William C Dudley: Impact of the Great Recession on public schools in the
region
Remarks by Mr William C Dudley, President and Chief Executive Officer of the Federal
Reserve Bank of New York, at the Quarterly Regional Economic Press Briefing, New York
City, 27 January 2012.
* * *
Good morning and welcome once again to the New York Fed's Quarterly Regional Economic
Press Briefing. I am pleased to have this opportunity to talk with the journalists covering our
region - and through you, to the people in our District. This morning I will focus on regional
economic conditions, with particular attention to how the recession has affected public school
spending in New York and New Jersey - states that dominate the Second Federal Reserve
District. Following my remarks, my colleagues will provide more details. As always, what I
have to say reflects my own views and not necessarily those of the Federal Open Market
Committee (FOMC) or the Federal Reserve System.
National economic conditions
I will begin with a review of overall economic conditions. Recent data suggest that the U.S.
economy ended 2011 on a somewhat stronger note - the best performance since the first
half of 2010. Nonetheless, the amount of slack in the economy remains substantial.
Moreover, I think it is unlikely that the pace of growth we saw in the fourth quarter will carry
through to the first half of 2012.
Growth of consumer spending strengthened in the fourth quarter, adding a needed boost to
the economy. Much of this stronger spending was for durable goods, particularly motor
vehicles. In the fourth quarter of 2011, sales of light-weight motor vehicles reached the
highest quarterly rate since the first half of 2008. This increase is encouraging because it
suggests that consumers are now more able to borrow money to finance their purchases of
cars and trucks.
However, I must note that this boost is likely due in part to temporary factors. First, vehicle
sales in the middle of 2011 were depressed due to supply chain disruptions stemming from
the tragic earthquake and tsunami in Japan. In addition, a stimulus-related tax provision that
allowed businesses to immediately expense some investments expired at the end of 2011.
So, some purchases were no doubt timed to occur before that expiration.
Moreover, for goods and services other than durable goods, the rate of growth of consumer
spending has been rather tepid. The picture that emerges - up to now - is of a consumer
who continues to be cautious.
In addition to stronger growth of consumer spending, manufacturing output has firmed over
the past several months. For example, the widely followed Institute of Supply Management
manufacturing composite index rose from October to December 2011. Improvements were
particularly notable in new orders and production activity. Stronger growth of consumer
spending on durable goods is likely boosting the manufacturing sector. In addition, growth of
U.S. exports has been well maintained, while import growth has been subdued.
Alongside the somewhat stronger near-term growth we have also seen some improvement in
the labor market. Workers are filing fewer initial claims for unemployment insurance. New
claims have fallen to levels not seen since mid-2008. Private-sector employees are working
more hours. Aggregate hours worked rose at a 3 percent annual rate in the fourth quarter of
2011, up from essentially no growth in the third quarter. Combined with average hourly
earnings rising at a 1.8 percent rate, the increase in hours worked suggests an annual rate of
increase in private wage and salary income of close to 5 percent. This is a respectable rate
that might support more spending - if sustained.
A firmer labor market has been accompanied by partial recovery in consumer confidence
over the past few months. Confidence is rising up from levels that were often - in the third
quarter of 2011 - lower than at the depths of the Great Recession.
It should be noted that while workers' hours grew at a healthy pace in the fourth quarter,
employers added an average of just 140,000 payroll jobs per month, somewhat less than in
the third quarter. Despite this rather tepid increase in jobs, the unemployment rate fell a
cumulative 0.5 percentage points from September to December. This apparent discrepancy
is due to two factors - faster job growth as measured by the household survey and an
outright decline of the labor force. Workers aged 25 to 54 have been particularly prone to
dropping out, which suggests that the decline in the unemployment rate may overstate the
improvement in labor market conditions.
Despite some improvements, the economy continues to operate with significant excess
slack. Less than 59 percent of the U.S. working-age population has a job. This is
unacceptably low - just about the same share as in late 2009 and well below the levels in
2006 and 2007.
Once again, this large amount of slack is putting downward pressure on trend inflation. After
a brief run-up during the second quarter of 2011 - reflecting the pass-through from higher
commodity prices and supply-chain disruptions - inflation has retreated and may be headed
down further.
As I noted earlier, it is unlikely that the faster growth experienced in the fourth quarter of
2011 will be matched in the first half of 2012. In addition to the temporary nature of some of
the recent improvement, there are significant impediments to a robust recovery that I'll list
briefly.
