Public Hearing - February 29, 2012
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2
3 NEW YORK STATE
2012 ECONOMIC AND REVENUE
4 CONSENSUS FORECASTING CONFERENCE
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6 State Capitol - Room 124
Albany, New York
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February 29, 2012
8 2:30 p.m. to 4:30 p.m.
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PRESIDING:
10
Robert L. Megna
11 Budget Director
NYS Division of the Budget
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14 SENATE MEMBERS PRESENT:
15 Senator John A. DeFrancisco
Chairman
16 Senate Finance Committee
17 Senator Liz Krueger
Ranking Minority Member
18 Senate Finance Committee
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20 ASSEMBLY MEMBERS PRESENT:
21 Assemblyman Herman D. Farrell, Jr.
Chairman
22 Assembly Ways and Means Committee
23 Assemblyman Robert C. Oaks
Ranking Minority Member
24 Assembly Ways and Means Committee
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SPEAKERS: PAGE QUESTIONS
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Hugh Johnson 14 85
3 (company position not identified)
Hugh Johnson Advisors, LLC
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Chris Varvares 36 85
5 (company position not identified)
Macroeconomics Advisers
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James Diffley 53 85
7 (company position not identified)
IHS Global Insight
8
Ronnie Lowenstein 74 85
9 Director
NYC Independent Budget Office
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11 ---oOo---
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1 ROBERT L. MEGNA: Let's try to get started.
2 We have a lot of folks with busy schedules.
3 And, so, I would like to welcome everyone to
4 our economic and revenue consensus forecasting
5 process.
6 I'd like to introduce the folks on the panel
7 today.
8 We have Senator John A. DeFrancisco, Chairman
9 of the Senate Finance Committee;
10 We have Assemblyman Herman D. Farrell,
11 Chairman of the Assembly Ways and Means;
12 Senator Liz Krueger, ranking member of
13 Senate Finance Committee;
14 And, Assemblyman Robert C. Oaks, ranking
15 member of the Assembly Ways and Means Committee;
16 And also joining us at the table is
17 Thomas Nitido. He's a deputy comptroller.
18 I think we'll jump right to have everyone to
19 do some opening remarks. I'll make some very quick
20 statements.
21 I think we're actually going to be missing
22 some of our panel today because of the weather
23 conditions. We've had at least one person who had
24 an automobile mishap on the way up, but, everyone is
25 okay.
4
1 And we have another person who got diverted
2 to a different airport; and, so, we're going to try
3 to set up a call-in for that person.
4 If we're successful, fine. If not, we'll
5 deal with the distinguished panel that we have, and
6 give them more time to talk to us.
7 Let me just briefly say, that, you know,
8 we've been living through very difficult economic
9 and fiscal times.
10 Everyone knows that.
11 Last year, we were coming out of the worst
12 recession in the post-war period.
13 We believe, and still believe, that we were
14 on the path to economic recovery; however, that
15 recovery stalled in the summer, and we've continued
16 to be hit, or buffeted, with very difficult economic
17 news which has kind of slowed us down.
18 But we know the economy's getting better, but
19 we know that we live through a lot of crises, and we
20 still have the euro debt crisis, and we have extreme
21 financial-market volatility.
22 And, I guess we'd like to ask the panel
23 members to talk about that.
24 And we know that there's always a lag between
25 what's going on in the economy and what happens to
5
1 tax collections.
2 Based on DOB's estimates, last year's events
3 translated into the weakest levels of finance-sector
4 revenues since 2003.
5 The Executive budget estimates a 32 percent
6 decline in finance- and insurance-industry bonuses.
7 And, collections to date seem to be
8 indicating that those estimates are on target.
9 Now, I know the Comptroller came out with a
10 report yesterday, but, I think it's just a nuance of
11 how you interpret the numbers.
12 I think, you know, when we look at the
13 tax-collection numbers, we understand what the
14 Comptroller's report was saying, but we think the
15 collections to date are consistent with about a
16 30 percent decline in bonuses.
17 These declines are taking place against the
18 backdrop of the most sweeping regulatory overhaul of
19 the finance industry since the 1930s.
20 Wall Street firms have already been altering
21 their executive-compensation practices in response
22 to regulations that are still being written.
23 We've observed dramatic reductions in the
24 cash portion of bonuses in favor of equity grants,
25 with large portions of compensation being deferred,
6
1 and even subject to clawback.
2 We don't doubt that these changes are making
3 us all better off in the long run; however, in the
4 short and the medium term, we must acknowledge the
5 added uncertainty to our income and revenue
6 projections, and plan accordingly.
7 The game on Wall Street has changed, and
8 perhaps the compensation game has changed
9 permanently.
10 Nevertheless, we know there is positive news.
11 The New York State economy added more than
12 150,000 private-sector jobs between the
13 third quarters of 2010 and '11.
14 The Budget Division estimates the state
15 unemployment rate will fall, from 8 percent in 2011,
16 to 7.6 percent in 2012, and even further in 2013.
17 And we know that these rates are already lower than
18 national rates.
19 So, in New York there is positive momentum;
20 however, there are risks which cannot be
21 understated.
22 Gasoline prices have risen over 40 cents a
23 gallon in just the past two months, and have topped
24 $4 in many places here in New York.
25 In the context of continued high rates of
7
1 unemployment, households will continue to struggle,
2 as will those State revenues that depend on other
3 areas of household spending.
4 Our state is not alone in the struggle to
5 achieve a balanced budget.
6 We must acknowledge that income and revenue
7 volatility is especially acute in New York,
8 especially because of the finance sector, where we
9 depend on such a large -- for such a large portion
10 of our tax collections.
11 Finally, as the economy improves, at some
12 point down the road, the current environment of low
13 interest rates and the accumulating national debt
14 will come to an end. And if unemployment rates
15 should fall more quickly than the Federal Reserve's
16 forecast, that day could come sooner than we think.
17 Historically, whenever the Federal Reserve
18 shifts from an expansionary to a contractionary
19 stance, the impact on financial markets, and
20 consequently, New York's revenue base is negative.
21 Consequently, it's critically that we look
22 ahead and prepare ourselves for that day.
23 In fact, if you look in our budget materials,
24 we include a chart that shows, that when the fed's
25 policy action takes place to be more contractionary
8
1 or more positive, there is almost an immediate
2 effect on financial-sector results that has been
3 almost an immediate effect on our tax-revenue
4 collections.
5 So, it's against this backdrop of economic
6 uncertainty that we embark upon the
7 revenue-consensus process.
8 It's important to note, that while we each
9 have forecasts at a fundamental level, I believe
10 there's broad agreement in the numbers.
11 It seems that we further concur that our
12 future revenue picture is very fragile.
13 The logical conclusion, is that we will need
14 to take responsible and necessary actions, to keep
15 our budget under control, and to strengthen our
16 fiscal position in a continuation of what we
17 accomplished last year.
18 Again, I'm going to turn the process over now
19 to folks, and, I would ask Senator DeFrancisco.
20 SENATOR DEFRANCISCO: Thank you, Mr. Megna.
21 In the interest of time: Ditto.
22 No, now I'll just say something.
23 First of all: I welcome the hardy members of
24 our panel. The hardy experts.
25 They must have some Syracuse, New York, blood
9
1 in them, because we don't miss anything because of
2 snow in Syracuse.
3 So, we welcome you. We look forward to
4 hearing from you on your expert advice on the issues
5 that we have to decide today. And, not today, but
6 before we even get into the budget process really in
7 earnest.
8 We have to know what the forecast of revenues
9 are going to be in order to determine how that money
10 is spent, or saved in some way.
11 The -- the -- I agree with Mr. Megna, that
12 the numbers are not far off from each of the reports
13 that we have here from the various groups that
14 provided the revenue forecast: the Senate Majority,
15 the Minority; the Assembly Majority and the
16 Minority; and from the Governor's Office.
17 So, I think that we're relatively close;
18 however, we're still apart. And we have to get some
19 kind of expert advice from all of you, to figure out
20 where we should end up in.
21 The worst thing we can do is not come up with
22 a reasonable forecast, and end up with more of a
23 problem come next year, because we want to make
24 certain that, each year, we're on the money, so that
25 we don't run into the problems we've run into in the
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1 immediate past, as far as budget deficits.
2 So, I'm looking forward to, and I know all
3 the people on our side of this panel are looking
4 forward to, your expert advice.
5 And, without any further ado, I'm ready to
6 listen.
7 ROBERT L. MEGNA: Assemblyman Farrell.
8 ASSEMBLYMAN FARRELL: Thank you very much.
9 I am pleased to be here today. And I, too,
10 look forward to hearing the panelists' thoughts on
11 the economic outcome of both the state and the
12 nation.
13 Giving the issues that still remain in areas,
14 such as, housing, credit, labor markets, as well as
15 issues in the euro zone, I'm interested in hearing
16 your assessment of the pace of the recovery.
17 I'm particularly interested in hearing your
18 thoughts on the implication of New York State's
19 economy from the changing landscapes of the
20 financial industry.
21 In addition, I want to hear your assessments
22 of the risks to the economic outlook, both for the
23 nation and the state.
24 And, your independent viewpoints, along with
25 today's discussion, will provide a solid foundation
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1 for our budget process.
2 I cannot emphasize strongly enough how
3 important this analysis is to us as we endeavor to
4 gauge the economy, and act as efficiently and
5 effectively as possible in this period of great
6 economic challenge.
7 And I thank you for being here today, and I
8 look forward to hearing your comments.
9 ROBERT L. MEGNA: Senator Krueger.
10 SENATOR KRUEGER: Thank you very much, Bob.
11 I, too, appreciate everyone getting here, and
12 I'm sorry that some people had a little trouble
13 today.
14 I think all New Yorkers are pretty stoic
15 about being able to get through the snow, and
16 needing to do what we need to do.
17 And, in fact, that's the value of today.
18 I agree, the revenue forecast the five or
19 six different parties are submitting today won't
20 greatly change the final outcome of our revenue
21 projection for this year.
22 In fact, I think, thanks to the growing
23 professionalism of the Legislature and the
24 Comptroller and the Governor's Office, those aren't
25 where the fights are. The fights take place in how
12
1 we choose to prioritize and spend the money.
2 But the real value, to have all of you be
3 willing to present to us each year, is for us to
4 think through and understand a bigger global
5 economic impact for our state, moving forward, for
6 the year, and the coming years, because, as I think
7 was mentioned by several people already, we're
8 living in a world with a changing economic forecast,
9 in: Who raises money? Who earns money? How do
10 they earn the money? How can we tax it?
11 And all of these are critical for making sure
12 that New York State knows how to plan in the
13 twenty-first century, for an annual budget, or even
14 a multi-year projection.
15 So, I appreciate your getting here on this
16 snowy day, and teaching us some more about the world
17 we're living in, economically.
18 Thank you.
19 ROBERT L. MEGNA: Assemblyman Oaks.
20 ASSEMBLYMAN OAKS: Thank you.
21 If anything, I've learned over budget
22 hearings with my colleagues, "listening," we've done
23 a lot of that over the last month or so.
24 We don't -- haven't shared a lot of our own,
25 and so I won't do that as well, because we're -- I
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1 think we've gotten pretty good at listening.
2 And, hopefully, we will hear several helpful
3 directions from you.
4 I would like to say, though, that the
5 Assembly Minority, in our report, and I know we have
6 a stack of those there, is the conferences of
7 [unintelligible].
8 And as you were presenting us some
9 information, they're a little more conservative than
10 the Governor, and looking at what the revenue might
11 be in coming in.
12 Actually, on the PIT, looking at that as
13 possibly being higher, but some of that just short
14 term, because of, some of what federal might do in
15 capital gains, and people adjusting to that.
16 But, we are concerned that -- actually, we
17 look at it and see that the business taxes might be
18 under some, that the rebound isn't sufficient
19 enough, especially on upstate.
