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 the Brooklyn College, Brooklyn, New York, 7 March 2014.
* * *
Good afternoon and thank you for inviting me. 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 talk with you, our future leaders.
I am especially pleased to be here at Brooklyn College, given the relationship that we at the
New York Fed have developed with The City University of New York (CUNY). As an
example, we collaborated this year on the 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 steps for U.S.
monetary policy. A number of CUNY schools competed and professors served as judges.
Also, several CUNY schools had a strong showing in our annual Savvy Credit Video Festival
which I'll speak more about later.
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. At the Federal
Reserve, we try to meet with a diverse array of people in order to get a comprehensive
picture of economic conditions in the regions we serve and a fuller understanding of the
major issues. Earlier today, I met with developers and local community leaders to learn about
the redevelopment of the Atlantic Yards, was welcomed to a roundtable breakfast meeting
with members of the Brooklyn Chamber of Commerce and then traveled to Brownsville to
learn about the challenges faced by that community. Following this visit to Brooklyn College,
I'm headed to Bush Terminal in Sunset Park to meet with city officials and learn about an
important redevelopment project and then I'll end the day at Etsy - a successful innovative
start-up and a major private-sector employer here in Brooklyn.
These trips are only one of the many ways in which we seek to engage with the people and
businesses in our region. We also reach out to our local communities through web
resources, workshops and conferences. To assess the performance of the regional
economy, we monitor economic activity on a monthly basis, we tap into the insights of the
members of our Small Business and Agriculture Advisory Council and Upstate Advisory
Board, and we have constructed a consumer credit panel that allows us to better understand
the financial condition of homeowners and students at the local level. We conduct two
monthly surveys - the Empire State Manufacturing Survey and the Business Leaders Survey
of service firms - which help us monitor regional business conditions in close to real-time.
We've also developed a "Regional Mortgage Conditions" analysis at the county and zip code
level. In addition, we conduct a biannual poll of small businesses to understand their credit
needs and availability. It is noteworthy that our most recent poll found that cash flow issues
replaced credit availability as the number one concern of small companies.
We also have worked to support better financial decision-making by young consumers. Every
year the Bank conducts two competitions in which college students are challenged to
produce a 30-second video promoting wise credit use. The two contests, one held in Puerto
Rico and the other in the tri-state region, provide students the opportunity to learn about the
importance of personal finance while showcasing their filmmaking creativity. The winning
video is then shown at numerous local movie theaters, helping promote the value of the
smart use of credit. This year the judges, including Maria Bartiromo from Fox Business,
Tamir Muhammad from the Tribeca Film Institute and Jim Rosenberg from UNICEF, selected
a Brooklyn College entry, entitled "Elevate Your Credit" as the winner. I am pleased to again
congratulate Rasa Partin, Ben Remetz and Andrew Roder, and their coach, Jay Kim, for
creating the winning video.
Now I would 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 employment and economic trends
First, let's talk about economic trends in New York City. The City's economy showed
resilience both during and after this last severe recession. Payroll employment fell sharply in
2008 and 2009; it bounced back, slowly at first, but by July of 2011, the City's economy had
recovered to its pre-recession employment peak and, in November, it eclipsed its previous
all-time peak of 1969. Since then, employment has continued to grow strongly, rising at a
roughly 2 percent annual pace and outpacing the national growth rate. The demand for labor
has been driven by start-ups, tech, health care and business services. While Superstorm
Sandy caused substantial damage to homes and the region's infrastructure and severe
economic disruptions in late 2012, the local economy as a whole bounced back quickly.
Despite the robust job growth, the unemployment rate among City residents has been
persistently high - though it did fall to 8.0 percent in December, nearly a 5-year low. Potential
workers are not counted as unemployed unless they are actively looking for work, so this
relatively high rate of unemployment, in part, reflects the relative strength in labor force
participation, as the City's residents remain engaged and looking for work. In contrast, at the
national level, the picture is quite different - job growth has been slower and proportionately
more people have dropped out of the labor force.
Perhaps surprisingly, while historically a key driver of the local economy, the finance sector
has not been a leader in terms of job growth recently. Instead, employment in New York
City's finance sector and the securities industry specifically, has been essentially flat over the
past two years. The city's job gains in this expansion have been broad-based across other
sectors, indicating a healthy diversification within the economy.
Conditions in Brooklyn
Now let's focus on Brooklyn. The borough's economy has been particularly strong in recent
years. Compared with the other boroughs, Brooklyn has seen generally stronger job growth,
a stronger housing market, and stronger trends in wage and salary earnings. This strength is
exemplified by the transformation of industrial neighborhoods - such as DUMBO, Red Hook,
Greenpoint, East Williamsburg, Gowanus and Bushwick - into increasingly diversified
residential and commercial neighborhoods; and the recent development of the Atlantic Yards
and Brooklyn Navy Yard. This changing landscape has helped spur economic activity which
has created many new jobs in the borough.