First, global financial and economic conditions may impede faster growth. In particular,
growth in the euro area is slowing and a recession may be underway with adverse direct and
indirect effects on the U.S. economy.
Second, fiscal policy has become more contractionary. Despite the extension of the payroll
tax cut, the stance of federal fiscal policy has tightened and employment and spending by
state and local governments continues to decline.
Third, despite record low mortgage interest rates, the depressed housing market remains a
significant impediment.1 While house prices are no longer overvalued by historical standards,
restrictions on access to credit and the large number of homes in the foreclosure pipeline
means that home prices remain under downward pressure. The ongoing weakness in
housing makes achieving a vigorous economic recovery more difficult for several reasons:
 The strong rebound in housing construction and related activities, such as furniture
sales, that typically power economic recoveries following deep recessions is absent.
 The decline in home prices has eroded household wealth, which then inhibits
consumer spending. Since home values peaked in 2006, homeowners have lost
more than half their home equity and many expect further declines.
 The weakness in home prices has reduced credit availability because many
households and small businesses use their homes as their primary source of
collateral for loans.
 The big drop in house prices has made it more difficult for borrowers to refinance,
undercutting some of monetary policy's ability to support demand.
In a recent speech I discussed some policy interventions that could help to stabilize the
housing market. I will not discuss this further as our focus today is on education.
In sum, I continue to expect moderate growth in the year ahead and see the risks to that
outlook as skewed to the downside, mainly due to uncertainty as to how events in Europe will
unfold.
Earlier this week we had a meeting of the FOMC. The committee reiterated its intention to
maintain a highly accommodative stance for monetary policy to support a stronger economic
recovery and to help ensure that inflation, over time, is at levels consistent with the dual
mandate. The committee said it now anticipates that economic conditions are likely to
warrant exceptionally low levels for the federal funds rate at least through late 2014.
The committee also released a statement of longer-run goals and monetary policy strategy
within the context of the dual mandate, and published information on individual participants'
expectations of the appropriate future interest rate path. As Chairman Bernanke explained in
his press conference on Wednesday, the strategy statement "should not be interpreted as
indicating any change in how the Federal Reserve conducts monetary policy. Rather, its
purpose is to increase the transparency and predictability of policy."
Further details on the discussion at the meeting will be available when the minutes are
published in three weeks.
I will not comment on monetary policy any further today beyond stating that monetary policy
has done and will continue to do its part in supporting the recovery - but it is not all-powerful.
Other complementary policy actions in housing, fiscal policy and structural adjustment or
rebalancing of the economy will be essential if we are to achieve the best available recovery.
Regional economic conditions
Turning now to the regional economy, growth slowed in late 2011 in New York City and New
York State, whereas New Jersey has seen a modest pickup.
As attendees at previous regional press briefings may recall, the New York Fed produces
economic activity indexes to help monitor the performance of the regional economy.2 Based
on these measures, economic activity has leveled off in both New York State and New York
City since the summer, following above-average growth in the first half of 2011. In contrast,
New Jersey's economy, which was sluggish throughout 2010 and into the first half of 2011,
has picked up noticeably in recent months.
We monitor Puerto Rico using an index produced by the Government Development Bank for
Puerto Rico. This index suggests that the island's recession, which started back in 2005,
may finally be ending. After bottoming out last August, activity has risen fairly
sharply - reaching a one-year high in November. Still, Puerto Rico's recovery has had a
number of "false starts" before and this measure is noisy. Thus, the recent improvements will
need to be sustained for longer before we can confidently declare that the island's recession
is over.
Turning to the employment situation, our region finished 2011 on a mixed note. In New
Jersey, private-sector job growth was quite robust in the fourth quarter, despite a small dip in
December. New York State, in contrast, slowed more in December and has seen only
minimal job gains since we last met in August.
Job growth in the region no longer appears to be out-performing the nation, and regional
unemployment rates remain unacceptably high: at around 9 percent in both New York City
and New Jersey, and close to 8 percent across New York State.
Turning to New York City, the local job market, which had been quite resilient during and
after the recession, has lagged recently - partly reflecting weakness in the city's securities
industry. Still, the Big Apple has recovered over half of the jobs lost during the recession,
whereas the nation has recouped only about a third of its job losses thus far. Despite recent
weakness in the securities industry, other industries, such as tourism, and professional and
business services, have fared reasonably well in the City. Weakness in financial activities
industry - and securities in particular - is worrisome because this sector has tended to drive
overall local growth and provide a major source of tax revenue for the city and the state.