20 And so, hopefully, as well as looking at your
21 insights, some of it is looking at what we could do,
22 panelists, the Legislature.
23 And I think one of those is, just looking at:
24 What are our policies, going forward?
25 They're going to be important this year, not
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1 just as the budget, but what we do to stimulate
2 growth, what we can do to change the economic
3 environment, in New York, both from a regulatory
4 stature and a taxing structure.
5 So, I think we need to do that, going
6 forward; but, again, I look forward to hearing your
7 insights today, to help us get to our final budget,
8 going forward.
9 Thank you.
10 ROBERT L. MEGNA: Tom Nitido.
11 THOMAS NITIDO: Just, you know, obviously,
12 the process provides for consensus among the
13 legislative parties and the Executive.
14 It also provides, in the unlikely event
15 consensus can't be reached, the Comptroller is
16 prepared to provide his own revenue estimate.
17 ROBERT L. MEGNA: With that, I just heard
18 some positive news, that, Chris will be able to join
19 us. He's in the cab, coming from wherever outpost
20 he got stranded.
21 And, also, as you mentioned to me, he'll be
22 able to pay off his bet to you.
23 So, let's start with Hugh Johnson.
24 [Laughter.]
25 HUGH JOHNSON: I'll wait until he arrives.
15
1 Well, thank you very much.
2 And, Senators, Assembly -- members of the
3 Assembly, Mr. Deputy Comptroller, Budget Director,
4 thank you very much for inviting myself and my
5 associates here, to work with you once again in
6 trying to, maybe, refine a forecast for the national
7 economy, the state economy. And, hopefully, help
8 you in the whole process of getting towards an
9 accurate forecast, or a reasonably accurate
10 forecast, for revenues, which is, of course, is, I
11 think, the goal here.
12 You mentioned that the growing
13 professionalism, Senator Krueger, in our forecasting
14 of the national and state economy, as well as
15 revenues. And, although we'd all like to take a lot
16 of credit for that, the real credit goes, I think,
17 to, quite frankly, all the people sitting around
18 this room.
19 It's remarkable how much hard work they do.
20 And it's remarkable the kind of output we see
21 in these reports, and the work they do. They're
22 really doing a very good job.
23 And I'm not all together sure, we'll
24 certainly try to add something to that whole
25 process, but, they alone have done -- are doing
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1 really, really great work.
2 What I'll try to do is, to -- you do have a
3 handout from me. I'm not going to plow through it
4 or labor through it, particularly, because it's full
5 of a lot of detail, or a lot of numbers, that are
6 part of my somewhat specific forecast of what lies
7 ahead for the national economy, and all of the
8 variables -- the state economy, and all of the
9 variables -- financial markets, short-term interest
10 rates, long-term interest rates, stock prices --
11 which is, you know, easy to forecast, of course,
12 with my fingers crossed.
13 But -- and, then, some comments on some of
14 the -- I think, the important issues that we face
15 today.
16 I'm not going to, as I say, plow through all
17 of that. I'll just get to what I think is some of
18 the bigger issues.
19 The starting point that I always like to use,
20 for this session, or for any session, in thinking
21 about what lies ahead for the economy, and for that
22 matter, the financial markets, is -- to me, is to
23 try to determine where we are in the current cycle.
24 The current cycle, which consists of a
25 stock-market cycle, followed by a business cycle,
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1 followed by an inflation- and interest-rate cycle.
2 Ordinarily, that's never an easy thing to do;
3 but, ordinarily, that's easier than it is to do this
4 time, because, what you need to do, in my view, and
5 I don't want to get too complex or too far off the
6 subject, but, is to superimpose on your
7 understanding of the cycle, and understanding of
8 where we are in the process of a mania.
9 Now, in this case, of course, we're talking
10 about the 2004-2005 housing mania: What stage of
11 that mania are we in?
12 And the reason I say that's important, is
13 because that's going to affect the shape, or the
14 outcome, of the underlying cycle.
15 Now, from a "big picture" point of view,
16 simply stated, using some of the terminology that
17 we've picked up over the years and -- in studying
18 manias, we're in the "revulsion" stage of the mania,
19 which is a tough word to deal with, but,
20 nevertheless, it captures some of where we are.
21 In the "revulsion" stage of a mania, you're
22 essentially working off the excesses that you built
23 during the mania.
24 And, in this case, of course, we're talking
25 about the significant build up in debt, generally;
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1 but mortgage debt in particular.
2 And that constitutes, first of all, a very
3 important component, or variable, in the current
4 picture, but, obviously, a significant head wind.
5 And it is one of the reasons, if not the
6 reason, why we're seeing economic activity, or
7 growth, the recovery being somewhat, let's call it
8 "anemic," when compared to other post-war
9 recoveries, whether we measure it by gross domestic
10 product, or, we look at important numbers, such as
11 the employment numbers.
12 So, we're still working through that
13 "revulsion" period.
14 And I might add, that in some of the
15 literature that you see these days, that
16 "revulsion" period tends to be much longer than
17 anybody appreciates; the average, being, say,
18 six years.
19 So, you tend to have this head wind, or
20 somewhat anemic -- comparatively anemic economic
21 activity, for a very long, and I might say,
22 unpredictable period of time.
23 But the point is: Where are we in all of
24 this?
25 And the answer to that question is: Do we
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1 have further to go in the current cycle, despite the
2 fact that we have this head wind?
3 And the answer to that question, in my
4 judgment, from a 30 -- 30,000 feet, is: Yes, we
5 have further to go.
6 The reason I say that, is because, first of
7 all, I look at the performance of the financial
8 markets.
9 And the message of the financial markets, so
10 far, particularly the recovery in the financial
11 markets since the middle of August of last year, if
12 I look at the performance of the financial markets,
13 the message there is, very clearly, that we have
14 further to go in the current economic cycle.
15 It's not just the case that the stock market
16 is rising. It's also the case that the so-called
17 "bull market," or, economically sensitive sectors of
18 the market, are the leading sectors of the market.
19 So you see things, like, technology,
20 industrials, and consumer discretionary stocks at
21 the top of the list.
22 And you see the safer sectors, the sectors
23 that investors buy when they're only very worried
24 about the -- about prospects for the economy, at the
25 bottom of the list.
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1 Utilities, telecommunications, health care,
2 consumer staples, they're right at the bottom of the
3 list.
4 So the point being, is the message that
5 investors are sending us. And they tend to be far
6 more right -- no offense -- but far more right than
7 we are. But, collectively, not individually, are --
8 really do a great job at forecasting.
9 Also, you see small- and mid-sized companies
10 outperforming large companies; growth companies
11 outperforming value companies.
12 The message from the financial markets is
13 very strong, and that is: We have further to go in
14 the current cycle.
15 Now the question is: Is that consistent with
16 some of the important monetary and economic
17 variables?
18 And the answer to that is: Yes.
19 Federal Reserve policy; Bob mentioned --
20 And I'll have a thing -- I'll mention
21 something about Federal Reserve policy in just a
22 minute.
23 -- he's right, that it's an important
24 variable, and we need to think about it,
25 particularly now.
21
1 But, Federal Reserve policy, obviously, to
2 this point in time, has been accommodative, and
3 that's the understatement of the year.
4 Secondly, in response to accommodative
5 policy, and a number of other factors, bank lending.
6 Not on real estate, not real-estate lending, but,
7 commercial and industrial loans are now growing, or
8 positive.
9 In response to that, we have strong, or
10 fairly solid, growth in the money supply, whether we
11 measure it in nominal or real terms.
12 As a result of that, liquidity conditions are
13 positive.
14 Simply stated: There's enough growth in
15 liquidity, as measured by the money supply, to drive
16 both the economy and the financial markets.
17 So, the message of the financial markets is
18 positive. We have further to go in the current
19 cycle. And that's confirmed by important economic
20 variables, and --
21 Did you bring your five bucks, Chris?
22 [Laughter.]
23 HUGH JOHNSON: Anyway, excuse me.
24 -- it's confirmed by important variables.
25 Nice to you have here.
22
1 Now, also contained in my report is some of
2 the -- is a lot of numbers.
3 After just giving you that big sense; in
4 other words, the sense that the -- the forecast that
5 the economy is going to expand for the remainder of
6 2012 and 2013, what I've simply said so far is,
7 that's on fairly firm footing. Or, at least it's
8 consistent with the message of the markets, as well
9 as the message of important monetary and economic
10 variables.
11 Having done that, then it's important, for
12 me, but most importantly, the folks that are sitting
13 around this room, to quantify, in as much detail as
14 you can, all of the variables that are going to lead
15 to, or determine, the outcome for the New York State
16 economy, and revenues.
17 I'm not going to pick my way through all of
18 those numbers, except to say, that, at the last
19 page -- don't look at it -- but, the last page of my
20 report, is a summary. Just has some numbers; the
21 numbers that I come up with.
22 I might add, that I'd be very surprised if my
23 numbers are significantly different from anybody
24 else's numbers. They're fairly consistent.
25 And, you know, if you were trying to decide
23
1 which numbers you're gonna use for national economic
2 growth -- personal income? wages? employment? -- a
3 coin is probably as useful as a forecasting tool is,
4 as anything. They're all close.
5 The reason I think that the numbers are
6 pretty good, is this: Is because, first of all, the
7 numbers are positive.
8 In my case, I'm working, starting point, with
9 the consensus forecast for the national economy,
10 which is: 2.2 percent growth in 2012. 2.6 percent
11 growth in 2013.
12 The reason that number, and any numbers that
13 are close to it, make sense, is because, first of
14 all, they're positive;
15 And, secondly, they're -- which is important,
16 is they're somewhat below. They're moving toward,
17 but they're somewhat below what we might call
18 "trend"; or what we might call, the average numbers
19 that you ordinarily see at this stage of a recovery.
20 So, yes, positive, that's good news.
21 A little bit less than the kinds of numbers
22 that you ordinarily see, as we begin the fourth year
23 of a bull market, and we get right close to the
24 fourth year of the recovery in the economy.
25 So, the point is, is you have those numbers.
24
1 Those numbers are there for you to see.
2 And one of the things that I have looked for,
3 or tried to produce in the numbers that I produced,
4 and I think it's something for you to maybe think
5 about, is -- is, internal consistency.
6 And, in my judgment, the numbers that I come
7 up with, whether it's numbers for New York State --
8 or, numbers for the U.S. economy, or numbers for
9 U.S. State -- for New York State, are, internally --
10 internally, consistent.
11 Let me just say one thing about, you
12 mentioned stock prices, Bob.
13 And, I just -- it's not unusual at this stage
14 of a recovery --
15 And, again, we're starting the fourth year of
16 a bull market and the fourth year of a recovery.
17 -- it's not at all unusual, in fact, it's
18 normal, that you have a slowdown in the growth rate
19 of profits.
20 And you have that in most of your forecasts.
21 I have it in mine.
22 And you also have a slowdown in the
23 performance of the financial markets or the equity
24 markets.
25 So the big news -- the big -- the good news
25
1 is always the first year. That's when you have a
2 big year for the stock market.
3 But each successive year, the rate of return
4 starts to come down. And in the fourth year, it
5 gets to be -- I've got, average over average, of,
6 about, 1.0 for this year, and 3 -- and 6.8 for next
7 year.
8 Those are price only. That's the kind,
9 that's normal.
10 I might have said -- also add, it's very
11 consistent with what you get in the fourth year of a
12 bull market, which we're about to start. And it's
13 also consistent, and this is pure whimsy, but, what
14 you get in the -- in an election year.
15 So, at any rate, things are going to slow on
16 the corporate-profit side, and on the S&P 500, and
17 we'll use that.
18 Let me get to a couple of -- a couple of
19 points about -- that I'd like to make.
