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, at Queens College, Flushing, New York, 18 November 2013.
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Good afternoon. It is always a pleasure to speak with the different communities that make up
our region, and it is especially gratifying to have the opportunity to speak with you, our future
leaders. So thank you for inviting me.
I am especially pleased to be here at CUNY (City University of New York) Queens College,
given the relationship that we have developed with CUNY through our educational and
regional outreach. This academic year we are hosting, at the Bank, a Queens College
student participating in the CUNY Service Corps which is a program to provide students with
work experiences in regional and economic outreach. We also collaborated with CUNY for
this year's College Fed Challenge, our yearly competition where teams of students from area
universities take on the roles of the members of the Federal Open Market Committee
(FOMC) and debate the appropriate next step for U.S. monetary policy. A number of CUNY
schools competed and professors served as judges, including your own Professor Thom
Thurston.
My meeting with you today is part of our continuing efforts to understand what is going on at
the grassroots level of our economy and to share what we are seeing. Earlier today, I met
with a number of Queens business leaders, and the leadership of HANAC, the Hellenic
American Action Committee. Following this visit to Queens College, I'm headed to the
Queens Chamber of Commerce to meet with others in the business community.
Subsequently, I'll tour the manufacturing floor of Steinway & Sons piano factory.
The agenda for these visits is always packed, but that's part of the point - to meet with a
diverse array of people in order to get a comprehensive picture of economic conditions and
issues in the regions we serve and a fuller understanding of the major concerns. This is our
second trip to the Borough of Queens in the past few years and recent trips have also taken
us throughout our District, to Upstate New York, Northern New Jersey, Long Island, Fairfield
County, Staten Island, Brooklyn and the Bronx.
These outreach trips complement the ongoing efforts of the New York Fed to assess
conditions in our region, which I will discuss shortly. Among our activities, we monitor
economic performance on a monthly basis, we tap into the insights of the members of our
Small Business and Agriculture Advisory Council and Upstate Advisory Board, we have
constructed a consumer credit panel that allows us to better understand the financial
condition of homeowners and students, we have developed a "Regional Mortgage
Conditions" dataset and other housing tools at the county and zip code level to ensure that
policymakers and counselors are well informed, and we conduct a biannual poll of small
businesses to understand their credit needs and availability. Interestingly, our most recent
poll, released in May of this year, shows improvements in small businesses' ability to get
credit throughout the region, though it remains a major growth challenge for these types of
firms.
As you can see, we have a lot to keep us engaged with the region. Much of this information
can be found on our website, which I would invite you to visit and use as a resource.
Now, I'd like to review recent developments in the local and national economies, and at the
end of my talk will be happy to answer any questions you have.
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.
Regional economic conditions
Starting with the area's economy, one of the greatest challenges in the City over the past
year has been the massive disruption and destruction caused by Superstorm Sandy. While
areas of the New York City metropolitan region were hard hit by the storm, the devastation
was particularly severe along the waterfronts of Queens - and in particular in Far Rockaway.
We saw and heard about the devastation of the storm first-hand from many of those affected,
through a series of support clinics that we held in the storm's immediate aftermath, as well as
from many of our own employees who lived in some of the hardest hit areas.
The good news is that a little more than one-year later there has been a significant rebound
in employment and economic activity across the five boroughs. New York City has continued
to see pretty solid job creation through this past summer, and, in stark contrast with past
economic expansions, this is happening without any direct contribution from the securities
industry - or, more colloquially, Wall Street. So far this year, the city's job gains have been
broad-based, led by strong growth in industries such as education and health, advertising,
computer services, leisure and hospitality, wholesale and retail trade, and, especially,
construction.
Of course, while it is reassuring that most of the city has bounced back strongly from this
historic natural disaster, it is important to remember that the hardest hit communities, and the
residents and businesses there, who lost so much, are still struggling to recover. Many of
those communities are right here in Queens: the whole Rockaway peninsula - from Breezy
Point to Arverne - was completely flooded, as were neighborhoods like Howard Beach,
Springfield Gardens, Lindenwood, and even parts of Flushing, Long Island City, Astoria and
Maspeth. Still, Queens as a whole showed strong resilience - employment bounced back
from Sandy fairly quickly, and as of early 2013 it had already surpassed its pre-Sandy level.
While many residents here commute to work in other boroughs, primarily Manhattan, Queens
has a formidable industrial base of its own. Jobs are prevalent in industries ranging from
medical care to construction, not to mention printing and a number of other manufacturing
industries that benefit from being in a large population center. But Queens' most
concentrated industry is transportation - specifically air transportation which employs about
27,000 workers, about five percent of Queens' jobs.
Education is another key industry in Queens and the city as a whole. And it is not just a job
creator. The investment in human capital that education entails makes it a socially desirable
activity. There is considerable value from a college education both to the person that has
been educated and to society as a whole. The Great Recession and sluggish recovery that
has followed has made it difficult for people to find jobs, and I'm sure you may be wondering
about whether going to college will turn out to be a good investment, especially if faced with
the burden of student debt, something we track quite closely.
Let me reassure you, the benefits of a college degree remain significant. Research we have
undertaken at the New York Fed shows that young people with a college degree are more
likely to have a job and they tend to earn considerably higher wages than those without
degrees - and this is true even for those who may be underemployed initially when they first
enter the labor market after graduation. Although the labor market has been challenging for
college graduates in recent years, I am confident that most will find work and transition into
higher-skilled jobs as they gain experience and as the labor market improves.
Now, I'd like to turn my attention to recent developments in the national economy.
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. However, the
compound annual rate of growth over that period has only been around 2 1⁄4 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 (gross domestic
product) 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.
Thank you for your kind attention and I will now be happy to take some questions.