William C Dudley: The national and local economic outlook - an update
Remarks by Mr William C Dudley, President and Chief Executive Officer of the Federal
Reserve Bank of New York, at the University of Bridgeport, Bridgeport, Connecticut, 8 April
2016.
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Jaison Abel, Jason Bram, Tony Davis, Richard Deitz, Jonathan McCarthy and Joseph Tracy assisted in preparing
these remarks.
Good morning. I am very pleased to be in Bridgeport and to speak with you today. I would
like to give a special thanks to the University of Bridgeport for their part in making this event
possible.
My visit today is part of our ongoing efforts at the Federal Reserve Bank of New York to
better understand the regional economy. We plan trips like this so that we can meet with a
diverse array of stakeholders in the region to gain insights and perspectives on the local
economy. These trips also allow us to hear from Main Street about the major issues and
concerns affecting people and businesses in the area. Fairfield County is our first destination
in 2016, and this is the second time we have visited the area in the past three years.
I am looking forward to meeting with a number of different groups today. After starting our
day here at the University of Bridgeport, we will meet with an organization called The
WorkPlace to hear about some of the nationally-recognized programs they have successfully
developed to help the long-term unemployed find jobs. Long-term unemployment is a
significant problem in the broader economy, and something that I will discuss in more detail
later in my remarks. Next, we will take a tour of the American Job Center, an organization
that provides workforce assistance to job seekers in conjunction with local businesses. Later
we will attend, a roundtable lunch with members of the Bridgeport Regional Business
Community. And, finally, we will meet with leadership from the Housing Development Fund,
New Horizons and NeighborWorks America to hear about the state of affordable housing and
community development in Fairfield County.
These trips are valuable to us, and represent one of the many ways in which the New York
Fed engages with people and businesses in our region. Another one of our efforts in this vein
is our Small Business Credit Survey - the latest version of which was released last month.
This survey - which includes responses from across 26 states - helps us understand the
challenges facing small businesses in the region, focusing on financing needs and
impediments to obtaining credit. We partnered with multiple organizations throughout
Connecticut to produce this survey - some of which are right here in Bridgeport - and
received responses from nearly 200 small business owners from around the state. I'd like to
personally thank those who participated in the survey.
The remainder of my remarks will focus on recent developments in the national and local
economy. As always, what I have to say today reflects my own views and not necessarily
those of the Federal Open Market Committee (FOMC) or the Federal Reserve System.
U.S. economic outlook
Despite the swings we have seen in financial markets over the past few months and the
recent divergences across different economic and financial market indicators, recent
developments have not led me to make a fundamental change in my outlook for the U.S.
economy. I continue to expect that the economy will expand over the course of this year at a
pace slightly above its long-term trend - sufficient to push the unemployment rate down a bit
further and to more fully utilize the nation's labor resources. On inflation, although recent
data have been somewhat firmer, it still appears that inflation for this year will fall short of our
2 percent objective for the personal consumption expenditure (PCE) deflator. However, I
anticipate an eventual return to our objective as the transitory factors that have held down
inflation dissipate over time.
In assessing the current state of the U.S. economy, recent news has generated divergent
signals. Several sectors have been showing signs of softness. Real consumer spending
growth appears to have moderated somewhat from the relatively robust pace of the second
half of 2015. Both new and existing home sales have flattened since the middle of last year.
Finally, indicators of real business investment spending point to continued softness. In
contrast, manufacturing production - which had been a particular weak spot of the U.S.
economy in 2015 - rose in the first two months of this year. Recent survey data, including
our own Empire State Manufacturing Survey, indicate further improvement in conditions for
the manufacturing sector in March.
Through it all, the U.S. labor market has remained healthy. Payroll employment increased an
average of about 229,000 per month over the course of 2015, and the gains in the first
quarter of this year were nearly as high. Even though the unemployment rate ticked up in
March to 5 percent, the amount of slack in the labor market still appears to be diminishing.
Both the share of the population that is employed and the labor force participation rate have
risen a bit over the past several months, with the employment-to-population ratio now at its
highest level since the end of the recession. However, measures of aggregate wage growth
have remained quite subdued, which suggests there is still some slack in the labor market.