20 First of all: It's important to, I think,
21 recognize, there's a fairly strong correlation
22 between the outcome for the U.S. economy and the
23 New York State economy.
24 Now, in this case, what I'm using is the
25 Index of Coincident Economic Indicators, as
26
1 published by the Federal Reserve Bank of
2 Philadelphia.
3 But there's a very strong statistical
4 correlation, and you'll see a chart in there.
5 There's also strong correlation between, for
6 example, all of the variables, but, let's say, the
7 growth rate of employment for the national economy
8 and the growth rate of employment for
9 New York State.
10 There's also an interesting correlation
11 between federal budget receipts and New York State
12 budget receipts.
13 I'm not saying that they're precise, but I'm
14 saying that, over longer periods of time, you see a
15 general correlation.
16 What that says to me, is that the practice
17 that we're doing here, the process we're going
18 through, of trying to get to revenues for
19 New York State, by starting with a forecast for the
20 national economy, and a forecast -- moving from
21 that, to a forecast for New York State, and then a
22 forecast for revenue, this whole process is -- is --
23 is legitimate.
24 We're doing this, in my judgment, in the
25 right way.
27
1 But the problem is, this, or, the logically
2 prior assumption which is contained in all of this,
3 is that we're right, on the forecast for the
4 national economy, if that's our starting point.
5 The problem -- the problem gets even more
6 significant, is when you review the consensus
7 forecast, which tends to be close to what all of our
8 forecasts are, we review the history of the
9 consensus forecast for the national economy, you
10 find, especially at this stage, it's invariably
11 wrong.
12 And the real question, as we approach 2012
13 and 2013 -- it's a little too early for 2013, but
14 not for 2012 -- is -- is the forecast.
15 2.2 percent: Is that too high, or is that
16 too low?
17 Which way do you want to, sort of, skew, or
18 lean, your revenue forecast?
19 And, interestingly enough, and again, this
20 falls into, not statistical analysis, but falls into
21 whimsy, is that there is a tendency of a consensus
22 forecast, for any given year during the forecast
23 period, which is a year before the actual year
24 you're forecasting, and the year of the forecast, is
25 to, sort of, pull in one direction.
28
1 And the sad news is, as I look at the
2 forecast for 2012, down to 2.2, it's generally
3 pulling in a negative direction, suggesting to me,
4 that, although I'm going to work with 2.2 percent --
5 My associates here are gonna work with
6 whatever numbers they want.
7 -- is that, if there's any way I would lean
8 your forecast for the national economy; and,
9 therefore, the New York State economy and revenues,
10 is I'd probably lean it towards the leaner side, if
11 you may, or, something, perhaps, lower than
12 2.2 percent.
13 In other words: I may be a touch on the high
14 side.
15 Okay, the next question is, the forecast for
16 inflation.
17 We've had discussions on this plenty of
18 times, but, I think that the consensus forecast --
19 the consensus forecast is 2.2 percent for this year,
20 and 2.2 percent for 2013.
21 I'm okay on this year. I think that that's
22 going to be about right.
23 I'm not okay for 2013.
24 2013, in my judgment, the consensus -- or --
25 the consensus at 2.2, 2.1, is wrong, and it's too
29
1 low, and it's going be closer -- not big, but closer
2 to 3 percent.
3 So, I would take a hard look at that number,
4 and maybe -- and listen to the other folks here,
5 who -- who spent a lot of time thinking about the
6 rate of inflation.
7 That has implications for Federal Reserve
8 policy.
9 As everybody knows, the Federal Reserve has
10 sort of changed the way they do things now. They've
11 formalized a 2 percent inflation target.
12 And I have a serious question.
13 I know the purpose of that is to increase
14 transparency, or a level of certainty, surrounding
15 Federal Reserve policy.
16 In my judgment, it decreases transparency --
17 or, it doesn't decrease transparency, but it raises
18 the level of uncertainty.
19 And, I ask this question, this way: As we
20 know, they promised to keep interest rates at zero
21 to 25 basis points, through 2014. To the end of
22 2014.
23 Well, if in 2013 the unemployment rate is
24 still coming down, but high --
25 And I believe it will be coming down,
30
1 continuously, through the 2012-2013 period, but
2 still at a high level.
3 -- and, we see the rate of inflation in 2013
4 heading up towards 3 percent, what does that imply
5 for Federal Reserve policy?
6 In my judgment, I don't know what it implies.
7 I've spent some time talking to various
8 people at the Federal Reserve who are in the, sort
9 of, hot camp, I might add, but, nevertheless, still
10 talking to them.
11 And, in my view, that probably implies that
12 the Federal Reserve is going to have to come off its
13 promise of maintaining, or keeping, their target for
14 the federal funds rate at zero to 25 basis points
15 through 2000, up till -- through 2014.
16 That, they may have to raise -- in other
17 words: The consensus forecast, plus every one of
18 our forecasts, for short-term, and even longer-term,
19 interest rates, might be a little bit too
20 conservative.
21 They're not going to go a lot higher, but the
22 feds, probably, which is the principal variable
23 driving interest rates, particularly at the short
24 end, is likely -- I think there's a really
25 reasonably good chance that they can -- they're
31
1 going to start to move higher there.
2 So, you might want to take a very close --
3 close -- close look at that forecast.
4 Federal Reserve policy is one of the
5 important, but uncertain variables.
6 The -- now, another thing -- this is
7 something I say, but I don't know if it's going be
8 all that -- I say this, on the federal level, but --
9 and it's true of the states as well:
10 If you do nothing, if you change no laws, if
11 the federal -- at the federal level, you change no
12 laws, there -- a lot of the -- there's a lot of laws
13 that are going to be changed. They're in, sort of,
14 various levels of flux, or uncertainty, right now,
15 such as the reduction in the payroll tax.
16 But if nothing happens, you're still going to
17 have a growth in receipts at the federal level, and
18 you're still going have growth in receipts at the
19 New York State level.
20 And I think that's kind of important, because
21 there is a tendency, when, let's say, at the federal
22 level, when revenues get to 14 to 15 percent in a
23 recession, which they ordinarily do -- not quite
24 that low, but they get down -- and when spending
25 gets to 24 percent of gross domestic product,
32
1 there's a tendency to panic, and to try to change
2 laws in order to try to reduce deficits and debt,
3 and to do it at the wrong time.
4 And the point I'm trying to raise, is that,
5 if we're right on the economy; if we get
6 2.2 percent, maybe a little bit less, growth in
7 2012; 2.6 percent, maybe a little bit less -- I
8 don't know -- 2.6 is good, for 2013; the point is,
9 is that, receipts at the federal level are gonna to
10 rise, and, also, receipts at the state level are
11 gonna rise some.
12 That's not say that, at some point,
13 especially at the state level, where you have to
14 balance budgets, is that you don't entertain revenue
15 enhancements and spending cuts, or some combination
16 thereof.
17 But it is to say, that a lot of the stuff
18 will start to heal itself, if given time, and you
19 don't want to -- you don't want to go to an extreme.
20 One comment on Europe.
21 The -- I -- I -- there's -- it's hard to
22 overstate, how creative, and how interesting, what
23 the ECB is doing.
24 They're doing very much the same thing that
25 we did in the savings-and-loan crisis of 1990 and
33
1 1991.
2 They're providing significant liquidity of
3 the banking system at a very low interest rate,
4 1 percent.
5 You may have seen the auction, or the results
6 of what they did today, that was, 760 billion,
7 700 banks.
8 I mean, it's -- it's really cheap money.
9 We did the same thing in 1990.
10 And the banks, of course, still didn't have
11 much of an appetite to make loans, and didn't, here.
12 And they're not likely to have much of an
13 appetite to make loans there.
14 But they do have an appetite to buy sovereign
15 debt; 2 to 3 years' sovereign debt.
16 And, as you see, interest rates on sovereign
17 debt are coming down in Europe.
18 And that's all a result of what they're
19 doing.
20 In time, when the profitability, and the
21 balance sheets, in capital, or banks improve, as a
22 result of this risk-free give-away --
23 I shouldn't call it that, but that's kind of
24 what it is. It's very creative.
25 -- in time, banks will become profitable
34
1 enough that their lending -- they'll have appetite
2 to increase their lending. And that will, in time,
3 lead to a recovery, not only in bank lending, but
4 the economy.
5 In my judgment, when I look at the prices,
6 when I look at interest rates on sovereign debt,
7 when I look at the prices of credit-default swaps,
8 when I look at financial-market prices in Europe,
9 the message is -- as was said by the premier of
10 Italy this morning, the message is, is: Things are
11 starting to heal there.
12 The economy's not doing well, but they're --
13 but they seem to be headed in the direct -- in a
14 positive direction, or, that investors are sending a
15 message, that perhaps that's not going to be nearly
16 the risk in 2012 and 2013 -- or, certainly, 2012 --
17 nearly the risk that we're all worried about.
18 That may be one of the least risks -- well,
19 it's still a significant risk.
20 Okay, that's, basically, all I have to say.
21 I think, in sum: I think, again, the staff,
22 everybody's done a great job. I think you're doing
23 a great job on forecasting.
24 The national economy, the state economy,
25 revenues, use a coin to resolve your differences.
35
1 I wouldn't really worry about it.
2 [Laughter.]
3 HUGH JOHNSON: I'm serious.
4 And, you know, there's no amount of
5 statistical analysis that'll close those small gaps.
6 And -- and, you know, prospects seem good for
7 this year. They seem a little bit better for next
8 year.
9 There -- it's not going to be a normal
10 recovery. It will be anemic when compared to other
11 post-war recoveries.
12 It has to be, because we're still working
13 through the "revulsion" period.
14 And, keep a very close eye.
15 I think -- think long, and think hard, about
16 Federal Reserve policy.
17 Think long and hard about inflation,
18 Federal Reserve policy, short-term and long-term
19 interest rates; the forecast for those variables.
20 And -- and I wouldn't -- well, just as -- I
21 shouldn't say something political, but I wouldn't
22 move too fast on anything in trying to resolve
23 deficits.
24 I mean, move with -- move carefully.
25 Let's put that it way.
36
1 Thank you once again for allowing me to be
2 here. It's been wonderful.
3 ROBERT L. MEGNA: How do we want to handle
4 it?
5 Do we want to ask questions, or wait until
6 the end?
7 UNIDENTIFIED SPEAKER: Wait till the end.
8 ROBERT L. MEGNA: We will wait till the end.
9 Okay, given that, I'm going to introduce
10 Chris, who we're really thrilled was able to make it
11 through the snowstorm, and get here.
12 So, the next person on the panel is
13 Chris Varvares, from Macroeconomic Advisers.
14 CHRIS VARVARES: Thank you very much.
15 It's a pleasure to be here, and be part of
16 this process again.
17 [Unintelligible]. I hope you can arrange a
18 pardon, because I had to hijack a cab.
19 [Laughter.]
20 CHRIS VARVARES: So, in listening to the
21 remarks, as far -- I want to sort of agree with my
22 esteemed colleague to my right, there is a lot of
23 uncertainty right now.
24 It's often said, that in this period, we're
25 very much in uncharted waters.
37
1 However, I think we're starting to move into
2 charted waters, and I expect that, by the end of
3 this year, one of two things going to happen:
4 Either the euro-zone crisis will re-intensify
5 and will drag the global economy back into a
6 recession, or, it will move in a way that is clear
7 that it is resolving, and the economy of the U.S.
8 and Europe, and the global economy indeed, will
9 begin to experience something much more akin to a
10 normal cyclical recovery that has been delayed now
11 for three years.
12 So, in that sense, we often say that the
13 probability distribution of outcomes is bimodal.
14 On the one hand, if we can eliminate that one
15 risk of the European situation from becoming some
16 kind of a meltdown, that we get back on track to a
17 much better kind of environment.
