William C Dudley: The national and regional 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 Business Council of Fairfield County, Stamford, Connecticut, 2 July 2013.
* * *
Good afternoon. I am pleased to be here with the Business Council of Fairfield County. I am
told that your meetings are very inclusive - that you routinely invite education professionals,
executives of local not-for-profit agencies and community leaders as well as business
leaders. In doing so, you assemble the type of broad Main Street audience that I most enjoy
addressing. So, thank you for inviting me here today.
Today I want to talk a bit about the outlook for the nation and the region. As many of you
know, I was scheduled to speak at this forum on October 29 of last year but that meeting had
to be postponed because of the arrival of Superstorm Sandy which hit on that very day. The
region covered by the New York Fed was at the center of the storm, and Fairfield County, as
well as parts of the Connecticut shoreline suffered extensive damage.
Immediately following the storm, our Regional and Community Outreach function worked
with all of the affected areas as part of a needs assessment. We asked: "How can the
New York Fed best leverage our resources to help our community?" We heard that it could
be challenging to find key recovery information and advice online. So we pulled key
resources under one roof - or I should say under one URL. We developed our Sandy
Information Center with the best information we could find for residents and businesses
impacted by Sandy - including key deadlines along with expert legal, finance and insurance
guidance.
Conditions are not entirely back to normal, and restoration and repair activities continue in a
number of hard-hit neighborhoods. Connecticut, along with New York, New Jersey, Maryland
and Rhode Island, have been appropriated federal funding for relief efforts and this should
help move the area's recovery forward. I am confident that these areas will recover over the
course of the year. The legislation also contains funding for helping coastal communities to
prepare to weather future storms better.
My meeting with you today is part of our continuing efforts to understand what is going on at
the grassroots level of our economy. Let me offer a few examples from this trip. Yesterday
evening I met with some of Stamford's business leaders to discuss the local state of
economic and business conditions. This morning I met with Mayor Finch and key economic
development staff to discuss Bridgeport's redevelopment initiatives. Local efforts such as
these and your business council are essential complements to the Fed's support for
economic recovery. I applaud the efforts of state and local governments and community
leaders to bolster the recovery in Bridgeport, Stamford and elsewhere in the district.
I also met with Joan Carty from the Connecticut Housing Development Fund. We discussed
innovative approaches for addressing the foreclosure crisis here and across the state.
Housing has been a major impediment to a more rapid economic recovery and we at the Fed
have been working hard to help homeowners and the overall housing market recover.
Afterwards, I spoke with small business leaders about the opportunities and challenges they
are facing today. I traveled to Sikorsky Aircraft Corporation with several goals in mind. I
wanted to learn how sequestration was affecting ground-level operations, to understand the
local and regional economic impact of Sikorsky, and to view state-of-the-art manufacturing at
work.
After this program, I will be meeting with Joseph Carbone of The Workplace to discuss best
practices and emerging approaches to workforce development, particularly his innovative
program for the long-term unemployed which I understand he is piloting in five different cities
across the nation. At the end of the day I will be meeting with University of Connecticut
(UConn) Stamford campus staff, your own executive director Chris Bruhl and other officials
to learn about the ecosystem that is being created to spur further economic development
locally. I'll end the day with a meeting with Governor Malloy to better understand the complex
issues and opportunities facing the state.
The agenda for these visits is always packed, but that's part of the point - to meet with a
diverse array of representatives in order to get a comprehensive picture of what's happening
on Main Street and its interaction with state and national developments. At the end of my talk
I will be happy to answer any questions you have about the economic outlook from my
perspective.
As always, what I have to say reflects my own views and not necessarily those of the Federal
Reserve System or the Federal Open Market Committee, also known as the FOMC.
National economic conditions
I would like to begin by taking stock of where we are at the moment. Then I will address my
expectations for the performance of the economy over the remainder of 2013 and into 2014.
Since the end of the Great Recession in mid-2009, we have had 15 consecutive quarters of
positive growth of real GDP. However, the average annual growth rate over that period has
been just 2.1 percent. Although the unemployment rate has declined by 2.5 percentage
points from its peak of 10 percent in October of 2009, much of this decline is due to the fact
that the labor force participation rate has fallen by 1.5 percentage points over this period.