An important question is how to reconcile these cross-currents. I continue to anticipate that
consumption and housing activity will expand at a moderate pace this year. Continued job
and wage gains, combined with still-low energy prices, should sustain real disposable
income growth and support consumer spending. The housing market should remain on a
solid trajectory, supported by rising employment and low mortgage rates. In contrast to
previous years, fiscal policy should also provide a moderate stimulus this year. I believe that
these positive factors will be sufficient to offset weakness in other areas, such as net exports
and fixed business investment that will continue to be adversely impacted by the still-strong
dollar, weak foreign growth, and low energy and commodity prices.
Putting this all together, I expect real GDP growth of about 2 percent in 2016, slightly below
the average pace of growth in this expansion, but a bit above my estimate of the potential
growth of the U.S. economy. If this materializes, then we should see some further reduction
in the unemployment rate to around 43⁄4 percent - my estimate of the rate that I view as
consistent with stable inflation over the long term.
Turning to the outlook for inflation, on a year-over-year basis, both headline and core inflation
have recently risen above the low levels that prevailed through most of 2015. Nevertheless,
inflation still remains below the Federal Reserve's 2 percent objective. As the FOMC noted in
its March statement, this continued low inflation is partly due to declines in energy prices and
non-energy import prices. Although energy prices have stopped falling and the dollar has
stopped appreciating, earlier movements in these factors still appear to be weighing on
inflation.
A concern with this long period of low inflation is that it has the potential to reduce inflation
expectations, which, in turn, would tend to continue to hold down inflation. As past
experience shows, it is difficult to push inflation back up to the central bank's objective if
inflation expectations fall meaningfully below that objective. Japan's experience is cautionary
in this regard.
Recent evidence on inflation expectations suggests some firming, but there is still cause for
concern. Although both measures of longer-term inflation compensation based on nominal
and inflation-indexed Treasury securities as well as some survey measures of inflation
expectations have risen modestly since mid-February, the levels of many of these measures
remain quite low.
Now, as I have noted, the low level of market-based inflation compensation probably reflects
factors besides inflation expectations, in particular lower term premiums. Still, it would be
prudent to consider the possibility that longer-term inflation expectations of market
participants may have declined somewhat. Even after a rise in its most recent reading, the
median of the three-year inflation expectations from the New York Fed's Survey of Consumer
Expectations remains near its lowest reading over its short history. Renewed declines in
survey measures would be worrisome. However, at this point, my conclusion is that inflation
expectations have not become unanchored.
In sum, I anticipate that the combination of decreasing resource slack and anchored
longerterm inflation expectations will help push inflation up to our 2 percent objective over the
medium term. The recent rise in inflation and in measures of inflation expectations have
increased my confidence around this outlook compared to earlier in the year, but it is still
possible that the return of inflation to our objective could take longer than I anticipate.
The forecast that I have just described is my best assessment of how the U.S. economy will
evolve this year. As always, there is uncertainty and risk relative to this forecast, which also
needs to be taken into consideration in assessing the implications of the outlook for monetary
policy. I see the uncertainties around my forecast to be somewhat greater than usual. This
assessment reflects the divergent economic signals I highlighted earlier. In addition, the
factors behind the financial turbulence we saw earlier this year do not yet appear to be
resolved fully.
Although the downside risks have diminished since earlier in the year, I still judge the
balance of risks to my inflation and growth outlooks to be tilted slightly to the downside. The
low levels of energy and commodity prices may signal more persistent disinflationary
pressures than I currently anticipate, while renewed tightening of financial market conditions
could have a greater negative impact on the U.S. economy. Also, there is significant
uncertainty about economic growth prospects abroad and how this will affect the U.S.
economic outlook. I continue to monitor global economic and financial market developments
closely to assess their implications for the outlook.
Given my outlook and risk assessment, I judge that a cautious and gradual approach to
policy normalization is appropriate. Moreover, caution is also called for because of our limited
ability to reduce the policy rate to respond to adverse developments, recognizing that we
could also use forward guidance and balance sheet policies to provide additional
accommodation if that proved warranted. Of course, the trajectory of short-term interest rates
and the timing of future monetary policy adjustments will continue to be informed by the
incoming data - both economic and financial - and how that data influences the outlook.