18 So when you look at consensus forecasts, the
19 blue chip, you're really are looking at an average
20 of individual forecasters' best guess; and, as such,
21 it may not really represent anything close to
22 reality.
23 On the one hand, you know, the story of: The
24 doctor, the physicist, and the statistician go out
25 hunting.
38
1 And the doctor takes the first shot. It's
2 far to the left.
3 The physicist takes the second shot. It's
4 far to the right.
5 The statistician goes, "We hit!"
6 Okay, on average they were right on.
7 [Laughter.]
8 CHRIS VARVARES: So, we have to be wary of
9 interpreting consensus forecasts as representing
10 sort of two different views of the world: One view,
11 that the European situation worsens, and we have --
12 we're on a slow-growth track, versus, that it
13 improves and we have a much better environment.
14 The -- there is a sense that uncertainty is
15 lifting.
16 And -- and as that uncertainty lifts, the
17 balance of risk between upside and downside risks to
18 our growth forecasts are becoming more balanced.
19 We have gone through this period where the
20 risks have been way overweighted to the downside.
21 And what's happened -- what's been happening
22 in Europe of late, is suggesting that, even -- there
23 seems to be this resolve now, that: Well, okay,
24 maybe Greece is going to end up leaving the euro,
25 but, you know, what? We'll get through it.
39
1 And, increasingly, I'm of the view that,
2 Europe, every time things get bad, they make the
3 political decisions that are necessary to get past
4 that immediate crisis and move on.
5 And I read a very interesting paper recently,
6 where the story was, that part of the
7 financial-market volatility that's at work there is
8 a necessary part of the process to force the
9 political decisions that are needed to resolve the
10 crisis.
11 And I -- and folks who believe it will be
12 resolved start from the premise, which we've had in
13 our forecast for a long time, that they'll do
14 whatever it takes to avoid an implosion of the euro
15 zone.
16 So, just as background, the forecast I'm
17 going to talk about assumes that the euro-zone
18 crisis does not re-intensify, we do not have a
19 meltdown.
20 It doesn't mean that the financial markets,
21 still, are on a rollercoaster as we see progress
22 forward, and then -- and, then, some progress --
23 reversal of that progress.
24 And that volatility in the financial markets
25 is one of things that does make for a slower-growth
40
1 outlook for the United States, because it adds to
2 uncertainty. More uncertainty reduces the value of
3 risk assets that has real balance-sheet effects,
4 that do have real effects on growth.
5 Okay, so, I want to talk just about seven of
6 these slides, so don't fret. I'm not going to go
7 through all of them.
8 So, really quickly, from 30,000 feet, we
9 think that the U.S. will, in fact, avoid a
10 recession, even though I think that the chance of
11 recession have receded dramatically, but not
12 everybody's taken off of recession calls.
13 This year will be another, kind of,
14 muddling-through year.
15 Fiscal contraction at the federal and state
16 levels is still a force that's slowing growth; and,
17 it's also a downside risk, because, at the federal
18 level, lots of things have to get resolved before we
19 hit 2013.
20 If they don't get resolved, pushed back out
21 of the way, et cetera, et cetera.
22 So, it's not only slowing growth on the track
23 that we're on, but there's a risk that it could
24 be -- we could see much more drag.
25 The slow growth in the economy means that
41
1 they will make little progress in lowering the
2 unemployment rate this year.
3 With the kinds of growth rates we're talking
4 about, we would expect the unemployment rate to be,
5 basically, unchanged. Maybe even drifting higher.
6 The European situation we think will resolve
7 itself. And, clearly, it's beginning to ease, but,
8 as I said, there's still that other scenario that
9 could threaten global expansion.
10 In this environment where we have relatively
11 modest growth, not a lot of upward pressure, we
12 think, to be sustained in commodity prices, we think
13 inflation will remain on a fairly level track.
14 So, we're -- our forecast will be much closer
15 to the [unintelligible] zone forecast, where the key
16 measures of inflation that they watch, the broad
17 consumer-price measures, would be rising at a pace
18 less than 2 percent over the next couple of years.
19 And, in that case, you take the fed at its
20 word, or at least its conditional commitment, that
21 it's going to keep rates low, steady, zero,
22 basically, through late 2014.
23 And let's face it, if the economy does
24 better, we know that -- and inflation is higher, we
25 know that they'll tighten before that time.
42
1 But, given the growth outlook that
2 characterizes most of the forecasts I've seen, it's
3 very consistent with the story that short-term rates
4 will remain close to zero through 2014.
5 So, I think, relatively good news, from a
6 budget perspective.
7 Nevertheless, long-term yields will begin to
8 rise.
9 Long-term yields are really nothing more than
10 a fancy weighted average of future expected
11 short-term yields. And as you roll forward in time
12 towards the date that the fed's going to begin
13 tightening, you're dropping zero at the front end
14 and adding 4 1/2 at the back end.
15 It doesn't take very long for that average to
16 begin to move up.
17 So long-term rates, we think, are currently
18 at their low level, and will begin to rise towards,
19 375, 380, by the end of 2013.
20 It will be an uneven rise, but the direction,
21 we think, from here, is up.
22 Equity markets, we believe, are significantly
23 undervalued. Still, 15 to 20 percent under value,
24 even given the expected rise in interest rates that
25 we see.
43
1 And, so, we think, this year, broad measures,
2 like the Wilshire 5000, will be up, something like,
3 12 percent, and, we can do another 15 to 20 percent
4 next year, to cure that undervaluation.
5 So let me go on and talk through a few of
6 these slides and, quick, put a few more numbers to
7 the story.
8 So, the -- Slide 3 shows the quarterly growth
9 path of real GDP, as well as the unemployment rate.
10 We had a pretty good number reported this
11 morning, for the fourth quarter, 3 percent, an upper
12 revision from the earlier prints.
13 We think that some of that was -- clearly,
14 was due to a surge in inventory building, that's not
15 going to be repeated.
16 In fact, inventory -- decline in inventory
17 building will help to slow growth early in year,
18 but, to about 2 percent.
19 So, we're fairly comfortable with 2 percent
20 growth for the first quarter, gradually rising over
21 the year, so that the year, as a whole, measures
22 fourth quarter -- where the fourth quarter would be
23 2.6 percent, or, 2.3 percent on a year-over-year
24 basis.
25 We think, with the expiration of the
44
1 unemployment -- emergency extended unemployment
2 benefits and the payroll-tax holiday, there's a hit
3 to disposable income early in 2013, which will slow
4 consumer spending in the first half of that year.
5 So, you see growth dip a little, and then it
6 gradually revives over the year. And growth, that
7 year, we have it, 3.2 percent, or, 2.9 percent on a
8 year-over-year basis.
9 So, I think a little better this year than
10 the consensus, but, next year, we're somewhat more
11 optimistic.
12 And it really gets back to that story of:
13 How do you weigh the dissipation of the head winds
14 that we've been dealing with for a long time,
15 versus, a return of some normal cyclical dynamics
16 that will help to lift the economy when we get out
17 to 2013?
18 One of the issues is, and one of things that
19 we hear a lot about, is the key head wind has been
20 the de-leveraging story.
21 Well, if you simply take a look at what's
22 happened at the household saving rate since it
23 peaked at about 5 3/4 percent early on in the
24 recovery period, to where it is today, as well as
25 the growth in consumer credit, I think it's pretty
45
1 safe to say that the household sector's big
2 de-leveraging days are behind them, and, that we're
3 not in a big credit boom again. But, we're at least
4 in a period where households are in a position,
5 that, the financial-obligation ratios, the
6 delinquency rates, are down at almost historical
7 lows, or certainly mid-cycle levels, to suggest that
8 there's capacity for households to use debt to once
9 again raise spending, or, use credit growth to raise
10 spending.
11 The housing market, we've seen early signs
12 that it's beginning to recover.
13 I think, if you -- you don't have to squint
14 too hard to see that home prices really are
15 stabilizing. It's still very much a regional story.
16 Home prices are rising, sharply in some
17 markets.
18 We look at the California market, the home
19 prices have been up for the last year to year and a
20 half, and by quite a good measure.
21 So, home builders are becoming more
22 optimistic.
23 The foreclosure-starts' rate has fallen off,
24 even if you take apart from the robo signing mess.
25 I think there's signs that the housing market
46
1 has clearly hit bottom, and has -- it's bounced
2 along bottom for a year and half, and it looks like
3 the early beginnings of a housing recovery are
4 there.
5 So, we think, if we can again get past the
6 situation in Europe, where we have a significant
7 meltdown, that there is a good chance that growth
8 could -- there's as good a chance that growth could
9 exceed the consensus forecast, as it could come in
10 lower.
11 Okay, in -- I mentioned fiscal drag, and, the
12 next slide details some of the sources of that drag.
13 Certainly, we know government spending
14 restrained at the federal level is accounting for
15 some restraint. So, there has been actual outright
16 spending reductions not relative to baseline, but
17 level reductions in spending that accounted for
18 six-tenths of drag last year. And we think it will
19 be another two- to three-tenths this year, and
20 a tenth or two in 2013. And that's before we'd
21 incorporate so-called "multiplier effects."
22 We think 2013 will be he held back about
23 a half a percentage point due to the expiration of
24 the payroll-tax holiday and the expiration of the
25 extended unemployment benefits.
47
1 We've been clearing out our forecast, some
2 sort of revenue enhancement, about a 60 billion
3 increase in personal taxes that would generate
4 600 billion over the 10-year window that they're
5 negotiating over.
6 There's some risk -- so that's the drag.
7 And the risks are, that the sunsetting of the
8 Bush and Obama tax cuts in 2013 would imply a very
9 large tax increase, together with the other
10 provisions I just mentioned, it would reduce
11 personal income by about $500 billion that year,
12 which would be massive, massive drag.
13 It's -- and, again, it's so bad, it's, just,
14 neither -- neither party wants to have their
15 fingerprints on that, so, we think that some kind of
16 resolution will occur this year.
17 But, from our base forecast, we have drag of
18 about eight-tenths from federal fiscal policy, in
19 2013.
20 It could actually extend to as high as
21 3 percentage points if everything that can go wrong
22 does go wrong.
23 And since our growth forecast for 2013,
24 fourth -- the fourth is 3 percent, if you had all
25 that drag, it would surely throw the economy back
48
1 into recession.
2 And, so, that's a risk, but we view it as a
3 low risk.
4 If you go on to the next slide, it details
5 some of the underlying forces on the unemployment
6 rate.
7 We do see employment growth kicking up this
8 year.
9 The lines that are for labor force and
10 employment growth are measured fourth quarter over
11 fourth quarter, so it belies a bit the fact that
12 growth of employment will be relatively slow in the,
13 roughly, 100,000 a month for the first several
14 months this year, we believe, but probably --
15 they'll up sharply, towards 200, or maybe a little
16 better, later in the year.
17 The unemployment rate, frankly, is a big
18 wildcard.
19 The labor force has acted in a very fluky
20 way, and a puzzling way, and it's difficult to know
21 whether the labor force will continue to, sort of,
22 languish, or whether it will come back sharply as it
23 does in a cyclical sense.
24 And, I hate to say this, but we've sort of
25 thrown up our hands to try and understand exactly
49
1 what's been pushing the labor force around lately.
2 So, the unemployment rate itself is a
3 wildcard, but we do think we're at a situation now
4 where we'll see sustained, solid increases in
5 employment that will build as we move through the
6 year.
7 In terms of inflation, on Slide 6, I like to
8 show this, to show the point that inflation is
9 indeed cyclical. Large amounts of slack typically
10 put downward pressure on inflation.
11 That was certainly true in the '70s and early
12 '80s.
13 It's less true today because fed credibility
14 has helped to stabilize inflation expectations, so
15 slack doesn't matter as much as it used to, but we
16 believe it still matters.
