William C Dudley: The national and regional economic outlook
Remarks by Mr William C Dudley, President and Chief Executive Officer of the Federal
Reserve Bank of New York, at the Long Island Association, Melville, New York,
19 March 2012.
* * *
Good morning. I am pleased to be here on Long Island. It is always a pleasure to speak with
the business community because of the leadership role you play in your communities and in
shaping the economic landscape in the region. So, I thank you all for coming today.
Over the past few years, I have been engaged in a series of outreach meetings all across my
Federal Reserve District. For example, in 2010 I visited several upstate cities. Early last year
I made visits to various parts of the city - Brooklyn, the Bronx, Queens - and to Puerto Rico.
In August, I met with community and business leaders and elected officials in Newark,
Patterson and Jersey City. In November, I went to West Point and the Capital region.
I consider these visits just as important as my trips to Washington, D.C., to help formulate
monetary policy or to Switzerland to help shape international bank regulation. Each visit
within the region helps me to deepen the relationships with the people I represent. I believe
that the understanding of issues and concerns that I gain today will help ensure that the
Fed's policy decisions reflect the public interest in the broadest sense.
Today, I want to talk with you first about the Fed - what we do and why we do it. Then I'll
provide some thoughts about the economic outlook nationally and locally. How the economy
performs is important in many ways. At the personal level, for example, it affects your
family's finances and students' job prospects at graduation time. Collectively, it affects the
potential of our nation to confront and deal with the many challenges we face.
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.
What the New York Fed does
By way of introduction, I will briefly review what the New York Fed does and what makes my
job so interesting.
I am vice chair of the FOMC, which meets eight times a year in Washington to set interest
rates and make other decisions about monetary policy. The members of this committee all
strive to set policy to advance the mandate given to us by Congress to promote the
maximum level of employment consistent with price stability. Sometimes we have different
views on the specific policy choice at hand, and you should view this as completely
appropriate: these are hard questions - particularly at times like this. In fact, I think we make
better decisions as a committee because we don't all think alike. But we are united in our
commitment to our dual mandate and in our belief that Fed independence is essential to the
public interest, because it allows us to make tough decisions insulated from short-term
political pressures.
At FOMC meetings, each Committee member presents a current outlook for his or her region
and the nation. For these assessments, we consult our researchers and add critical
information that we learn from listening to our boards of directors, regional advisory councils
and community leaders, such as you and others I'll meet on this visit. This trip includes a
meeting with the Long Island Housing Partnership - and a visit to some distressed
neighborhoods, a tour of the D'Addario string factory and lunch with its workers; and
concludes with a tour and meeting at the Brookhaven National Laboratory.
At the New York Fed, we continually track conditions in our District, and we have created a
number of tools for that purpose. For example, my staff produces monthly indexes of
economic activity for New York City, the entire state of New York, and New Jersey. These
indexes are essentially measures of local output - similar to gross domestic product, or GDP,
at the national level. These measures provide a more complete gauge of activity than the
employment report, which is another important metric at the state level. We have also
constructed a consumer credit panel to track local household credit conditions, including the
amount and type of personal debt and whether payments are being made in a timely way.
In addition, we have a periodic poll about the credit needs of small businesses, which are an
important source of new jobs. We are just launching our latest survey that also includes
questions about the skill needs of small businesses and if the right kinds of skilled labor are
available. Almost 900 regional businesses responded to our last poll, of which roughly
5 percent were from Long Island. If you, as part of a small business, would like to participate
in our current poll, please pass your card to my colleagues, who are in the audience, or see
me after the speech and we will be glad to add you as a respondent.
In December, we hosted a workshop for small businesses in the New York City metro area to
provide information about how they can export their products and services. The
ExportImport Bank, the Small Business Administration and the U.S. Department of Commerce were
on hand to tell participants how to tap demand in the global marketplace and what
government programs are available to enhance credit and to increase lines of working
capital. In 2012, we're further developing our small business program. We hope to partner
with many of you to support the small business sector.
As you know, even states as wealthy as New York have large pockets of poverty. So, we
target some key initiatives specifically to low- and moderate-income groups. Here on Long
Island there are pockets that suffered greatly in the recession. In Nassau County,
communities in Hempstead, Baldwin, Roosevelt and New Hyde Park have a foreclosure rate
over four times the national average. The same holds true for parts of Brentwood, Central
Islip and Patchogue, in Suffolk County.
