New York State 2012 Economic and Revenue Consensus Forecasting Conference

1 2 3 NEW YORK STATE

2012 ECONOMIC AND REVENUE 4 CONSENSUS FORECASTING CONFERENCE 5 -------------------------------------------------- 6 State Capitol - Room 124

Albany, New York 7

February 29, 2012 8 2:30 p.m. to 4:30 p.m. 9

PRESIDING:10

Robert L. Megna 11 Budget Director

NYS Division of the Budget 12 13 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 19 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 25 1

SPEAKERS:PAGE QUESTIONS 2

Hugh Johnson 14 85 3 (company position not identified)

Hugh Johnson Advisors, LLC 4

Chris Varvares 36 85 5 (company position not identified)

Macroeconomics Advisers 6

James Diffley 53 85 7 (company position not identified)

IHS Global Insight 8

Ronnie Lowenstein 74 85 9 Director

NYC Independent Budget Office 10 11 ---oOo--- 12 13 14 15 16 17 18 19 20 21 22 23 24 25 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. 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 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, 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 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 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 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 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 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 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 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 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. 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 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, 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; 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 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. 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. 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. 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 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. 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 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 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. 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. 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 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, 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 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, 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 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 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. 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. 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. 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. 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. 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 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 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. 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. 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 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 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 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. 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 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 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. 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 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. 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 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 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 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 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 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. 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 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 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 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. 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. 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 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 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 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 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 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 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 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. 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 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 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 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 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 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 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 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; 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 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 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. 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 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 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. 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. 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 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 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 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. 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. 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, 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. 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 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. 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 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 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