William C Dudley: The outlook for the national and local economy
Remarks by Mr William C Dudley, President and Chief Executive Officer of the Federal
Reserve Bank of New York and Chairman of the Committee on the Global Financial System
(CGFS), at the Staten Island Chamber of Commerce, Staten Island, New York, 16 April 2013.
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It is always a pleasure to speak with the business community given your important role in the
community and in the region. I am particularly pleased to have the opportunity to speak to
the Staten Island Chamber of Commerce and to be part of this distinguished panel. Thank
you for inviting me today.
As you know I have the honor of serving as the president and CEO of the New York Fed, one
of the 12 Federal Reserve Banks that together with the Board of Governors in Washington
make up the Federal Reserve System, our nation's central bank. As head of the New York
Fed I am vice-chairman of the Federal Open Market Committee (FOMC), the body that sets
our nation's monetary policy.
The Fed was founded 100 years ago in 1913 to advance economic and financial stability.
Over this century our nation's economic output and standard of living has increased greatly,
but the United States also faced many different challenges - ranging from the Great
Depression of the 1930s to the Great Inflation of the 1970s and most recently the financial
crisis.
The Federal Reserve is independent from politics and the national government but is subject
to oversight by Congress, which has set our dual mandate to promote maximum sustainable
employment and price stability. The Federal Reserve is structured to ensure that the
economic needs of people and businesses in every part of our country are fully considered in
our policy deliberations. What I learn in my visit to Staten Island today is an important input to
our policymaking process.
As New York Fed president I try to get out of my New York City office as much as I can to get
a sense of regional economic conditions across what is known as the second Federal
Reserve District. I've traveled throughout New York, New Jersey and Puerto Rico in recent
years and plan to visit Fairfield County, upstate New York and Queens later this year.
These visits give me the opportunity to explain what the Federal Reserve is doing and to get
your thoughts about the state of our economy and the challenges that you face.
Today, I will focus on the economic outlook regionally and nationally. After that, I'll be happy
to answer any questions you have about what the Fed does, and about the economic
outlook. As always, my views are my own and do not necessarily reflect those of the FOMC
or the Federal Reserve System.
Regional economic conditions
The financial crisis underscored the fact that the world is a complicated place and that the
insights of professional economists and financial experts must be supplemented with a
broader set of perspectives from households and businesses. Today's visit is in that spirit - I
want to talk about what we are seeing in the economy but also to hear from you firsthand
about your assessment of economic conditions.
So what do we see? Let me start with basic economic characteristics. While Staten Island is
the city's least populous borough, its population has grown steadily and rapidly, more than
doubling in the last half-century to close to one-half million residents. On its own, Staten
Island is larger than all other cities in the entire New York-New Jersey region, with the
obvious exception of New York City.
In many ways - homeownership, educational attainment, income, and demographics -
Staten Island more closely resembles the nation than the rest of New York City. For
example, the homeownership rate on Staten Island is almost 70 percent, well above the
30 percent average homeownership rate citywide. Still, with a sizable proportion of the
borough's workers commuting to Manhattan (about 1⁄4 of the island's workers or more than
50,000 people) Staten Island's economy is closely tied to the rest of the city's economy, as
well as to northern New Jersey's. Thus, when Manhattan sees brisk job growth, the residents
of Staten Island have better opportunities.
The New York City economy continues to rebound strongly from the 2008-09 downturn -
more strongly than the nation as a whole. The New York Fed's index of economic activity for
the city has grown solidly and steadily for the past three years, signaling a robust rebound in
the local economy. This strength is reflected in strong job creation: while the U.S. economy
has thus far recovered only about two-thirds of the jobs lost during the recession, New York
City has recovered all its lost jobs and then some. In fact, total employment in the Big Apple
recently surpassed not only its pre-crisis peak of 2008 but also its all-time peak of 1969.
Here on Staten Island job creation has not been quite as robust over the past couple years. It
should be recognized, however, that Staten Island's economy was actually more resilient
than Manhattan's during the recession, experiencing only minimal job losses. Staten Island's
key industries - local-market sectors like health, education and retail trade - tend to be less
susceptible to sharp economic downturns than more cyclical sectors, like manufacturing,
construction and finance.
Even so, not all indicators of the local economy are improving. Unemployment remains
stubbornly high, at just over 8 percent. And home prices, though recovering gradually, are
still down about 15 percent from where they were back in 2007. This compares to nationally
where they are down about 25 percent on average.
The New York Fed's quarterly measures of household credit conditions signal some recent
improvement, though there clearly remain pockets of financial stress among families here. At
year-end, for those people with a credit report, average debt per person in Staten Island
ticked up, rising to about $67,000, after trending down for a number of years. A similar uptick
in debt was observed nationwide, potentially signaling that households are now somewhat
more willing to take on debt. Delinquency rates, however, are still fairly high: 9.7 percent of
all debt in the county is seriously delinquent, well above the national rate. On a more positive
note, delinquency rates on Staten Island are declining and are at their lowest level in
31⁄2 years. Mortgage delinquency rates, though still above the national rate, are also at a
31⁄2-year low.