17 The fact that the unemployment rate is
18 remaining elevated has slowed the rate of growth of
19 labor compensation.
20 We know this, it's very clear, and that has
21 helped to keep profit margins expanding.
22 I agree, that we are probably at the peak of
23 the profit share. And, if there's any movement up,
24 it's probably slight, and we're probably towards the
25 downside slope of the profit share.
50
1 And, so, be ready for those implications.
2 But, nevertheless, that expanding of the
3 corporate profit share, companies still do compete
4 on price to gain market share; and, so that has
5 helped to keep inflation relatively soft.
6 You can see, also in this chart, the growth
7 of unit labor costs. There have been very large
8 outright declines in union labor costs on the
9 backside of the recession, a combination of strong
10 productivity gains and relatively slow growth of
11 labor compensation. And that expansion of those
12 margins has led to very strong profit growth.
13 That strong profit growth has led to huge
14 increases in retained earnings. We're at record
15 levels of retained earnings. [Unintelligible]
16 absolutely, and as a share of the GDP.
17 Corporations are lending money back into the
18 economy, if you will, by the amount of saving that
19 they're doing, and building up large balances of
20 liquid assets.
21 Once we get to the other side of the European
22 crisis and uncertainty lifts, I think there's a
23 chance here, and we might only be one good burst of
24 animal spirits away from catching on to that
25 virtuous cycle of strong investments, strong
51
1 employment growth, at a -- and a really good couple
2 of years of overall economic growth.
3 Certainly, corporate -- large corporations --
4 large non-financial corporations have the
5 wherewithal to increase capital spending quite
6 dramatically, should they decide to do so.
7 Gone to Slide 7, this shows the rate picture.
8 It goes through 2013, showing that funds'
9 rate, basically, at zero, all the way out.
10 We have no increase in the policy rate over
11 that period; but, again, long-term rates would be
12 expected to move higher.
13 You'll notice -- some people sometimes ask:
14 Gee, why are the lines so erratic in history, but so
15 smooth in the forecast period?
16 We don't forecast noise.
17 And these are meant to show the general
18 direction of interest rates, which, clearly, is
19 higher for long-term rates, as I explained earlier.
20 But even still, by the time we get to the end
21 of 2013, look at the conventional mortgage rate.
22 It's still at what, apart from this most
23 recent episode, would be a historically low level.
24 So, we don't think that that's -- itself,
25 would stand in the way of a housing recovery.
52
1 The same thing for the 10-year treasury
2 yield, it's at a historically low level.
3 So, real interest rates will remain
4 historically low, just as, you know, inflation's
5 edging up a little bit. But, real interest rates
6 would remain at near historic lows, and we don't
7 think that that would stand in the way of a serious
8 recovery beyond 2013.
9 And, finally, if you look at the next charts,
10 Chart 8 on the equity markets, this -- the colored
11 band shows our -- what we view a fair value for
12 Wilshire 5000 index.
13 We've been at the bottom end of that, with
14 the meltdown in the market last summer. We were
15 well, well below that range. We've crept up to the
16 bottom edge of it, and we expect that we'll see
17 continued strong gains in equities over the next
18 couple of years, to help get us back into, sort of,
19 the middle of that range.
20 And that is supported by the very strong
21 level of profits.
22 And as we'll see, going forward, we'd expect
23 that the dividend-payout ratio will be rising, and
24 that would help to offset, somewhat, the rise in
25 interest rates that might otherwise tend to reduce
53
1 valuations.
2 So, our -- our -- so that's the -- pretty
3 much, the end of the story.
4 Our view is slightly more optimistic than the
5 consensus this year. A bit more optimistic next
6 year. And, again, it is very scenario-dependent.
7 I think we believe, that, as long as we avoid
8 the re-intensification of the euro crisis, we can be
9 in for the kind of growth that we're forecasting.
10 ROBERT L. MEGNA: Thanks, Chris.
11 Jim Diffley.
12 JAMES DIFFLEY: Thank you, Budget Director
13 Megna.
14 You know, I thought we had some big
15 differences in the forecast.
16 And, first of all, I'd say we don't have many
17 differences [unintelligible] as I thought we did,
18 but that is one thing Chris said earlier, when I saw
19 2.6 percent in one of your tables.
20 2.6 percent for GDP this year, was Chris's
21 measure of Q4 2011 to Q4 2012.
22 And I was contrasting that, quickly, with the
23 2.2 percent we have. [Unintelligible], and as you
24 mentioned, it's about the consensus.
25 So I thought, my God, Chris was much more
54
1 optimistic, but he corrected me. I mean, he just
2 clarified, 2.6 was the Q4 to Q4.
3 It's a tricky data question, but 2.3, is
4 Chris's forecast for year-over-year growth for 2012.
5 So, we don't disagree that much at all.
6 What we -- you know, what I can say, to
7 summarize our forecast, is that we're more certain
8 now than ever, through the course of this recovery,
9 that we're on the road to recovery. That we have
10 momentum, both in the U.S. and, as Bob said, in
11 New York State.
12 We're also more certain that the recovery is
13 slow, and sluggish, and prodding along. Slowly, but
14 surely, we're moving up.
15 Okay?
16 So I'm going to go through the slides a
17 little. I'll try not to repeat much of what Chris
18 said, and I'll spend more time on New York when we
19 get there.
20 Recent news in New York, including this
21 morning's GDP release, which was revised up for the
22 fourth quarter, to 3.0 percent, is a little
23 misleading.
24 It's probably due to good weather, I'll
25 mention. No one's mentioned that before, but
55
1 there's also a big inventory build in the
2 fourth quarter, that we know will not occur -- and
3 both you and Chris mentioned this -- in the first
4 quarter.
5 So, the rate of growth -- the rate of
6 measured growth is bound -- bound to slow a little.
7 On the other hand, today there was a huge
8 revision upward in wages, as measured in the
9 second half of 2011.
10 That bodes well, because households, turned
11 out, they're spending was not so far out of line
12 with their income in the latter half of 2011, but
13 was indeed more supported by that income that we
14 thought, and hence is more sustainable, by the
15 increased rate of consumer spending.
16 So, consumers are indeed cautiously
17 increasing their spending, as businesses have been,
18 at least outside the construction sector or
19 structural investment -- real estate investment.
20 We believe the housing market recovery -- we
21 also agree the housing market has clearly hit the
22 bottom, and is coming up, to some degree, but
23 slowly.
24 However, a normal path of new-home
25 construction in the U.S., and including new-home
56
1 sales, and people being able to move around, for
2 purposes of jobs and careers, et cetera, is very
3 vital to more robust economic growth, but, it's
4 still a couple of years off.
5 The housing market is starting up, but it's
6 at a very low level.
7 The export outlook, in the medium term, is
8 very favorable.
9 We're very bullish on exports being a leading
10 sector in growth in the rest -- for the rest of this
11 decade.
12 2012 will be a little slow, though.
13 The euro zone's in recession now. Not in a
14 deep recession.
15 There are serious risks there, as we'll
16 mention, but we do look for it to come out of even
17 that mild recession in the second half of 2012.
18 China and the Pacific are also slowing a bit.
19 They're still growing very fast, much faster
20 than the Western economies, but slowing a little off
21 the pace than they had in the last -- in over the
22 last decade.
23 Fiscal policies will tighten a bit.
24 We agree with Chris's point, that we -- that
25 the political parties cannot let the nightmare
57
1 scenario occur in the beginning of 2013, of sharp
2 cuts in spending or increase in taxes.
3 But, we also think it's crucial that the
4 payroll-tax cut have been continued through 2012,
5 because the economy does not have enough momentum
6 without it to withstand the serious negative
7 consequence to demand, should that happen.
8 But, over the longer term, fiscal policy is
9 going to be contractionary, we agree.
10 The euro-zone sovereign-debt crisis has been
11 handled better than it -- one might have been
12 worried about a few months ago.
13 The European Central Bank is providing a lot
14 of liquidity; and, effectively, it wasn't quite
15 clear they would be willing to do so.
16 We also take the view, that they will do
17 whatever's necessary, as the Federal Reserve did in
18 the U.S., to keep the euro zone from falling apart.
19 And, so, those risks have decreased, but
20 they're still there.
21 Germany is still driving a hard bargain in
22 terms of austerity measures being demanded of
23 certain countries.
24 And, it remains a threat, as do rising oil
25 prices.
58
1 We have not been sanguine about oil prices
2 coming back down to, you know, levels earlier in the
3 last decade, at all. We've always maintained that
4 the fundamentals are, the oil prices will remain
5 high -- high, historical, and -- in historical
6 terms. Although, natural gas prices are low, and
7 that's an aid to the economy, particularly in
8 households, particularly in the northeast.
9 But this recent uptick is worrisome. I mean,
10 oil prices have always, and geopolitical
11 uncertainties always, been a potential drain on the
12 economy, and something we do have to be concerned
13 about, but, we were not counting on oil prices
14 declining in our current forecast at all.
15 So if you look at the graph on page 3, you'll
16 see, in the blue bars, our projected rates, to the
17 right of the vertical line, at the start of 2012, in
18 GDP growth, positive, but, you know, not strong.
19 Anything much less than 3 percent is hardly a
20 potential GDP growth in the U.S. It takes us a
21 couple of years to get back up there.
22 And, as a result, the unemployment rate, and
23 the number of jobs added to the economy, improves,
24 but only very gradually.
25 The idea that, even in 2015, we're still
59
1 flirting with 7 percent unemployment, is not a very
2 optimistic view, historically, again, of the U.S.
3 economy, but it's an improvement from what we have
4 today, and part of the recovery process.
5 Our numbers on Slide 4 show you the gradual
6 ramp-up in real-growth domestic product, to over
7 3 percent, finally, on a year-over-year basis, in
8 2014, but a gradual rise.
9 Consumption remains moderate in growth. We
10 do think households have largely been through the
11 de-leveraging, but, of course, they're not going to
12 take on debt the way they did 10 years ago, in the
13 last decade.
14 So, we're not going see consumption leading.
15 That's one of the reasons we're looking and -- for
16 exports to move up and take a larger share, roughly,
17 about, almost 40 percent of projected growth this
18 decade in the U.S. will come directly from exports.
19 Business fixed investment remains strong.
20 The residential investment increases,
21 16 percent in 2013, 26 percent in 2014.
22 Remember, come off very low levels and
23 they're just getting back up to normal, so, it takes
24 that type of growth to be get back to normalcy.
25 On the next slide, page 5, you see other
60
1 indicators.
2 I'll point out:
3 Light vehicle sales only getting back to,
4 again, improving. And there's some pent-up demand
5 we have seen for automobiles, but we don't see it
6 rising very fast.
7 15 million cars in a year was topped many
8 times in the last decade, but, at least we get up to
9 a somewhat healthy rate by 2014.
10 Housing starts don't reach a million until
11 sometime -- a million-unit annual pace, until
12 sometime in 2013. And that's, historically, a very
13 low number.
14 In the bubble there were 2 million. That was
15 unsustainable. But we expect a normal rate, owing
16 to household formation in the U.S., and
17 demographics, to be about 1 1/2 million.
18 There's still a large amount of inventory of
19 unsold houses and unoccupied houses on the market,
20 much larger than is healthy, and that keeps pressure
21 down on prices, but it is slowly being worked off,
22 thankfully.
23 We agree with the previous presenter on -- I
24 think, if I remember their points correctly --
25 Consumer Price Index. CPI is not a threat for a
61
1 while. About 2 percent, we think, is maintained.
2 You see oil prices over $100, on average, per
3 barrel.
4 And, again, monetary policy remains very
5 loose, 0.1 percent federal funds' rates, for
6 foreseeable future.
7 And, so, I agree that the threat of a fed
8 tightening has very serious implications for the
9 New York budget, and other budgets. That's
10 somewhere off into the future now.