We have worked hard to help neighborhoods that face high foreclosure rates. Over the past
three years, my staff has come to Long Island to meet with housing counselors and legal
services practitioners. We have provided housing advocates with the latest information on
mortgage conditions, via mortgage briefs, roundtables, presentations and newsletters. We
have now developed an online resource that shows delinquency and foreclosure conditions
in neighborhoods each month. We believe that this site will be a useful complement, aiding
the work of housing counselors and other parties seeking to help these communities.
To share what we learn about our diverse District, we have a website, with detailed
information about the region. I invite you to visit newyorkfed.org to explore our highly
localized maps and information on small business, credit and housing conditions and even
the latest job openings at the New York Fed.
Finally, and crucially, in the aftermath of the financial crisis, we are working with our
colleagues in Washington, D.C., and at other agencies to help put the nation's financial
system on a firmer footing. Much has been done, yet much remains to be done and we are
determined to keep at it. I recognize fully that there can be no return to pre-crisis business as
usual - whether on the part of the financial sector or on the part of regulators like ourselves.
All in all, there is a lot to keep myself and my colleagues busy.
National economic conditions
The incoming data on the U.S. economy has been a bit more upbeat of late, suggesting that
the recovery may be finally establishing a somewhat firmer footing. Real GDP expanded at a
3 percent annual rate in the fourth quarter of 2011, the fastest growth since the first half of
2010. The average monthly gain in nonfarm payroll employment moved up to 256,000 in
January and February from 164,000 in the fourth quarter. Sales of light-weight motor vehicles
rose to a seasonally adjusted annual rate of 15.1 million in February, the highest since early
2008. The ISM nonmanufacturing index rose for the third consecutive month in February and
now stands at its highest level in a year. Even the housing starts data have firmed
somewhat, although from quite depressed levels.
While these developments are certainly encouraging, it is far too soon to conclude that we
are out of the woods. To begin with, the economic data looked brighter at this point in 2010
and again in 2011, only to fade as we got into the second and third quarters of those years.1
Moreover, the United States has experienced unusually mild weather over the past few
months, with the number of heating degree days in January and February about 17 percent
below the average of the preceding five years. While this reduces the amount that
households and businesses must spend for heating, I suspect that it temporarily boosts
economic activity overall. For example, the mild weather is certainly conducive to higher than
normal levels of construction activity, and we did see a surge in hours worked in that sector
over the past few months.
More importantly, real economic activity has yet to be strong enough on a sustained basis to
make a big dent in the overall amount of slack in the U.S. economy. While it is true that
growth was stronger in the fourth quarter, most of that growth was due to inventory
accumulation. Growth of final sales was actually quite weak. Historically, a quarter in which
inventory investment makes a significant growth contribution is typically followed by a quarter
in which that growth contribution is modest or even negative. That appears to be what is
shaping up for the first quarter of this year.
Based on available data, current expectations are that real GDP will expand at around a
2 percent annual rate during the first quarter of 2012. Despite the increase of light vehicle
sales, overall consumer spending has been sluggish. While growth of retail sales in February
was reasonably strong in nominal terms, it was considerably less impressive when the large
increase of gasoline prices that occurred that month is taken into account. Based on data for
the first half of March, gasoline prices are continuing to move higher which will further sap
consumers' real purchasing power. And growth of business investment spending, which was
quite strong in the second and third quarters of 2011, entered the new year with little forward
momentum.
To put the recent pace of growth into perspective, we believe that the economy's long-run
sustainable growth rate (what economists call the potential growth rate) is around a
2 1⁄4 percent annual rate. We need sustained growth above that rate to absorb the substantial
amount of unused productive capacity. Thus, our recent growth rates are barely keeping up
with our potential.
Although the sharp decline in the unemployment from 9 percent last September to
8.3 percent in February suggests we are doing better than that, it is important to recognize
that about half of that decline was due to a declining labor force participation rate. In fact, had
the labor force participation rate not declined from around 66 percent in mid-2008 to under
64 percent in February, the unemployment rate would still be over 10 percent. Also, it
appears that productivity growth has slumped recently. Although that means that a given
amount of growth translates into bigger employment gains, it certainly is not an unmitigated
good development.
Also, we cannot lose sight of the fact that the economy still faces significant headwinds and
there are some meaningful downside risks. In the headwinds department, I would include the
run-up in gasoline prices mentioned earlier because that will sap purchasing power, the
continued impediments to a strong recovery of the housing sector, and fiscal drag at the
federal and state and local levels. In terms of downside risks, these include the risk that
growth abroad disappoints and the risk of further disruptions to the supply of oil and higher oil
prices.
