conditions
Let me turn now to the regional economy. A year has passed since Superstorm Sandy
devastated the tri-state region. And even today, many of the hardest-hit places are still
struggling to recover and rebuild from the storm. In fact, reminders of the storm's damage
remain visible in neighborhoods across Brooklyn, Queens and Staten Island, as well as
along the coasts of Long Island and New Jersey. On a more encouraging note, however, the
broader regional economy has proven to be remarkably resilient. After a brief dip following
the storm, the regional economy quickly rebounded and has continued to add jobs at a
reasonably good pace. Moreover, the region's housing markets have continued to show
steady improvement throughout the year.
To help monitor the performance of the regional economy more generally, the New York Fed
produces economic activity indexes for New York State, New York City and New Jersey.
Based on these measures, New York City's economy has continued to grow strongly
throughout the year, and both New York State and New Jersey have seen some pickup in
growth in recent months. As a result, a growing number of places in the region have either
recovered or are close to recovering the jobs that were lost during the Great Recession.
More troubling, however, is that Puerto Rico's economy remains exceptionally weak; activity
and employment on the Island continue to decline. Our economists will elaborate on these
trends this morning.
Private for profit institutions in the higher education landscape
The important role of post-secondary education is undeniable given the key role that human
capital plays in economic growth. However, the higher education landscape comprises
different types of post-secondary institutions that provide different educational experiences.
One such group of institutions - private for-profit institutions - have progressively become
more visible in the U.S. higher education market. For-profit institutions and their growth in the
market for student loans and federal need-based aid is the subject of the special topic in
today's briefing.
Analysis done here at the New York Fed reveals that enrollment in for-profit colleges showed
explosive growth nationally during, and for some time after, the Great Recession.
Interestingly, this growth in enrollment has leveled off perceptibly as the economic recovery
has taken hold. These patterns suggest that workers who were displaced from their jobs
during the Great Recession chose to enroll in two-year and less-than-two-year colleges,
mostly in for-profits but also in public community colleges. Now, with improved labor market
conditions, individuals have less reason to get a short-term degree or may have returned to
the labor force.
Stark patterns are also observed in the market for student loans. Both the incidence of
student loans and average loan size are by far greater in for-profit institutions than in
comparable public colleges. Given the importance of post-secondary education in our
nation's future, and the key role that human capital plays in our nation's growth, we at the
New York Fed will continue to analyze the growth of the private for-profits in particular, and
post-secondary institutions in general, in our region and the nation.
I will now ask Jaison Abel to discuss economic conditions in our region.