11 Employment: Let's take a look at employment
12 by itself, on the bar chart on Slide 6.
13 We finally get back with less than 2 percent
14 growth. Again, positive growth, going forward, but
15 less than 2 percent is not a typical recovery at
16 all.
17 If you look quickly at 2004 to 2006, you see
18 2 percent easily being topped, and that's after jobs
19 have been recovered from the recession.
20 We don't get at that rate, the level of jobs
21 that existed in the U.S. in early 2008 or late 2007,
22 again, until late in 2014, at these rates.
23 New York, as you'll see, reaches that level,
24 previous peak employment, somewhat -- somewhat
25 quicker.
62
1 Notice I said "previous peak employment."
2 Unemployment still remains high at that time
3 because we've had labor-force growth in the
4 intervening period, of course.
5 So, it's not really full employment in any
6 sense -- in that sense.
7 Chart 7 gives all the reasons why we think
8 market fundamentals support high oil prices, going
9 forward.
10 And I won't go through that, other than to
11 note the obvious risks coming from Iran, and
12 elsewhere.
13 Turning to consumers a bit: Disposal-income
14 gains for households, of course, limit the rate of
15 growth of consumer spending.
16 Remember, the consumer spending was propelled
17 a lot by home-equity loans, et cetera, in the last
18 decade, and we won't see that reappear.
19 So, here, I've plotted real consumer spending
20 versus real disposable income.
21 You see the negatives during the recession,
22 but, somewhat moderate pace coming out of the
23 recession, in terms of spending, and obvious
24 implications for sales-tax bases, in other words --
25 and other spending activity.
63
1 Durables behave more cyclically, this pent-up
2 demand.
3 If you haven't bought a car in a while,
4 they -- they cars do deteriorate.
5 Same thing with other appliances.
6 And so we see a spurt in durables that we
7 don't see in non-durables, but that must end.
8 There's a spurt, as pent-up demand appears, then,
9 pent-up demand is exhausted.
10 So, it has a natural cycle in the recovery
11 from a recession.
12 That's documented on Chart 9 of our forecast.
13 Take a look at what the other factors,
14 driving:
15 Spending, well, the savings rate, and, of
16 course, the wild fluctuations in household net
17 worth, owing to two big factors: Stock market
18 cycles, and improvements lately, of course; but,
19 also, real-estate equity.
20 We do look for savings rates, in the blue, to
21 gradually increase in, quote, the new normal, as
22 consumers do not take on the debt burdens they had
23 in the past.
24 But, the decline in savings rates you see,
25 you'll see the blue line, coming from 2010, down to
64
1 2012, will reverse itself at last.
2 Light -- this is the, graphically, light
3 vehicle sales, or, cars and light trucks, you see
4 recovering together, after the recession.
5 Won't belabor that.
6 Slide 7 dramatically showing how real-estate
7 markets plummeted to below half a million -- or,
8 virtually, half-a-million unit annual pace of
9 construction, post-World War II lows, by a lot, by
10 the way.
11 And then, only by the last five years of the
12 decade, getting back up to, what we term, a normal
13 rate. A sustainable long-term rate of household
14 home growth, given household formation.
15 Multi-family markets are stronger now than
16 single-family markets, as families adapt to the new
17 realities of real-estate home-price appreciation,
18 amongst other things.
19 So, summarizing this: We want to talk about
20 a baseline forecast, and then talk about, what are
21 the risks around it.
22 And we provide both optimistic and
23 pessimistic scenarios.
24 For a while, our pessimistic scenario, for a
25 while -- I mean, in the months leading to the end of
65
1 2011, probability associated, that was up around
2 40 to 50 percent.
3 Okay?
4 We've now moderated our assessment of the
5 risks of having a double-dip recession. We still
6 put it at a quarter, led by a credit crunch, spurred
7 by sovereign-debt crisis in the euro zone, you know,
8 falling apart from the current agreements that are
9 in place between Germany and Greece and the other
10 countries.
11 That the payroll-tax cut and unemployment
12 insurance benefit extensions would have been allowed
13 to lapse after March, we think would be ruled into
14 that scenario.
15 Consumers would then retrench, and housing
16 recession would continue to drag on without much end
17 in sight.
18 So, those types of factors lead us to, and we
19 put a 25 percent probability on it. It's not
20 something to be dismissed, but that's our
21 pessimistic scenario.
22 I'll show you what it looks like,
23 graphically, in a second.
24 Optimistically, the euro-zone crisis, which
25 as, you know, the prospects have, look a lot better
66
1 than they did a couple of months ago, but is
2 resolved convincingly.
3 The reforms get in place that are, both, not
4 crippling to the companies -- to the countries --
5 sorry -- at the time, and, also, increased
6 confidence that the crisis is indeed over, credit
7 channels around the world begin to function more
8 smoothly.
9 They are functioning more and more smoothly
10 since the problems of 2008 and 2009, but really get
11 humming like they should. And that leads to
12 confidence, and there's another virtuous cycle
13 there, in terms of confidence and spending that we
14 can plug in.
15 And then, emerging markets, the growth
16 engines for exports, which are really in the
17 Far East, take off as well.
18 That's our optimistic scenario.
19 If you look at the graph, then, on page -- on
20 Slide 14, page 14:
21 You see the gap between our red, the low
22 scenario, the double-dip recession, where GDP growth
23 goes negative for a while in 2012;
24 And the high scenario, 3.5 percent to
25 4 percent growth for a year or two. A very bullish
67
1 view of the economy, should that happen.
2 And the baseline, much more moderate,
3 2 1/2 to 3 percent growth for the next six quarters.
4 Bottom line, the most likely outcome, in our
5 view, is:
6 Continuing but modest growth, cautious
7 consumer spending, businesses and exports, with some
8 help from consumer durables, continue to drive the
9 expansion for a few quarters;
10 Pent-up demand for housing, eventually, but
11 slowly, releases itself;
12 Fiscal tightening is coming, but it's not
13 coming too soon;
14 And then we have the major global risks from
15 the euro zone, from an oil-price shock.
16 And I haven't mentioned it, but, again, China
17 is slowing in terms of its rate of growth.
18 And, they have their own real-estate bubble,
19 by the way, that they seem to be managing, in a
20 way -- in sort of a brute-force way, of preventing
21 home prices from going up.
22 But, we would be hurt by a hard landing in
23 China from their bubble activity, because we do get
24 a lot of business, both, directly, in terms of
25 business to China, but also the Pacific nations
68
1 that, themselves, depend upon Chinese economic
2 growth, would hurt us should the growth rates there
3 plummet.
4 And, so, the probability of another
5 recession -- double-dip recession is down to a
6 quarter, finally.
7 All right?
8 Let's take a look at the regional outlook,
9 across the country, briefly.
10 This year, by the end of 2012, we expect all
11 regions of the country, all states -- a nice way to
12 measure it -- to be increasing in employment; to
13 have employment gains.
14 It's not the case right now, but most are --
15 and, for unemployment to be falling.
16 The states that were most greatly impacted by
17 the housing crisis will finally begin to be growing,
18 and they'll be growing at a relatively fast rate.
19 Of course, they have a much sharper rebound
20 to make. They lost in -- at a much larger fraction
21 of the job basis than, say, New York did, and,
22 certainly, than the country -- than states in the
23 center of the country have.
24 The Rust Belt and southern manufacturing
25 states are doing rather well, relatively, in terms
69
1 of, again, historical precedence, as manufacturing
2 takes a leading role in the recovery.
3 And, New York is among one of the four states
4 that will be adding over 100,000 jobs again this
5 year.
6 Looking at that by a map, it's a little fuzzy
7 I see in the printout, but, New York in the lead.
8 That's, actually, fourth-quarter growth in
9 New York just gets into that top rank, 1.7 percent.
10 That's Q4 over Q4. The average for the year is a
11 bit less than that.
12 But, relatively strong growth in the near
13 term for New York, and following a weaker -- a
14 stronger -- that is, a weaker fall, a smaller fall,
15 during the recession, as we'll see in a minute.
16 The state unemployment rates remain
17 stubbornly high in the -- ironically, in the
18 Sun Belt. You know, and big reversal of fortune and
19 regional economics in the countries of the Sun Belt
20 is now the least well-performing sector -- regions
21 of the country; whereas, for years and years, in the
22 post-war period, it was quite the opposite.
23 But, you can get a sense of that.
24 I've added real-growth state product here, as
25 well. An important indicator, "the indicator," of
70
1 overall economic activity, comparable to real gross
2 domestic product for the U.S.
3 New York is -- appears much worse, in terms
4 of GSP than it does in employment, and that's
5 because of a bit of a retrenchment in the financial
6 sector -- the very high value-added financial sector
7 in New York City.
8 Which, I guess I'll skip to, and mention
9 right now, for the moment.
10 We do think that there is risk from
11 financial-sector retrenchment, clearly.
12 We're relatively optimistic that the really
13 large amounts of layoffs announced by the
14 Wall Street firms --
15 And they really haven't been focused on
16 New York; they've been focus on their worldwide
17 operations.
18 -- are overstated, or, in the sense, that we
19 don't think they'll all come to pass.
20 But, we do see sharply lower bonuses this
21 year, and we think that's a permanent change for
22 Wall Street;
23 And, very weak, if at all, employment growth,
24 going forward, over next couple of years in the
25 financial sector in New York.
71
1 But, there's a risk, though, that, you know,
2 not stemming partly from the euro-zone crisis, but
3 also from the sharply -- sharp downturn in profits
4 in finance this year, that those layoffs and other
5 retrenchments in Wall Street will come to pass.
6 It's a big negative risk for New York; and,
7 of course, a bigger risk for New York than it is for
8 the U.S.
9 A contrasting, go to slide -- oh, we don't
10 have a number on this slide.
11 Slide 20: When does New York regain jobs it
12 lost in the recession?
13 A little earlier than the U.S.
14 By 2013, New York has reached the previous
15 peak, which I believe was the first quarter of 2008.
16 I'll have to check back, exactly.
17 This is tailored to the different states'
18 cycles, by the way, but you get a sense of how that
19 stands in terms of the rest of the country, in the
20 top quartile of states, in terms of overall
21 experience.
22 The euro-zone exposure is greater here, in
23 terms of how much the export sector. This is a
24 share of state exports to Europe.
25 Along the East Coast, you see a greater
72
1 exposure to Europe, in terms of types of exports
2 that are -- that are sent, should Europe -- but
3 that's a lower -- should Europe go into a deeper
4 recession, but that's a lower-probability event than
5 we had previously referred to.
6 New York employment growth here, on the next
7 slide, again, a shallower recession than the U.S.,
8 coming back up now.
9 U.S. rebound catching up to New York, in
10 terms of growth rates, but, of course, there's more
11 to gain, more to recover, in the U.S.
12 And, overall, New York performs -- continues
13 to be relatively strong, relative to the U.S. At
14 least comparable to that.
15 The next graph, on wage and salary growth,
16 New York looks a little worse.
17 Why? That's those -- those are the
18 Wall Street bonuses.
19 All right?
20 The finance -- the very important finance
21 sector taking a hit this particular -- this -- at
22 the end of 2011, in particular, and, falling below,
23 in terms of the overall.
24 This measure's not just Wall Street. This is
25 all wages in New York, but Wall Street's a
73
1 significant factor, as you know.
2 Then, looking at two big spending items:
3 Cars -- automobiles/sales, in red; and housing
4 starts, in blue.
5 Recovering, again, comparably to the U.S., in
6 the sense of not reaching yet, for quite some time,
7 the heights they had in the -- during last decade,
8 but recovering slowly, finally, at last, and surely.
9 Bottom line for New York: Continued growth.
10 I haven't mentioned real-estate markets.
11 We think real-estate markets -- residential
12 real-estate markets have hit the bottom, but, it's
13 still the case that one could make.