Recently, of course, Staten Island's greatest challenge has been the massive disruption and
destruction caused by Superstorm Sandy. While many parts of the New York City
metropolitan region were hard-hit by the storm, the devastation was particularly severe here
on Staten Island. And this is something that has had large consequences for some of my
colleagues at the Federal Reserve Bank of New York. Nearly 150 of our employees call
Staten Island their home. While many, thankfully, were spared the full brunt of the storm, I
know quite a few people whose homes were destroyed or severely damaged and others who
lost many of their belongings.
Immediately following Sandy, our Regional and Community Outreach function reached out to
all of the affected communities as part of a needs assessment. We asked: "How can the New
York Fed best leverage our resources to help our community?"
After dozens of conversations with leaders of the community, we determined that pulling
together key service providers under one roof would make a useful contribution. Our
outreach team organized a free relief clinic in this very building. We brought together a wide
variety of government agency representatives and other service providers. I would like to
acknowledge what is a long list: Federal Emergency Management Agency (FEMA), the Small
Business Administration (SBA), the Office of the New York Attorney General, the New York
State Department of Financial Services, the New York Legal Assistance Group, Staten Island
Legal Services, the Legal Aid Society, MFY Legal Services, various bar associations, New
York City Department of Small Business Services, Center for New York City Neighborhoods,
Neighborhood Housing Services of Staten Island and the Northfield Local Community
Development Corporation. I'm proud to say we were able to assist over 150 Staten Islanders,
including homeowners, tenants and small business owners.
We also heard that it could be challenging to find key recovery information and advice online.
So once again, we pulled key resources under one roof - or I should say one URL. We
developed a Sandy Information Center with the best information we could find for folks
impacted by Sandy - including key deadline dates along with expert legal, finance and
insurance guidance. Over 2,000 have benefited from our web resources.
While we are not yet back to normal in neighborhoods like Midland Beach, Oakwood Beach,
New Dorp Beach and Tottenville, the situation is improving and I expect that this recovery will
continue over the coming year. We are going to continue to examine where we can provide
assistance in supporting this effort. One effort, for example, is to provide assistance in
collecting detailed data on the areas that were impacted by the storm.
From talking to some local business people late last November, we know that many
residents and businesses had to wait a long time for insurance claims and small business
loans, as well as to get their heat and power restored. We also know that eight public schools
were closed.
Unfortunately, timely statistics pertaining specifically to Staten Island's economy are scarce,
thus making it hard to accurately gauge the impact from Sandy or the strength and breadth of
the ensuing recovery. So we truly value input from all of you - people on the front lines of the
local economy - to assist us in gauging recent trends and developments in Staten Island's
economy.
National economic conditions
Turning to the national outlook, the U.S. economy remains on the slow growth track that has
persisted since the recession ended in mid-2009. In fact, real gross domestic product (GDP)
grew just 1.7 percent in 2012, below the 2.2 percent rate of the preceding two years. This
lackluster and disappointing performance masks the fact that the underlying conditions that
support growth have been gradually improving. However, in the near-term, this improvement
in fundamentals is being offset by federal tax increases and spending cuts, which economists
call "fiscal drag." The most obvious example of this is the end of the partial payroll tax holiday
at the beginning of this year. This reduced the take-home pay for all those that pay into the
Social Security system.
In a recent speech to the Economic Club of New York, I discussed a number of areas where
economic fundamentals have improved. Here, let me concentrate instead on some areas of
the economy where the impact of this improvement in fundamentals has been most evident:
consumer spending, the housing market, and investment in equipment and software.
Despite the increase in payroll taxes and in high-income tax rates, real - that is,
inflationadjusted - personal consumption expenditures rose solidly in January and February. As has
been the case for some time, the growth of consumer spending has been led by purchases
of durable goods. Car and light truck sales in the first quarter were at the highest pace since
the fourth quarter of 2007. This growth in consumer spending probably is due, in part, to
improvements in labor market conditions, household balance sheets and household access
to credit. However, retail sales were quite weak in March, suggesting that the tax increases
that occurred at the start of the year may be beginning to have a material effect.
After a long period of being a drag on the economy, the housing market is now providing lift
to economic activity, with upward trends evident in housing starts, home sales, and home
prices. To see why this is so important, in 2009 residential investment exerted a
0.4 percentage point drag on GDP growth, while in 2013 it is likely to provide a boost to
growth on the order of 0.5 percentage point - a swing of nearly a full percentage point. In
addition, rising home prices can create positive spillovers to the rest of the economy as
higher home prices lift household wealth and reduce the number of homeowners with
negative equity.