Recall that discouraged workers who do not actively look for work are regarded as not
participating in the labor force and so are not counted as unemployed even though they are
without jobs. Using an alternative measure, the employment to population ratio, which is not
influenced by changes in the number of discouraged workers, there has been limited
improvement in labor market conditions. Job loss rates have fallen, but hiring rates remain
depressed at low levels. Taken together, the labor market still cannot be regarded as
healthy. Numerous indicators, including the behavior of labor compensation and household
assessments of labor market conditions, are all consistent with the view that there remains a
great deal of slack in the economy.
That being said, I see persuasive evidence of improved underlying fundamentals for much of
the private sector of the U.S. economy. Key measures of household leverage have declined
and are now at 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 liabilities. Banks are
beginning to ease 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, light-weight motor vehicles sold at a seasonally-adjusted
annual rate of 15.3 million in May, not far from the 16.1 million sales in 2007.
Similarly, after five years in which housing production was well below what is consistent with
underlying demographic trends, it now appears that we have worked off the excess supply of
housing built up during the boom years of the last decade. Housing starts and sales are now
on a clear upward trend, and a widely followed national home price index is up around
12 percent over the twelve months ending in April.1 Indeed, anecdotal reports suggest that
this higher-than-expected increase in home prices is due to a lack of homes for sale.
Unfortunately, the improvements in consumer spending on durable goods and housing are
not yet showing through in the overall GDP growth rate due to the significant headwinds that
we continue to face. First, federal fiscal policy has recently become quite contractionary.
Estimates from the Congressional Budget Office (CBO) indicate that this fiscal restraint is on
the order of 1.75 percentage points of potential GDP this year. In the period since 1960,
there have been only two previous episodes of fiscal contraction of this order of magnitude
- 1969 and 1987 - both of which occurred when the economy was on a more solid footing
than it is today. Second, the euro area is experiencing a protracted recession and growth in
many of the largest emerging economies has slowed. This has resulted in a very sharp
slowing of U.S. exports, with an associated slowing in production and employment growth in
the U.S. manufacturing sector.
Thus, I continue to see the economy as being in a tug-of-war between fiscal drag and
underlying fundamental improvement, with a great deal of uncertainty over which force will
prevail in the near-term. This tug-of-war is clearly seen in the monthly employment data.
Over April and May, the average monthly gain in employment in the private service-providing
sector has been well maintained at 175,000. In contrast, employment in the manufacturing
sector and the federal government declined a combined 20,000 per month. And the resulting
uncertainty is, I believe, an important contributing factor behind the relatively sluggish pace of
business investment spending.
My best guess is that growth for all of 2013, measured on a Q4/Q4 basis, will be about what
it has been since the end of the recession. But I believe a strong case can be made that the
pace of growth will pick up notably in 2014. The private sector of the economy should
continue to heal, while the amount of fiscal drag will begin to subside. I also see some
indications that growth prospects among our major trading partners have begun to improve;
for example, the rise in the June euro area composite Purchasing Managers' Index. And this
combination of events is likely to create an environment in which business investment
spending will gather strength.
Finally, I believe this tug-of-war analogy is useful in explaining the recent inflation dynamics.
As is well known, total inflation, as measured by the personal consumption expenditures
(PCE) deflator, has slowed sharply over the past year and is now running below the FOMC's
expressed goal of 2 percent. Softness in energy prices, resulting from the weakening of
global growth mentioned earlier combined with increased energy production here in the U.S.
has contributed to the slowing of total inflation. However, it is also the case that core inflation,
that is, excluding food and energy, has slowed sharply as well. A decomposition of core
inflation reveals that some of the decline is due to slowing in the rate of increase in prices of
non-food and non-energy goods. This probably is due in large part to the softening of global
demand for goods and the modest appreciation of the dollar that has occurred since
mid-2011.
In the service sector, the rate of increase in prices of medical services and "non-market"
services - the latter includes some financial services - also has slowed notably recently. In
contrast, the rate of increase in prices for other non-energy services has been relatively
stable. Comparing this set of conditions to that in 2010, the recent slowing of inflation has
been less widespread across core goods and core services, and inflation expectations so far
have declined less appreciably than they did in 2010. Thus, my best guess is that core goods
prices will begin to firm in the months ahead as global demand begins to strengthen and
inventories get into better alignment with sales.
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 be monitoring 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 in response to new information.