14 You know, there's still a lot of foreclosure
15 activity to take place.
16 There's still a lot of home sale -- homes for
17 sale. There's little -- a lot of notional homes for
18 sale, in the sense that people aren't putting them
19 on the market.
20 This spring selling season, by the way, will
21 be -- will tell us something about how strong demand
22 is.
23 And there is still a risk of further
24 home-equity falls.
25 We're not projecting further falls. We think
74
1 we're at the bottom, but, we do acknowledge the
2 risk.
3 Real-estate markets, given the rise in
4 real-estate values over the last -- and during the
5 bubble in the last decade, real-estate markets have
6 been a lot -- the crash has been a lot milder in
7 New York than it might have been, comparing it to
8 California or Florida or Arizona, okay, for
9 instance.
10 But, to be sure, that the risk of recession
11 is certainly diminished.
12 We expect growth; but, again, it's going to
13 be moderate in the near to medium term, for
14 New York.
15 All right?
16 Thank you.
17 ROBERT L. MEGNA: Thank you.
18 Last, but certainly not least,
19 Ronnie Lowenstein.
20 RONNIE LOWENSTEIN: Thank you very much for
21 having me.
22 I'll be talking about New York City, so, it's
23 somewhat different from what you've been hearing.
24 And, I'd also like to say, that, before I
25 start, I was at the first Consensus Revenue Forecast
75
1 Conference, and, there's no comparison between the
2 sorts of cooperation, professionalism, you see now,
3 and what was happening back then.
4 So, that's all to the good.
5 All right, I want to make one main point.
6 New York City's Independent Budget Office,
7 which I head, is putting out a new forecast for the
8 city, and U.S. economies, next Monday.
9 So, a lot of what you're hearing, you'll be
10 seeing then.
11 This is a very different forecast than the
12 last forecast which we put out, which was,
13 literally, two months ago, back in December.
14 And the difference is, we're now expecting
15 that the weakness that we saw in the securities
16 industry in the second half of last year is going to
17 persist.
18 We're anticipating, this is due to structural
19 change within the industry, as opposed to cyclical
20 factors.
21 And, because of that, the forecast we'll be
22 releasing on Monday is very much more pessimistic
23 for the city's economy than we had seen in December,
24 or the forecast before that.
25 The bottom line is: We're expecting the city
76
1 of New York to add just 22,000 jobs this year, which
2 is down about 10,000 from what we added last year
3 when the recovery was more shaky. And, it's a far
4 cry from the nearly 40,000 jobs we were forecasting
5 back in December.
6 So, this is a huge change in our forecast,
7 and it's reflected everyplace in the forecast.
8 We're also anticipating that the
9 all-important security industry barely grows over
10 the course of the forecast period, through 2016,
11 and, that has effects on, pretty much, every
12 variable you can think about.
13 And the final "big picture" thing to say
14 about our forecast, is, throughout the recovery,
15 we've been really focused on downside risk.
16 You know, the risk is, that there are big
17 structural changes coming in the industry, and what
18 will happen then?
19 Or, there are big risks of a double-dip
20 recession.
21 Unlike those past recent forecasts, the risks
22 on this forecast are more balanced.
23 There are definitely still downside risks,
24 but, there's some upside potential in this forecast
25 as well, and the sort that we haven't seen in the
77
1 past.
2 So let me say a little bit about what
3 happened to the city in the downturn, what happened
4 in the recovery, and how we've changed the forecast.
5 If you want to compare the city of New York
6 and the nation, during the great recession, it
7 depends on what you're measuring.
8 If you're doing it on the basis of
9 employment, certainly, New York City was later to
10 get into the recession, and we were earlier to come
11 out.
12 So, our downturn, at least measured by
13 employment, was shorter.
14 Moreover, if you're still looking at
15 employment, our downturn was also shallower.
16 Over the course of our downturn, the city of
17 New York lost less than 4 percent of total
18 employment.
19 And if you look at the U.S., the
20 corresponding number is, the U.S. lost more than
21 6 percent over the course of their downturn.
22 So, we had a shorter downturn, it was a
23 shallower downturn, but the picture changes if you
24 start looking at wages.
25 Adjusted for inflation, if you look at
78
1 aggregate wages, which is total wages for the
2 New York City economy; so, a combined 12 percent in
3 2008 and 2009.
4 The securities industry, which is a very
5 small part of that employment, but very highly paid,
6 accounted for close to two-thirds of that decline.
7 So, there's a really big 12 percent decline
8 in aggregate wages. Most of it's attributable to
9 the securities industry, but smaller declines spread
10 throughout all the sectors.
11 In contrast, during the U.S. downturn,
12 U.S. wages, excluding New York City, for a total of
13 5 percent during the downturn.
14 So, we had much steeper declines in wages,
15 but much less steep and shorter declines in
16 employment.
17 Now, look at the recovery.
18 Certainly, through most of the recovery, so
19 far, economic growth in New York City has outpaced
20 that of the nation.
21 And based upon the most recent employment
22 data, the city of New York has recovered 57 percent
23 of the jobs it lost.
24 That's 57 percent of total jobs.
25 The private sector, much bigger numbers;
79
1 nearly three-quarters of the jobs are back.
2 And you contrast that with the U.S., where
3 they've gotten back, as of January, 36 percent of
4 the jobs they lost in the downturn.
5 So, you know, we've really have been doing
6 better, in terms of putting on jobs.
7 Same thing, if you look at income measures,
8 if you look at inflation-adjusted personal income,
9 New York City regained its personal-income peak last
10 year, 2011.
11 As far as we can tell, that has not happened
12 yet for the country as a whole, although, we're
13 expecting it will happen sometime this year.
14 So that's the good news.
15 But, more recently, starting about midway
16 through 2011, things changed.
17 And, last spring, the U.S. economy softened a
18 lot, and so did the New York City economy.
19 And, although the U.S. economy softened, the
20 New York City economy actually began to contract.
21 If you look at the U.S. economy as a whole,
22 you know, employment growth is back.
23 They recovered fairly quickly. It felt
24 gut-wrenching at the time, but, in four out of the
25 last five months, the U.S. has regained -- has
80
1 gained over 150,000 jobs each month, for four out of
2 the last five.
3 It's looking pretty good.
4 In contrast, New York City jobs actually
5 declined; and, moreover, they didn't start picking
6 up again until the very end of the year.
7 Moreover, when you look at that, again,
8 high-paying securities sector, it was adding jobs
9 fair -- at a, I think, healthy rate early in the
10 year.
11 Those job gains were basically erased by the
12 end of the year. They're gone.
13 Now, each time I went back at our forecast
14 for the last two years, and I went back at them a
15 lot, particularly where I'm trying to write the next
16 one, we spent a lot of time talking about risks.
17 And the big risk we kept talking about,
18 besides double-dip recession, was that there was
19 structural changes coming in the financial industry;
20 that, a more highly regulated financial industry,
21 and particularly the securities sector, and, a
22 sector that was required to hold more capital,
23 would, by definition, be a less-profitable sector.
24 A smaller, less-profitable, slower growth,
25 maybe more stable, but, certainly not the profit
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1 engine that we've seen in the city in the past.
2 It strikes us, that although we don't know
3 the scale of the changes yet, we're starting to see
4 them.
5 So what we've done is, we've gone into our
6 forecasts, and we've brought down the numbers for
7 the financial industry. And, as you've seen, it has
8 a huge impact on the total city economy.
9 Okay, so we've started to build these
10 structural changes into our forecast.
11 And the forecast we're releasing on Monday,
12 it seems that there's a 25 percent decline in bonus
13 payments for this year, for the current bonus
14 season.
15 As of last night, as we looked at personal
16 income-tax withholding, it was up about 30 or
17 31 percent, but it bounces around a lot.
18 I also don't think there's that much of a
19 difference between our number and the Comptroller's
20 number, because the Comptroller's got a bigger
21 number for this bonus season, and a smaller number
22 for last bonus season, so that magnifies the
23 percent-change difference.
24 But, still, you know, we're holding with our
25 first estimate.
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1 We're expecting that there's a 7.5 percent
2 decline in average securities' industry wages in
3 2012, which is huge.
4 We're expecting the securities industry to
5 lose about 4,300 jobs, or, 2.6 percent of
6 securities' industry employment, over the year.
7 And if you look at the total financial
8 industry, the drop is more like 7,000.
9 And we're also expecting a sharp decline in
10 the profits of New York Stock Exchange member firms.
11 That's what we typically call "Wall Street
12 profits."
13 The member firm numbers that we look at are
14 just a small fraction of the total industry, but it
15 serves as a very good bellwether for what's
16 happening in the industry.
17 We're anticipating, that once those
18 fourth-quarter numbers from last year are in, we
19 expect them to be reasonably bad.
20 The total profits for these New York Stock
21 Exchange member firms will top out at about
22 $10 billion for 2011; which, if you compare it to
23 the year before, 28,000 doesn't look so good.
24 And, we expect them to remain quite weak,
25 reaching just 13 billion for the current year, and
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1 not a whole lot more than that a couple of years
2 out.
3 So these changes in the financial industry
4 ultimately affect every sector of the local economy,
5 and that's how we get to our forecast of the
6 22,000 job gain for the year, which is down from --
7 down 10,000 or so from last year.
8 But, from my perspective, what's really
9 important, it's a sea-change in our forecast.
10 We expected nearly 40,000 jobs in December,
11 two months ago, and now we're looking at something
12 that's half of that.
13 Similarly, we expect personal-income growth
14 to slip. We're expecting it to reach 2.4 percent in
15 2012, down from nearly 4 percent last year.
16 So, jobs are down, personal income down.
17 And, longer term, the forecast is down as well.
18 While New York City will be adding jobs,
19 we're expecting the securities industry to be pretty
20 much more [unintelligible] losing jobs this year,
21 but then, going forward, job growth averaging,
22 roughly, 600 jobs a year, for the next four -- I
23 guess, through the rest of the forecast period,
24 which is through 2016.
25 That's job growth of well under one half of
84
1 1 percent, which is, pretty much, nothing.
2 Although there isn't a lot of job growth,
3 there still is income growth, of course. And, so,
4 if the securities industry is responsible for that
5 1 percent of all of the jobs we're expecting to gain
6 over the forecast period, it's about 14 percent of
7 wage growth.
8 And that may sound like a lot, but it's
9 gotten -- it's actually nothing, compared to what
10 the security industry has done, in good years and
11 bad, for the city's economy in the past.
12 So if you look at the last decade, both the
13 ups and downs, the securities industry alone, which
14 isn't even the whole financial sector, but just the
15 securities industry, typically, in good years and
16 bad, is responsible for about 40 -- I'm sorry --
17 60 percent of the wage change -- aggregate wage
18 change, and, the New York City economy is driven
19 just by this one small segment of the economy.
20 If you go back a couple of decades, it's more
21 like 40 percent, but, the last decade, it's
22 60 percent.
23 So, in the boom, 60 percent of the total
24 growth in aggregate wages for the New York City
25 economy is driven by just a small handful of people.
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1 We don't expect that to be a case, going
2 forward, and that's where all the changes come from.
3 So, again, it's a very different forecast.
4 You'll see there is also -- you'll see it in more
5 detail on Monday.
6 And, I'm sure it's not our last word on this.
7 Thank you.
8 ROBERT L. MEGNA: Thank you, Ronnie.
9 I guess, do folks have questions?
10 I mean, I have one, and I think it's based
11 open what Ronnie was talking about, and I throw it
12 out to the whole panel.
13 Has the Wall Street model changed?
14 Are we in a different environment, where we
15 should expect financial-service payouts to be
16 consistent with the declines we've seen in the
17 current year?
18 Is that to be expected, going forward?
19 Jim touched on it a little bit.
20 You know, I'd be interested in what folks
21 think.