The problem of long-term unemployment
Before turning to the outlook for the local economy, I would like to spend a few minutes
talking about the problem of long-term unemployment. The Great Recession was very
severe, resulting in a large decline in output and damage to the labor market. From peak to
trough, non-farm payroll employment declined by 8.7 million. The unemployment rate peaked
at 10 percent. At the same time, the average duration of unemployment increased
significantly. The number of individuals classified as long-term unemployed - that is, those
who were unemployed for at least 27 weeks - peaked in December 2010 at 6.4 million, an
increase of 5.3 million from the cyclical low in May 2007. Long-term unemployment as a
fraction of total unemployment increased from 16.7 percent to 44.8 percent. The hardships of
prolonged unemployment touched many families around the country and this is tragic.
The very accommodative monetary policy that we implemented in response was aimed at
helping to heal the labor market and promote price stability. Slowly, the economy began to
respond and to recover. In October 2014, the FOMC announced the end of its latest asset
purchase program citing that "there has been substantial improvement in the outlook for the
labor market since the inception of its current asset purchase program." In March 2015, the
FOMC set out conditions for the decision to begin to normalize monetary policy, stating "The
Committee anticipates that it will be appropriate to raise the target range for the federal funds
rate when it has seen further improvement in the labor market and is reasonably confident
that inflation will move back to its 2 percent objective over the medium term." The FOMC
judged at its December 2015 meeting that those conditions had been met.
The improvement that we have seen in the labor market is very welcome. It took until May
2014 for the labor market to recover the jobs lost in the recession, but now there are
5.3 million jobs beyond the prior cyclical peak. The unemployment rate has declined to
5.0 percent. With this improvement, the number of long-term unemployed has been reduced
to 2.2 million. Despite these gains, it is important to emphasize that more needs to be done
to improve the labor market. The current number of long-term unemployed is still higher than
the prior cyclical peak in June 2003, and is more than a million above the prior cyclical low in
October 2006.
Further progress on transitioning these unemployed workers back into jobs requires
sustained effort on many fronts. Essential to this effort are programs such as the Platform to
Employment developed by The WorkPlace. I am looking forward to my visit there later today
to hear more about this program. The Platform to Employment program has been replicated
in nearly 20 communities across the country from Newark to San Diego. Helping the
longterm unemployed regain employment needs to be a priority for all of us.
The ongoing challenge in reducing the number of long-term unemployed is also a reminder
of the importance of financial stability and sustainable economic growth. Recessions can
quickly undo years' worth of hard-earned progress in the labor market. Making the financial
system and the economy more resilient so we can avoid such deep downturns in the future is
a responsibility that I take very seriously.
Local economic outlook
Turning now to the region, while Fairfield County's economy has recovered from the Great
Recession, its job growth has lagged behind both New York City and the nation. Only
recently has employment approached its pre-recession levels, and it is still well shy of where
it was back in 2000. Other barometers of the Fairfield County economy, such as home
prices, also indicate a slow recovery from the recession. There are still a sizable number of
properties that are either in foreclosure or up for foreclosure sale, which has weighed down
the local housing market. Yet, Fairfield County has not been the only place in the metro
region to see a sluggish recovery - notably, both northern New Jersey and the Mid-Hudson
Valley have yet to see employment return to their pre-recession peaks.
This picture is in contrast with New York City's economic performance, which has been
exceptionally strong throughout this expansion, and has been a driver of growth for the whole
tri-state region. Why is New York City seeing so much stronger job growth than Fairfield
County? After all, it wasn't so long ago that Stamford was attracting finance-sector jobs away
from Manhattan. The answer lies in a mix of cyclical and secular trends. On the cyclical side,
while finance employment has been sluggish in both New York City and Fairfield County,
New York City is benefiting from strong employment gains in technology, construction,
retailing and advertising - sectors that are not contributing to the same degree in Fairfield
County. In addition, Stamford has had to deal with the relocations of UBS and RBS, while
Fairfield faces the prospective relocation of GE.