At its recent meeting, the FOMC decided to continue its accommodative policy stance. It
reaffirmed its expectation that the current low range for the federal funds rate target will be
appropriate at least as long as the unemployment rate remains above 6.5 percent, so long as
inflation and inflation expectations remain well-behaved. It is important to remember that
these conditions are thresholds, not triggers. The FOMC also maintained its purchases of
$40 billion per month in agency MBS and $45 billion per month in Treasury securities, with a
stated goal of promoting a substantial improvement in the labor market outlook in a context
of price stability.
In its statement, the FOMC said that it may vary the pace of purchases as economic
conditions evolve. As Chairman Bernanke stated in his press conference following the FOMC
meeting, if the economic data over the next year turn out to be broadly consistent with the
outlooks that the FOMC sees as most likely, which are roughly similar to the outlook I have
already laid out, the FOMC anticipates that it would be appropriate to begin to moderate the
pace of purchases later this year. Under such a scenario, subsequent reductions might occur
in measured steps through the first half of next year, and an end to purchases around
mid-2014. Under this scenario, at the time that asset purchases came to an end, the
unemployment rate likely would be near 7 percent and the economy's momentum
strengthening, supporting further robust job gains in the future.
As I noted last week in our regional press briefing, a few points deserve emphasis. First, the
FOMC's policy depends on the progress we make towards our objectives. This means that
the policy - including the pace of asset purchases - depends on the outlook rather than the
calendar. The scenario I outlined above is only that - one possible outcome. Economic
circumstances could diverge significantly from the FOMC's expectations. If labor market
conditions and the economy's growth momentum were to be less favorable than in the
FOMC's outlook - and this is what has happened in recent years - I would expect that the
asset purchases would continue at a higher pace for longer.
Second, even if this scenario were to occur and the pace of purchases were reduced, it
would still be the case that as long as the FOMC continues its asset purchases it is adding
monetary policy accommodation, not tightening monetary policy. As the FOMC adds to its
stock of securities, this should continue to put downward pressure on longer-term interest
rates, making monetary policy more accommodative.
Third, the Federal Reserve is likely to keep most of these assets on its balance sheet for a
long time. As Chairman Bernanke noted in his most recent press conference, a strong
majority of FOMC participants no longer favor selling agency MBS securities during the
monetary policy normalization process. This implies a bigger balance sheet for longer, which
provides additional accommodation today and continuing support for mortgage markets
going forward.
Fourth, even under this scenario, a rise in short-term rates is very likely to be a long way off.
Not only will it likely take considerable time to reach the FOMC's 6.5 percent unemployment
rate threshold, but also the FOMC could wait considerably longer before raising short-term
rates. The fact that inflation is coming in well below the FOMC's 2 percent objective is
relevant here. Most FOMC participants currently do not expect short-term rates to begin to
rise until 2015.
To reiterate what I said last week, some commentators have interpreted the recent shift in
the market-implied path of short-term interest rates as indicating that market participants now
expect the first increases in the federal funds rate target to come much earlier than
previously thought. Setting aside whether this is the correct interpretation of recent price
moves, let me emphasize that such an expectation would be quite out of sync with both
FOMC statements and the expectations of most FOMC participants.
Regional economic conditions
Turning to the regional economy, my colleagues and I at the New York Fed continually track
conditions in our District, and we have a number of tools we use for that purpose.
To promote growth in our local communities, we publish extensive data and analysis on the
local economy. We provide outreach initiatives, such as our workshops on access to global
markets to help small businesses learn about loan programs and sources of credit
enhancements. We also run an annual video festival for college students in the Second
District. In this program student teams produce videos aimed to help young adults make
sound personal financial decisions. A panel of advertising and video professionals selects
winning video productions for screening in local movie theaters.
As you know, even states as wealthy as Connecticut have large pockets of poverty. So, we
target some of our work specifically to low- and moderate-income groups.
We have worked hard to help neighborhoods that face high foreclosure rates. This work is
important obviously because foreclosures are a terrible event for those who lose their homes.
But beyond that, this work is important because high levels of foreclosures affect neighbors'
home values, the local tax base and economic vitality more broadly. We have provided
housing counselors and community groups with the latest information on mortgage
conditions via mortgage briefs, roundtables, presentations and an interactive web tool that
shows very local monthly delinquency and foreclosure conditions. This past fall we hosted a
conference on distressed residential real estate to share new expert analysis with senior
policymakers and practitioners from across the nation. Your new Commissioner of Housing
- whom I note, formerly worked at the New York Fed - attended that conference.