Indeed, employment held up well during the recession, declining by less than 2 percent over
a brief period in early 2009, and has averaged a nearly 3 percent annualized growth rate
since then. Job growth has been particularly strong at retailers, hotels and restaurants, and
also service firms ranging from advertising to engineering. That said, the employment picture
does have some difficulties. For example, there is concern over some well-paying health
sector jobs given the financial strain at Long Island College Hospital and Interfaith Medical
Center and the pressure to close those institutions.
Brooklyn's economic vitality is also reflected in the commercial real estate market, as both
office and retail vacancy rates have fallen steadily over the past few years. In fact, office
vacancy rates are now lower in Brooklyn than in Manhattan. The strength in the housing
market is also evident, with the median home price up by roughly 10 percent in each of the
past two years, and the rental market has shown similar strength.
However, these increasing prices also raise two other issues that acutely afflict many in
Brooklyn and New York City more broadly: housing affordability and poverty. Despite
Brooklyn's economic renaissance and growing affluence, a large swath of the Borough's
population - one in four residents - still lives in poverty, and many struggle to pay their rent
or mortgage. Even with the strong pace of job creation, Brooklyn's unemployment rate has
remained high, averaging more than 9 percent in 2013.
There are also continued financial challenges for families here as indicated by the New York
Fed's measures of credit conditions. As of the end of 2013, average debt per person was
about $42,000 in Brooklyn - little changed over several years. At the same time, the
Borough's delinquency rate on that debt is now 11.6 percent, much higher than the state
average and more than double the national average. What's more, the mortgage crisis
continues to take a toll on local homeowners. As of the end of 2013, more than 11 percent of
mortgage debt in Brooklyn was 90-plus days delinquent, again significantly higher than the
New York State and national delinquency rate.
I also want to make a few comments about the impact of 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 Brooklyn - and in particular in southern Brooklyn
and neighborhoods like Red Hook. We saw and heard about the devastation of the storm
from many of those affected, including a number of our own employees as well as other
residents we met at a series of assistance clinics we organized in response to the storm.
Those already living close to the edge financially were particularly vulnerable as were the
City's public housing residents. Still, Brooklyn's economy showed resilience: while
employment did drop in November 2012, it bounced back strongly the next month and
accelerated during the spring of 2013, reaching new highs.
Sandy was a catastrophe for many in our region and significant challenges remain in the
years ahead. Recently, the Federal Emergency Management Agency issued preliminary
Flood Insurance Rate Maps that show a much larger number of Brooklyn residents and
businesses at risk of a future storm. While a once-in-a-hundred-year risk of flooding may not
appear worrisome, many within this expanded zone may be required to purchase insurance.
The expanded flood zones, coupled with federal government efforts to have insurance
premiums accurately reflect the risk, could create a serious affordability problem in the years
ahead. The New York Fed has created maps of community-level flood risk in Brooklyn.
Now I would like to turn my attention to recent developments in the national economy.
National economic conditions
From the end of the Great Recession in mid-2009 through mid-2013, real Gross Domestic
Product, or the aggregate value, after adjusting for inflation, of all the goods and services
produced within the borders of the U.S., grew at a rather tepid 2 1/4; percent annual rate.
Then, in the second half of 2013, the pace of growth moved notably higher, reaching an
annual rate of 3 1/4 percent. Nonetheless, despite this pickup in the growth pace, the
average monthly gains in nonfarm payroll employment were somewhat lower in the second
half of the year compared to the first half.
At the same time, both total and core inflation, as measured by the Personal Consumption
Expenditures (PCE) deflator, slowed in the second half of 2013 relative to the first half, and
the overall PCE deflator index is currently running well below the FOMC's expressed goal of
2 percent for total inflation.
Combined with the still-elevated unemployment rate and the drop in the labor force
participation rate, these conditions suggest that there continues to be a substantial
underutilization of both labor and capital resources. This implies, in turn, that the current,
highly-accommodative stance of monetary policy will remain appropriate for a considerable
time to come. Let me elaborate on these points.
While the timing and magnitude of the pickup of growth were earlier and somewhat stronger
than our internal forecast, in qualitative terms the economy has performed much as we
expected. First, by several measures, households' balance sheets are in much better shape,
and this has led to faster growth of consumer spending, particularly for durable goods. Key
measures of household leverage have declined and are now near the lowest levels they
have been in well over a decade. Reflecting rising equity and home prices and declining
debt, household net worth relative to disposable income has climbed back to its average of
the previous decade. Recently, banks have eased credit standards somewhat after a
prolonged period of tightening. In fact, our own Consumer Credit Panel, a representative
sample of the liability side of the U.S. consumer balance sheet derived from consumer credit
reports, indicates that total household liabilities increased last quarter on a year-over-year
basis, the first rise since mid-2008.