Business investment in equipment and software, another component of private final demand,
strengthened in the fourth quarter, and shipments and orders for nondefense capital goods
suggest further growth in the first quarter. Moreover, indicators of the U.S. manufacturing
sector, including the ISM manufacturing index and most Federal Reserve regional
manufacturing indexes, point to continued moderate growth in the sector.
So why isn't the U.S. economy growing more quickly? The most important reason is the
sharp shift in federal fiscal policy from mild restraint in 2012 to much greater restraint in
2013. The increase in payroll tax rates, the rise in high income tax rates, the increase in
taxes associated with the Affordable Care Act, and the sequester will result in fiscal drag of
about 13⁄4 percentage points of GDP in 2013, an unusually large amount of fiscal restraint
when the economy doesn't have strong forward momentum and unemployment is still
elevated.
In terms of the labor market, we have seen only a moderate improvement in labor market
conditions over the past six months or so. After an encouraging pick up in the pace of job
creation around the turn of the year, the employment report for March showed a gain of only
88,000 jobs. While I don't want to read too much into a single month's data, this underscores
the need to wait and see how the economy develops before declaring victory prematurely. I'd
note that we saw similar slowdowns in job creation in 2011 and 2012 after pickups in the job
creation rate and this, along with the large amount of fiscal restraint hitting the economy now,
makes me more cautious.
Since September, payroll employment has increased an average of 188,000 per month,
compared with an average of 172,000 per month over the previous two years. The
unemployment rate has declined from a peak of 10 percent in October 2009 to 7.6 percent in
March; however, much of the decrease is due to a fall in the number of people actively
looking for a job. Furthermore, as of March there were still almost 3 million fewer jobs than at
the end of 2007, and the ratio of employed Americans to the working age population was
actually lower than it was at the end of the recession. Also, in an indication that employment
is far from healthy, job finding rates have changed little since the recession. New York Fed
staff research agrees with the broad consensus that cyclical factors are the major reason for
the continued weakness in labor market conditions.
In sum, these developments lead me to expect sluggish real GDP growth over the course of
2013 of about 2 to 21⁄2 percent. As such, I anticipate that the unemployment rate will decline
only modestly through the rest of the year.
In the near term, there is considerable uncertainty about the outlook, particularly because the
multiplier effects from fiscal drag and sequestration are still unclear. This uncertainty should
gradually decline - for better or for worse - over the coming months, as the sequester's
impact takes hold and more economic data come in, giving us a clearer picture of the forward
momentum of the economy.
Inflation, as measured by the personal consumption expenditure deflator, is currently well
below the Federal Reserve's objective of 2 percent. There is substantial slack in the labor
market and in the markets for goods and services, and underlying measures of inflation are
subdued. Moreover, peoples' expectations of inflation remain well anchored at levels
consistent with our 2 percent longer-run objective. Thus, I conclude that the risk that inflation
could significantly exceed our 2 percent objective is quite low over the next few years, even if
the economy were to strengthen considerably.
With inflation well below its longer-run goal and high unemployment, the FOMC decided at its
March meeting to maintain a "highly accommodative" policy stance: a federal funds rate in a
range of 0 to 25 basis points with forward guidance based on economic thresholds.
Moreover, to support a stronger economic recovery, the FOMC is purchasing long-term
Treasury securities at a rate of $45 billion per month and agency mortgage-backed securities
(MBS) at a rate of $40 billion per month, and will continue purchasing assets until it sees
substantial improvement in the outlook for the labor market, conditional on ongoing
assessment of benefits and costs. Combined, these actions are intended to ease financial
conditions and thereby help to establish a self-sustaining economic expansion.
As I stated in my recent Economic Club speech, the benefits of our asset purchases - as
reflected in improving financial conditions and the quickening pace of interest-sensitive
spending such as that on consumer durable goods, housing, and capital goods - exceeds
the costs. Furthermore, the labor market outlook has yet to show substantial improvement.
Consequently, I see the current pace of asset purchases as appropriate.
At some point, I expect that I will see sufficient evidence of improved economic momentum to
lead me to favor gradually dialing back the pace of asset purchases. Of course, any
subsequent bad news could lead me to favor dialing them back up again. As Chairman
Bernanke said in his press conference following the March FOMC meeting "when we see
that the...situation has changed in a meaningful way, then we may well adjust the pace of
purchases in order to keep the level of accommodation consistent with the outlook."
Conclusion
Let me reiterate how pleased I am to be here on Staten Island and to have the opportunity to
speak to the members of the Chamber. Parts of Staten Island were among the most
devastated areas in the region and we at the Federal Reserve Bank are committed to doing
all that we can to help people and businesses recover. Many obstacles remain to be
overcome but I am confident that Staten Island will meet the challenges that lay ahead.