We also conduct a periodic poll about the credit needs of small businesses, which are an
important source of new jobs in the District. If you represent a small business and would like
to participate in our next poll, please pass your business card to my colleagues, who are in
the audience, or see me after the speech. And if your business is somewhat larger, I urge
you to consider becoming one of our business contacts - just indicate your interest to us on
your business card.
So how is the region doing? I want to begin by pointing out that Fairfield County has a
number of strengths, beginning with a highly-educated workforce: Two in five adults in the
county hold a college degree, nearly twice the nationwide average. It also has an array of
fine educational institutions, including Fairfield University, UConn Stamford, the University of
Bridgeport, Sacred Heart University, Western Connecticut State University, Housatonic
Community College and Norwalk Community College.
The industry mix here is quite diverse, with a good representation of jobs in the high-paying
finance sector. In fact, roughly 35,000 jobs in the county, about 9 percent of total
employment, are in the finance and insurance industry, a share almost twice as large as in
the nation and even slightly higher than in New York City. Although the sector has shed jobs
over the past two years, it remains an important and valuable component of the local
economy. There are also numerous corporate headquarters in the county and a notable
manufacturing presence, particularly in the pharmaceuticals, electrical equipment and
aerospace industries.
In addition, the whole tri-state region has benefited from its proximity to New York City,
where the rebound in the economy - and also in employment - has been much stronger.
Fairfield County's connection to New York City is not quite as strong as Long Island's or the
lower Hudson Valley: About 7 percent of working residents in the county commute to
New York City compared to about 20 percent in those areas. Still, the city's strong pace of
job creation during the current recovery is supporting incomes in the county.
Turning to the recent performance of the economy, this area is growing pretty much in line
with the nation, at least in terms of employment. That's a bit of an improvement from 2012
when, after solid gains in 2010 and 2011, job creation in both Fairfield County and
Connecticut had stalled. Some sectors, such as education, health, and professional and
business services were adding jobs; but those were offset by job losses not only in finance,
but also in the goods-producing and distributing sectors.
And at the end of October, Superstorm Sandy hit the region, causing major damage and
disruption. While most of the news focused on New York City, Long Island and New Jersey,
parts of Fairfield and New Haven counties - cities and towns like Bridgeport, Stamford,
Milford, and Fairfield - were severely affected as well. Thankfully, Sandy's disruptive effect
on the region's economy seems to have been short-lived. Fairfield County did see some job
losses during the winter months, and Sandy likely contributed to that. But, in the spring this
area saw a strong and broad-based rebound in employment. In fact, in May employment in
Fairfield County surged to a more than four-year high.
Even with this recent surge in employment, however, the county has recouped only about
60 percent of the 36,000 jobs lost during the last downturn, whereas the nation has recouped
close to three-quarters of its job losses and New York City has more than fully rebounded.
And, at more than 7 percent, the county's unemployment rate remains high.
Another dimension of the local economy where we have seen modest improvement is
housing. Homebuilding, as measured by housing permits issued, languished from 2008
through 2011; but last year, multi-family construction picked up noticeably, and this year
single-family construction has begun to move up as well. Home values have also begun to
recover. After falling about 25 percent between 2006 and early 2012, home prices have risen
by 5 percent in Fairfield County and 3 percent across Connecticut overall. While this upturn
in home prices is encouraging, it has been considerably weaker than in other parts of our
region and also weaker than nationally.
The New York Fed's measures of regional credit conditions suggest continued financial
challenges for families here. As of the first quarter of 2013, average debt per person was
about $60,000 in Connecticut and over $90,000 in Fairfield County - little changed over
several years. The county's delinquency rate on that debt is now 5.7 percent, similar to the
national average. And the mortgage crisis continues to take a toll on local homeowners. As
of the first quarter, about 6 percent of mortgage debt in Fairfield County was 90-plus days
delinquent, slightly higher than the national delinquency rate.
It is also important to recognize the county's strengths that will support recovery and the rise
in household income over the longer term - over and above just being close to a thriving
New York City. In particular, the above-average educational attainment of residents and the
numerous educational institutions position the area well to move into the expanding
knowledge-based economy. Also, its diverse industry mix has a good representation of jobs
in high-paying sectors and the area maintains its attractiveness as a location for corporate
headquarters.
Thank you for your kind attention and I will now be happy to take a few questions.