One potential long-term trend that is likely affecting the region is a renewed urbanization: that
is, a gradual but broad-based shift of preferences to urban living, especially for younger
generations. Throughout the second half of the 20th century, we saw a steady and
widespread migration from cities to suburbs. More recently, this suburbanization trend seems
to have halted; and there are signs that cities, especially major cities, have been gaining
relative to their suburbs. It's too early to say if this is the start of a secular trend, and the
implications for Fairfield County are unclear. However, Stamford and Bridgeport stand to
benefit from a shift in preferences toward more urban living, given their high population
densities and strong transit links to New York City.
Even now, while Fairfield County may have lagged in job growth, population growth has
remained quite sturdy - not only across the county, but here in Bridgeport as well. In fact,
Bridgeport's population has grown by about 6 percent since 2000 - its first sustained
increase since the 1940s - while Stamford's has grown by almost 10 percent.
Fairfield County can leverage its proximity to the New York City job market. While most
residents of Fairfield County rely on job opportunities locally, many residents commute to
jobs in Manhattan. So the strength in New York City's economy should be of significant help
to Fairfield County. Over the past year, New York City's economy has, on average, added
more than twice as many jobs each month as the total expected job losses from the
relocations of GE, UBS and RBS. While a majority of these jobs may not have been in
highpaying-industry sectors, some of them were - especially in technology-related industries. So,
as long as New York City keeps adding jobs at such a brisk pace, Fairfield County will
benefit. In addition, research indicates that a strong central city is critical for the well-being of
its suburbs, meaning that a healthy and growing New York City economy is critically
important to Fairfield County.
What else can the region do to foster economic growth going forward? It certainly helps for
cities like Bridgeport and Stamford to be attractive locations for businesses to locate and
grow. It is also important to focus on quality of life issues that make people want to live here
- like good schools and low crime, and also amenities ranging from nice parks to good
restaurants. Bridgeport has clearly been making progress in this regard, both along the
waterfront at Steelpointe Harbor and along Main Street. With New York City's large and
booming economy nearby, and Metro North providing a convenient mass transit link,
anything that makes people more inclined to live here - and perhaps even set up shop here
- is bound to boost the local economy. And finally, one of the most important ingredients for
a healthy urban economy is a well-trained and motivated work force. It cannot be overstated
how important it is to help provide residents with the skills and tools they need to be
productive and successful, so that they can realize their full potential.
College graduates finding good jobs
I would like to close with a message for the students in attendance today, especially those of
you who will be graduating soon. If you started college four or five years ago, you may have
heard about the difficult time that graduates have had finding good jobs, perhaps even
making you wonder about the value of obtaining a college degree. Indeed, in the years
following the Great Recession, unemployment and underemployment among recent college
graduates reached highs not seen in decades. So, it wouldn't be surprising if many of you
are concerned about your ability to find a good job after graduation.
I want to make two points that should temper these concerns. First, it is not unusual for
college graduates to take some time to find the right job when they transition from school to
the working world. In good economic times, as well as in bad times, there is often an
adjustment period as newly-minted graduates search for a job that best fits their skills and
interests. Second, as the job market has continued to strengthen through the expansion, it
has gotten easier for those graduating from college to find a good job.1
While job opportunities for those with a college degree were flat between 2011 and early
2014, demand for college graduates has been on the rise for about two years now. As a
result, for the first time during this recovery, both unemployment and underemployment
among recent college graduates has generally been falling. This means that, not only has it
become easier to find a job upon graduation, but more college graduates are taking jobs that
better utilize their degrees. In addition, starting salaries for recent college graduates have
been increasing for the past couple of years, reflecting the growing demand for their skills in
a tighter job market.
To conclude, while there are economic challenges facing both the nation and the region, I am
optimistic that we will continue to make progress on both fronts over the next few years.
Achieving our dual mandate of maximum sustainable employment and price stability will help
those who will graduate soon to achieve their own aspirations.
Thank you for your kind attention. I would be happy to take some questions.