On the inflation front, the overall rate of increase of consumer prices, as measured by the
12-month change of the consumer price index slowed to 2.9 percent in February from a
recent peak of 3.9 percent last September. Despite the recent rise of gasoline prices
mentioned above that may interrupt this pattern, we expect this moderation in the growth rate
of consumer prices to resume later this year. While the underlying core inflation rate, that
strips out volatile food and energy prices, has been somewhat higher than expected a few
months back, it appears that the annual rate of core inflation2 has peaked and we expect it to
begin to decline later this year.3 Finally, inflation expectations, which play an important role in
the inflation process, remain well anchored. By this I mean that people expect that the rate of
inflation will continue to be relatively low for some time to come.
Regional economic conditions
So how is the recovery proceeding in the state and the region? As I mentioned, the New
York Fed produces indexes that help us track economic activity in the region. Based on
these measures, the economic recovery got underway in both New York State and New York
City in late 2009, and economic activity has continued to expand through early 2012.
The New York Fed also conducts the monthly Empire State Manufacturing Survey to monitor
conditions for regional manufacturers. The most recent survey, for which a number of Long
Island firms participated, points to continued expansion in manufacturing activity throughout
the first quarter of 2012 and heightened optimism about the general business outlook.
Recently released employment revisions indicate that the economic recovery has taken hold
on Long Island. But there still is a long way to go. Employment on the island declined by a
little over 4 percent in the downturn - a steep drop, to be sure, but only about two-thirds of
the decline that occurred nationally. Since bottoming out in late 2009, employment here on
the island has rebounded by almost 2 1/2 percent. So we've come a bit more than halfway
back to the early 2008 peak.
Moreover, these job gains have come despite ongoing job cuts in local government. While
other parts of the region sustained job losses in local government starting in 2010, Long
Island's just started in the spring of last year, creating a drag on the labor market overall.
Nevertheless, the private sector has picked up the slack. This is most pronounced in
professional and business services, finance, leisure and hospitality, and health care. Even
the island's manufacturing sector has added jobs over the past year.
Another sign that a recovery is taking hold on Long Island is that banks that were created just
before or just after the financial crisis - while only a small portion of the local market - are
starting to show signs of growth.
Long Island's labor market has also been aided by its proximity to New York City. With a
large portion of the island's workforce commuting to New York City, especially from Nassau
County, the brisk job creation we've seen in the city has helped matters here as well.
Unemployment here on the island topped out at 7.6 percent back in late 2009, and it has
hovered around 7 percent for most of the past year - a high rate to be sure, but well below
both the national and state levels.
Turning to the housing market - there matters are more dreary. After more than doubling
between 2000 and 2006, home prices on Long Island are down more than 20 percent from
their peak and prices have yet to show any strong signs of bottoming out. This weakness is
underscored by our latest quarterly consumer credit panel data. This dataset shows that
mortgage delinquency rates on the island are much higher than in other parts of the state
and continued to edge higher in the fourth quarter of last year.4
The housing crisis also has also put pressure on local school finances. Historically, the island
has been heavily dependent on local sources for its school funding, and the housing debacle
has generated a sharp drop in local property tax revenue. State aid has been generally
insufficient to make up for these losses and school administrators have been forced to cut
both instructional and non-instructional spending.
Despite some of these ongoing problems, I believe that the long-term outlook for Long
Island's economic growth is quite positive. The island's workforce is particularly well
educated, with well over a third of adults holding a college degree. It has a sizeable industrial
base, which is concentrated in high-tech manufacturing. Moreover, Brookhaven Labs and
Cold Spring Harbor Laboratory, as well as a fine array of academic institutions, provide a
strong foundation for the island's tech sector and business sector more broadly. The recent
move to create stronger ties between the business community, research labs and SUNY
(State University of New York) is a welcome development. It has the potential to help
leverage the island's existing assets to enhance the prospects for economic development.
Conclusion
To sum up, the incoming data on the U.S. economy has been a bit more upbeat of late,
suggesting that the recovery may be getting better established. But, while these
developments are certainly encouraging, it is far too soon to conclude that we are out of the
woods in terms of generating a strong, sustainable recovery. On the inflation front, the
yearover-year rate of consumer price inflation has slowed in recent months, and despite the
recent rise of gasoline prices, we expect inflation to moderate further in 2012.
Looking ahead, the key challenge for the Long Island economy will be to continue to prepare
its residents for the best jobs being created here. Expanding educational access and
opportunity and the skills that go along with it will go a long way to broadening participation in
the economy to all residents and bolstering Long Island in the future.
Thank you for your kind attention. I would be happy to take a few questions.