22 HUGH JOHNSON: I don't know.
23 I haven't studied, or tried to study hard,
24 and get a good -- I know it's an important question,
25 and I know it needs a studied answer.
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1 But the -- I think there's just two things
2 that have happened.
3 One is, certainly, profits have declined.
4 And when profits decline in Wall Street, like any
5 other business, but particularly Wall Street,
6 compensation is very sensitive to the swings in
7 profits.
8 Revenue is, probably as much as profits, but,
9 nevertheless, a combination of the two.
10 So that's one of the big variables: revenues
11 and profits.
12 And as I look forward, and I ask myself: Is
13 that going to change?
14 And, maybe.
15 But, last year, if you take a look at the
16 numbers, you saw that underwriting and training,
17 revenues and profits, or success -- whatever you
18 want to call it -- were pretty dismal. Pretty
19 understandably dismal, given the volatility that we
20 had in the financial markets.
21 You talked to issuers of securities, that
22 there wasn't much of an appetite in that kind of an
23 equity environment that issued securities.
24 So I -- my suspicion is, is, based on what
25 Diamond, and another of others have said, and what I
87
1 believe is the case, is that you're gonna have a
2 recovery in trading and underwriting, particularly
3 if -- well, I mean, if I'm right, I think you'll
4 have it, and I'm -- my outlook, or forecast, for
5 equity prices, are the success of the financial
6 markets.
7 This year's gloomier than Chris's, for sure.
8 And if you have that kind of an outcome that
9 Chris is talking about, you're talking about a
10 pretty good move in underwriting and trading
11 profitability.
12 There is changes in the structure of how
13 people get paid. And that's, largely, a lot of
14 public pressure on Wall Street.
15 I mean, deferred -- you mentioned it before,
16 deferred compensation is a very possible takebacks
17 of compensate -- theres a lot of changes that have
18 gone on [unintelligible]. And that's broad -- very
19 much driven by the public outcry against
20 Wall Street.
21 So -- but I don't think that's changed
22 permanently.
23 I think that's changed, maybe in an election
24 year, but, I think that's going to -- you know,
25 people on Wall Street, believe me, they go there to
88
1 make money. And, they'll find a way to make money.
2 So, I mean, I just -- I think that the -- I
3 think there are structural changes.
4 I think the biggest -- the third thing I
5 would mention is, regulation, it's just -- is --
6 it's very burdensome.
7 I know -- just speaking anecdotally, I know a
8 lot of people that work on it, including my
9 daughter, who is a lawyer with Citibank. And she
10 have can't figure out whether she's coming or going,
11 with the regulation -- the changes in regulation,
12 what to do.
13 So, I think those are -- that's probably a
14 significant problem.
15 But I -- I, frankly, think there's going to
16 be a recovery, which is -- without studying it,
17 that's my view, based on what I think is possibly a
18 positive outcome for the financial market
19 performance for the next two years.
20 Does that help you?
21 It's -- you gotta really study it, and
22 quantify it. But [unintelligible].
23 CHRIS VARVARES: I have a couple of comments.
24 I think -- I want to echo Ronnie's remark,
25 that, to the extent that financial firms have to
89
1 hold more capital, they'll be somewhat less
2 profitable.
3 So, there's certainly a downside.
4 I think there's some silver linings in all
5 this.
6 On the one hand, the very, I think, strong
7 and smart move to better align the incentives of the
8 principals of financial firms with those of
9 shareholders will lead to less volatile
10 compensation.
11 So, for purposes of trying to make budget
12 forecasts, revenue forecasts, that may be a good
13 thing.
14 And, otherwise, profitability is very much
15 transactions-based.
16 So I think, based on the kinds of
17 stock-market forecasts and economic forecasts that
18 we have, we would expect to see transactions rise;
19 and, so, that should be generally favorable for
20 profitability in the coming couple of years.
21 And, finally, one of the big areas that was a
22 big profit engine, was in mortgage securitization.
23 We know that's, completely, just dead right
24 now; and, so, we have to fix the mortgage
25 securitization model.
90
1 I suspect, that over the next couple of
2 years, that will get fixed and we'll start to come
3 back.
4 So, it's not going to be like it was before,
5 but I don't think that we're going to be in this
6 slow-growth trap forever.
7 JAMES DIFFLEY: Yeah, let me say, first of
8 all, although I disagree with Ronnie's forecast --
9 As I said, I'm taking a more optimistic view
10 of Wall Street.
11 -- I understand exactly where it's coming
12 from.
13 I mean, if I were writing a pessimistic
14 forecast for New York City now, I would do exactly
15 what you're doing.
16 So, the way I would phrase it, is, I would
17 put a fairly high probability on your forecasting,
18 right, although, I'd go with the more optimistic as
19 the baseline.
20 But I do think, to the question, though, if
21 we go back over the last two decades, we've seen a
22 number of times where the compensation on
23 Wall Street had just exploded, all right, and then
24 crashed down, following the, 2000, 2001 recessions
25 and, you know, dot-com bust.
91
1 And then we saw -- I -- so I view, that we're
2 not seeing a sea-change on Wall Street. We're
3 seeing a sea-change in the way compensation occurs,
4 that's true, but, the deferred compensation is going
5 to hit in the future.
6 In fact, I hate to say it, but I think it
7 makes forecasting more difficult, not less
8 difficult, you know, because you guys have to figure
9 out when that deferred compensation is hitting.
10 The -- as opposed to the cash payment of
11 bonuses.
12 But, the -- what we're seeing is a -- what
13 we're seeing is the end of that insane time, during
14 the bubble of 2006 to 2008, before the crash, when
15 compensation really got out well above its
16 historical norms.
17 And now we're back, ratcheted down to a level
18 that I think persists, but I don't see it as a major
19 change, in terms of the broadest historical spoke --
20 scopes.
21 RONNIE LOWENSTEIN: Yeah, I guess the last
22 thing I would say is, just to get the last word in
23 here on this, I'm not counting the industry out by
24 any stretch.
25 You know, I've seen them come back, like,
92
1 time and time again.
2 We're just not anticipating the same sort of
3 incredible boom that we've seen in recent years, and
4 I think, to some extent, we've all pretty much
5 gotten used to it.
6 ROBERT L. MEGNA: Thanks.
7 SENATOR KRUEGER: I have a quick follow-up to
8 that.
9 So you're all talking about it -- you know,
10 is Wall Street changing its model for good or for
11 short term?
12 I guess a slight variation, I would ask:
13 Aren't we just seeing people changing how they make
14 payouts, and how they do their books, to avoid
15 taxation, as we have seen corporations do with other
16 models, and now we seem to be doing it with
17 compensation?
18 JAMES DIFFLEY: Well, this is not to avoid
19 taxation, necessarily.
20 I'm not sure how the other people in the room
21 know better how the types of deferred compensation
22 are being offered has to impact tax liability.
23 But the idea of deferring compensation, and
24 getting away from immediate cash bonuses that
25 outsized is not, by itself, deferring taxation.
93
1 It hurts the State in the immediate term,
2 but, those monies are recouped if the income's
3 ultimately taxable, if the same amount of income,
4 overall, were paid over the longer --
5 SENATOR KRUEGER: I had heard, that at least
6 under federal tax law, if you pay someone with
7 deferred stock, even when they cash it in, it gets
8 counted at the lower late-written level, that it was
9 worth at the time they gave it to you; as opposed
10 to, the amount that it may be worth when you cash
11 in.
12 So, it actually does prevent having to pay
13 taxes on the larger amount.
14 JAMES DIFFLEY: That's a function of the
15 stock price.
16 I mean, by itself, [unintelligible] stock
17 price doesn't change. There's no tax benefit to
18 deferred compensation.
19 RONNIE LOWENSTEIN: I --
20 HUGH JOHNSON: Well, I think --
21 RONNIE LOWENSTEIN: Go ahead.
22 HUGH JOHNSON: -- [unintelligible] best I can
23 gather.
24 I was part of many a deferred comp, not that
25 I'm proud of it, but that was all -- that was all
94
1 deferred. The public compensation and tax impact
2 was very much deferred.
3 And it was a way of -- well...
4 RONNIE LOWENSTEIN: It depends on the
5 duration.
6 I mean, if -- and I have no expertise in this
7 at all, and I would love deferred compensation.
8 I've just never had it.
9 But --
10 [Laughter.]
11 RONNIE LOWENSTEIN: -- the firms you're
12 talking about, I thought, like, a period of
13 five years, or so.
14 I mean, we're not talking about deferring
15 this compensation until after you retire and you're
16 in a lower tax bracket.
17 If it's five years, for example, there's no
18 reason to expect that the tax implications would be
19 different.
20 But, the State would be getting its part
21 further down the road.
22 HUGH JOHNSON: The -- no, the idea was -- the
23 idea was -- we deferred compensation, because the
24 idea, you know, I agree, five years, it's probably
25 not going make that much difference.
95
1 As it turns out, it didn't make that much of
2 a difference.
3 But -- thankfully.
4 But the idea was, is defer -- to just to do
5 exactly that: to defer compensation to a time when
6 your tax rate was lower. Or, your compensation --
7 you -- we -- the payouts were so large, that it was
8 just common sense.
9 You didn't need that much money. Let's find
10 a way to defer a substantial percentage of your
11 compensation to a point in time when you were in a
12 lower tax bracket.
13 That was the idea.
14 It never worked that way, but that's what --
15 JAMES DIFFLEY: That type of deferred
16 compensation has been in place for a long time.
17 HUGH JOHNSON: Yeah. Oh, yeah.
18 JAMES DIFFLEY: [Unintelligible] the
19 experience with it.
20 No -- I mean, I'm not sure, institutionally,
21 what they're doing on Wall Street, but, if they are,
22 for instance, lowering cash bonus payments, and
23 granting restricted stock options -- offerings,
24 one year, two year, three years down, there's no tax
25 advantage, other than deferral of when the tax is
96
1 due.
2 All right?
3 You're taxed at the high rate at that time.
4 HUGH JOHNSON: I think that may be part of
5 it, but I think it's awful -- also, what I'm
6 gathering, is, not just the tax part of it, but
7 trying to compensate people a little more soberly,
8 or a little bit more sensibly, in the public
9 pressure.
10 The public pressure on Wall Street is very
11 intense. And, I think that's a big reason for
12 changing things.
13 But I don't -- I don't know how long that
14 lasts.
15 SENATOR KRUEGER: Thank you.
16 RONNIE LOWENSTEIN: If it's also, you know,
17 to encourage employees of the firms to think
18 slightly longer term, I mean, these payouts are so
19 huge. And, that, if you can have a one-year payout,
20 that -- you know, means that you don't care whether
21 you work again, your ability to think long term, for
22 the benefit of your firm, is pretty much nil.
23 HUGH JOHNSON: Uh-huh.
24 RONNIE LOWENSTEIN: So I think this was
25 another -- that this, besides public pressure, was a
97
1 way for the firms to actually align the incentives
2 for their employees a little bit longer term.
3 If it works.
4 SENATOR KRUEGER: Thank you.
5 Thank you.
6 ROBERT L. MEGNA: Thanks, Senator.
7 Other questions?
8 If --
9 SENATOR DEFRANCISCO: I have a question.
10 ROBERT L. MEGNA: Go ahead.
11 SENATOR DEFRANCISCO: Is that the coin he
12 wants? [gesturing]
13 [Laughter.]
14 [All participants talking at same time.]
15 ROBERT L. MEGNA: Again, I want to thank the
16 panelists, and, thank the legislators, and the
17 Comptroller's Office, for being here today.
18 And, as always, this is invaluable.
19 And, thank you very much.
20 [All speakers say, "You're Welcome."]
21
22 (Whereupon, at approximately 4:30 p.m.,
23 the conference concluded.)
24 ---oOo---
25