Joseph Tracy, Executive Vice President and Senior Advisor to the President, Federal Reserve Bank of New York, began his assessment of the regional and national economies by focusing on The Federal Reserve’s ability to meet its two primary objectives – keeping inflation at 2% and attaining maximum sustainable employment.
“The Committee is gaining confidence that the economy is moving toward the price stability objective.” He commented that for the last five years this metric has fallen short, but that the rate of inflation is starting to move up slowly to the objective of 2%.
Looking regionally, Mr. Tracy’s analysis shows the Fairfield County economy growing modestly, albeit behind national growth.
The Big Picture
Tracy addressed the mandate of employment from the dual perspectives of output/GDP and unemployment. Pointing out the significant decline of GDP growth of during the Great Recession, a -7.2% drop in output, and its magnitude of severity as compared to prior post-war recessions, the recoveries of recessions based in financial crisis are ‘long and protracted.’
Of note during the past recession was the drop in the potential GDP growth, a measure used by the Congressional Budget Office to determine whether the economy needs more or less monetary stimulus based on the difference between actual and potential GDP, also known as the output gap.
While the 2.1% growth rate we experienced from 2009Q2 to 2016Q3 exceeded the 1.7% potential GDP growth set by the Congressional Budget Office Tracy commented, “It is interesting people talk about why the expansion has been disappointing. It is not disappointing in the sense that actual growth has failed to exceed potential. But why they feel disappointed is probably due to the fact that the potential growth rate for the U.S. has been slowing.” The potential growth rate for the U.S. was 2.9% for 2000-2005, almost less than half that for 2015-2020.
As shown at the right, it has taken a long time to close the output gap, but it appears to be getting closer. Tracy pointed out that as the potential growth rate slows dramatically, it becomes a question for policy makers on how to get the potential back up higher.
Unemployment as a measure is also signaling positive as the ‘headline’ unemployment rate, near 10% at the end of 2009, is now at levels seen prior to the recession. And while the broader measures of unemployment that include the unemployed and marginally attached are higher than the traditional rate, their declines are mirroring that of the headline rate with all getting closer to the levels they were prior to the recession.
As the economy nears meeting both mandates, Tracy commented that the question of next steps for policy makers requires more consideration than in prior recessions, as the Fed now has multiple ways to normalize the economy. Prior to the recession the traditional tool used by the central bank to steer the economy was the effective federal funds rate, or the short term overnight interest rate. However with the housing bust and the onset of the financial crisis the fed fund rate alone, then at 0, could no longer be the only tool to fight the recession. As a result there was a ‘massive injection of credit’ to get credit to flow into the economy. Such measures have increased the balance sheet to $4.5 trillion, where it had been under $1 trillion before the crisis.
“Going forward markets need to be aware as the committee decides to continue normalization, they will have to look at not only the fed funds rate, but at the balance sheet as a whole, as the committee now has more dials to tune,” said Tracy.
With 2/3 of the US economy fueled by consumption, and the impact of income and household net worth on consumption, Tracy addressed the issues of income growth and employment nationally and within the region.
Currently, consumption growth has kept in line with income growth and as income growth has recently slowed, so has consumption growth. Yet unlike the spending driven growth of the 2000’s, while the household sector is getting wealthier, consumers have not been as willing to spend as their household net worth has grown.
With the recession came a 6% loss of employment nationally followed by a slow four year employment recovery. For Fairfield County, unfortunately, that recovery has taken much longer. While our employment growth tracked the nation from 2010 to early 2012 employment growth dropped below the national pace in 2012 and didn’t get back to the prior cyclical peak range until last year.
In addressing this slower pace, Tracy pointed to an anomaly in New York City’s recent recovery. For the first time New York City’s employment growth has not been driven by the securities sector, which has remained virtually flat, but by the tech and health sectors. “If we were to rely on securities as an engine, employment in New York would look much different, possibly what we are seeing in Fairfield County,” offered Tracy.
Housing was a major contributor in the prior expansion. Currently, U.S. housing prices are close to 5% below the prior cyclical peak. “This is amazing given the housing boom back then. This is not a housing boom now, but we are close to those prices.”
Locally, while the fall in home prices was not as steep – 20% locally vs. 30% nationally – the recovery has not been as strong. “In fact, Fairfield County has gone horizontal, Rockland has performed worse, Westchester slightly better, and New York City is very different.”
On the topic of home ownership, Mr. Tracy pointed to recent historical data. From 1980 to 1995 ownership was about 64% followed by two decades of increases which pushed home ownership up to 69%. “That proved unsustainable and the housing bust completely reversed that. We are now below where were in the mid ‘90s as we see a dramatic reorientation of households go from owning to renting.”
That shift led to a dramatic increase in multi-family housing starts, peaking at 450,000 units in 2015, but one Mr. Tracy believes is flattening out.
The basic message
In reviewing recent economic performance, Joseph Tracy closed with some basic points and questions:
Will the economy continue to grow 2% even with the tightening of financial conditions when normalizing policy?
The household sector is very strong and the deleveraging is over.
Income growth is slowing but still adequate to support consumer growth of around 2.5%.
While business investment has slowed, sentiment has rebounded. Will that sentiment increase translate to real activity in 2017?
Will we see a big pick-up in federal spending? Expect more clarity over the next six months as details of policies from the new administration are released.
Potential changes in proposed tax policy could affect net export numbers and the dollar, while uncertainty remains on those policy changes.
The National Economic Outlook and Regional Forecast is an event produced by the Fairfield County Information Exchange, an initiative of The Business Council of Fairfield County.
We would like to thank and acknowledge the underwriting support provided by Deloitte for this event and the ongoing contributions provided by the Information Exchange Steering committee:
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