The New York Fed also conducts the Empire State Manufacturing Survey to track conditions
for regional manufacturers. I am pleased to say that January's report points to some firming
in manufacturing and a pickup in hiring - a big improvement from late last year, when this
survey consistently signaled little or no growth.
Nonetheless, ongoing weakness in the housing market, coupled with a sluggish jobs
recovery has increased financial pressures on families. Attendees at previous press briefings
may recall that at the New York Fed we have a special consumer credit panel that allows us
to track these trends closely.3 Since the beginning of 2008, many regional households have
been reducing their per-person debt for mortgages, credit cards and auto loans quite
consistently. However, the last three to four quarters show signs that households may have
reached the end of this deleveraging process. Debt levels have been flat to slightly
increasing in both New York and New Jersey - as they have also been for the United States
as a whole. Only in Puerto Rico have debt levels continued to decline, suggesting that
households on the island may not be finished with their deleveraging.
The picture for debt delinquencies is similar. Although still quite high by historical standards,
as of the third quarter of 2011, delinquencies were subsiding in New York and New Jersey,
as they were for the nation as a whole. Unfortunately, Puerto Rican households stand out as
now having a higher delinquency rate than the mainland, New York and New Jersey - and
one that is continuing to rise. Thus, although the financial strains on many families in the
region remain severe and are very troubling to me, they do show some signs of abating
slowly outside of Puerto Rico.
Impact of the great recession on public schools in the region
Now, I will turn to our special topic. In an important sense, schools constitute the backbone of
our national and regional economy. Yet, this backbone can be vulnerable during recessions.
Schools teach our citizens skills, including how to read, write, do math, create art or music
and work in teams. Economists call these skills "human capital" because they are an
important input that fuels a nation's or region's economic growth and development. In this
way, schools play a key role in shaping our future. Therefore, it is essential to understand
how the Great Recession has affected our ability to educate the next generations of
students.
Thus, today, we will examine how the recession has affected funding levels for schools in our
region. As you know, there is an ongoing vigorous debate about how to most effectively
organize public education and provide incentives to teachers, students and administrators.
Such inquiry is key to any effort to ensure the best possible education for our citizens, but it
is beyond the scope of this briefing.
The housing bust and the onset of the recession in 2007 strained state and local government
finances. Most local governments rely heavily on property tax revenue to fund their schools
and other activities. This was particularly true during the first half of the decade, when the
housing boom strongly supported property tax revenues. Then came the bust; steep declines
in the housing market led to corresponding drops in local property tax revenue. State
governments' revenues also fell, as rising unemployment cut income tax revenue and
reduced consumption shrank sales tax revenues. Since most state and local governments
spend at least half of their budgets on education, these developments have constrained
funding for our primary and secondary schools.
To stave off drastic state and local government spending cuts, the federal government
allocated $100 billion to states, including New York and New Jersey, for education through
the American Recovery and Reinvestment Act (ARRA). Research done here at the New York
Fed reveals that school finances in both New York and New Jersey were impacted by the
Great Recession, with New Jersey sustaining particularly severe cuts.4 ARRA funds helped
school finances in both states, yet did not completely compensate for lost state and local
revenues.
With ARRA funding drying up and our local and state economies still under stress, a question
looms before us. How might we expect school finances and student learning to fare in the
near future? Given the key role that human capital plays in our nation's growth, this is an
important issue. We at the New York Fed will continue to monitor school finances and other
education indicators in our region closely as this will, over time, affect our regional economy.
Conclusion
In summary, during the second half of 2011, growth slowed in New York, falling well short of
the national rate, although New Jersey kept pace. It's also important to note that the national
labor market is showing more consistent signs of improvement, and the regional labor market
has continued to make progress. However, at the national level, the pace of recovery
remains sluggish by historical standards and is likely to slow somewhat in early 2012. Thus,
unemployment, both nationally and locally, is likely to remain unacceptably high for some
time. Also, inflation is likely to be below our objective for several years. Clearly, much work
remains to achieve the Fed's dual mandate of maximum sustainable employment in the
context of price stability.
The Great Recession has affected education financing in both New York and New Jersey,
but New Jersey was hit harder. Through its impact on the education of the next generation,
this situation could have troubling implications for the ability of the next generation to
succeed in the demanding jobs of the future.
I will now ask Jason Bram to provide additional details on the regional economy.