In addition to the firming in consumer spending, growth of exports was quite strong over the
second half of last year. Following a few years of lackluster performance, growth among our
major trading partners improved, providing a boost to employment and output in our
manufacturing sector. Moreover, the important advances made in oil drilling technology have
boosted U.S. energy production, cutting oil imports and boosting petroleum product exports
and this is also leading to steady improvement in our trade balance. The economy also
received an important boost from quite strong inventory accumulation, which added nearly a
full percentage point to the annualized second half growth rate. This inventory investment
was broad-based across sectors and types of goods. In fact, all four quarters of 2013 saw a
positive growth contribution from inventory accumulation, something that typically only occurs
as the economy first emerges from recession. I interpret this as a sign of increased
confidence about the economic outlook within the business community.
Finally, federal fiscal restraint lessened over the second half of 2013. This is in sharp
contrast to the first half of the year, when the payroll tax cut expired, 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. Moreover, the sustained contraction in spending and employment
by state and local governments appears to be nearing an end.
I wish that I could report that the improved pace of growth of economic activity led to a
corresponding increase in the rate of improvement in labor market conditions. But such was
not the case. As I noted earlier, the average monthly change of nonfarm payroll employment
over the second half of the year, at 184,000 per month, was somewhat below the 204,000
average monthly increase of the first half. In addition, growth of aggregate hours worked by
private sector employees was somewhat slower in the second half than in the first. The
source of this apparent anomaly is the fact that labor productivity, or output per hour worked,
rose rapidly over the second half of the year after being essentially unchanged over the first
half. This is a perfect example of the double-edged sword of productivity growth. In the
longrun, sustained strong productivity growth is what boosts real living standards. However, in
the short-run it can depress job creation.
While overall labor market indicators for the second half of 2013 were not particularly strong,
the overall trend in unemployment showed some improvement with the unemployment rate
falling sharply over that period, from 7.5 percent in June to 6.7 percent in December.
However, as has been the case since October of 2009 when the unemployment rate peaked
at 10 percent, this decline in the unemployment rate was driven in large part by a decline in
the labor force participation rate. Much has been written about the forces that are causing
this decline of the labor force participation rate. Researchers have shown that the aging of
the population is playing a role, as are changes in behavior. But our own analysis suggests
that the cyclical weakness of demand for labor is an important contributing factor. As a result,
I conclude that the decline of the unemployment rate significantly overstates the degree of
improvement in the labor market.
Looking forward, I believe that the underlying fundamentals of the U.S. economy have
improved to the point where we can expect sustained growth above the roughly 2 1/4 percent
annual pace that prevailed from mid-2009 through mid-2013. Also, the amount of fiscal drag
continues to diminish. Another good piece of news is that Congress has raised the debt
ceiling until March 2015. This lessens the risk that political brinkmanship in Washington could
harm consumer and business confidence.
That said, I expect that growth, over the near term, will slow somewhat from the pace we saw
during the second half of last year. In particular, during the current quarter, unusually cold
and snowy weather will undoubtedly depress activity somewhat - especially with respect to
construction activity, but also to a lesser extent in areas such as retail spending. Also, as
mentioned above, some special, one-time factors, such as very rapid growth of exports and
sustained inventory building, are unlikely to be repeated over the first half of this year.
Moreover, while there is now a much better balance between supply and demand in the
housing market, that market is still adjusting to the roughly 100 basis point increase in
mortgage interest rates that occurred in mid-2013.
I do expect that growth will be strong enough to lead to continued improvement in labor
market conditions. I must caution, however, that the outlook for the unemployment rate is
unusually uncertain. If our assessment is correct, at some point an improving labor market
should cause the labor force participation rate to stabilize or rise a bit as currently
discouraged workers begin looking for work. Such developments could result in a more
muted rate of decline of the unemployment rate despite the faster growth.
Finally, as the expansion continues, I expect inflation to gradually rise toward the FOMC's
objective of 2 percent as measured by the PCE deflator. This forecast is based on the
projected gradual increase in the levels of resource utilization, a firming in global demand,
and the upward pull exercised by stable inflation expectations on actual inflation.
Underpinning the latter assumption is the broad stability of long-term inflation expectations
across different financial and survey measures, combined with ongoing moderate growth of
wages and unit labor costs - all observations consistent with anchored inflation expectations.
Overall, I would characterize the outlook as reasonably favorable. But I would very much
prefer faster economic growth and more rapid progress towards our dual mandate objectives
of maximum sustainable employment and price stability. Hence, the continued need for
monetary policy to remain highly accommodative to support the economic recovery to the
fullest.
Thank you for your kind attention and I will now be happy to take some questions.