New York State 2014 Economic and Revenue Consensus Forecasting Conference

PRESENTERS:PAGE QUESTIONS 2

Hugh Johnson 15 3 Chairman and Chief Investment Officer

Hugh Johnson Advisors, LLC 4

Chris Varvares 37 5 Senior Managing Director

Macroeconomic Advisers 6

James Diffley 61 80 7 Senior Director U.S. Regional Economics

IHS Global Insight 8

Jason Bram 81 9 Research Officer

Federal Reserve Bank of New York 10

Ronnie Lowenstein 99 11 Director

NYC Independent Budget Office 12 13 ---oOo--- 14 15 16 17 18 19 20 21 22 23 24 25 1 ROBERT L. MEGNA: [Inaudible], especially 2 this time of year, I know, is incredibly valuable. 3 I'd like to open up the Economic and Revenue 4 Consensus Forecasting Conference for 2014. 5 I'd like to make some very, very short 6 remarks, but before I do that, let's introduce the 7 panel. 8 We have Senator John DeFrancisco, who's the 9 Chairman of the Senate Finance Committee; 10 We have Senator David Valesky, the IDC Deputy 11 Conference Leader, and member of the Senate Finance 12 Committee; 13 We have Assemblyman Herman Farrell, Chairman 14 of the Assembly Ways and Means Committee; 15 Senator Liz Krueger, Ranking Member of the 16 Senate Finance Committee; 17 Assemblyman Robert Oaks, Ranking Member of 18 the Assembly Ways and Means Committee; 19 And, last, but not least, Robert Ward, who is 20 the Deputy Comptroller. 21 Again, I'll do some very brief remarks, and 22 I would expect each of the panel members will want 23 to give some opening remarks. 24 Actually, we've lived, all of us, including 25 the panel members, have lived through an 1 extraordinarily difficult period for the past 2 three or four years. 3 And, 2013, I guess, we started to see some 4 light at the end of the tunnel. 5 The U.S. economy grew over 3 percent. 6 8 1/2 million private-sector jobs have been 7 created since early 2010. A half a million of those 8 have been in New York. 9 The national unemployment rate fell to 6.6 in 10 January, the lowest level since 2008, October. 11 And the state unemployment rate is at its 12 lowest level since January of 2009. 13 The housing market is also on the mend. 14 Almost 4 trillion in real-estate wealth has been 15 recovered since the third quarter of 2011. Median 16 and existing values are up 26 percent. 17 And, the state was never as adversely 18 impacted in the housing market, but, we're still 19 doing better. The state's number, a fraction of 20 underwater homes, has fallen by 30 percent since 21 2012. 22 Indeed, not only has the state's real-estate 23 market staged a healthy recovery, but, in fact, 24 New York City's condo and co-op purchases rose to 25 their highest level in more than 25 years, at the 1 end of last year. 2 It's always, I feel, especially given my job 3 title, to focus on risk. 4 And, we must remind ourselves significant 5 risks remain, a fact that Mother Nature has made 6 abundantly clear in the past few years. 7 The current economy, while strengthening a 8 little bit, is the weakest of the post-war era. 9 The labor and housing markets are in their 10 best shape since the start of the recovery, but, the 11 recovery has certainly not been a smooth one, as 12 everyone here knows. 13 For New York, the greatest risks still lie 14 with future actions of the Federal Reserve, which is 15 why we're always glad Jason's here. 16 As the nation's financial capital, 17 financial-market volatility poses a particularly 18 large degree of uncertainty in New York. 19 Recent events have demonstrated how sensitive 20 markets can be to shifting expectations. 21 Federal Reserve policy and resulting market 22 reactions are likely to have a large impact on the 23 state economy, larger than for the nation as a 24 whole. 25 In addition, the finance industry -- finance 1 and insurance industry continues to restructure. 2 Since the third quarter of 2011, the state's 3 finance and insurance sector has shed more than 4 8,000 jobs. 5 Although Wall Street has always been a source 6 of high volatility, we have to recognize Wall Street 7 is playing under a new set of rules and may never be 8 the revenue-growth engine that it. 9 Has been in the past. 10 Wall Street firms have been altering their 11 executive-compensation practices -- and, again, 12 I would be interested in what the panel thinks -- in 13 response to regulations that are still being 14 written, excuse me, under Dodd-Frank. 15 We've observed dramatic reductions in the 16 cash portion of bonuses, in favor of equity grants, 17 with large portions of compensation being deferred 18 and subject to clawback. 19 These changes, while necessary, have 20 challenged our forecasting models in ways that we 21 are still trying to figure out. 22 This is exactly the right forum for 23 acknowledging that added uncertainty in our income 24 and revenue projections. 25 Another feature of uncertainty in the market 1 that has made us uncertain is changes in federal tax 2 policy. 3 As we all know, the federal tax regime 4 changed in fiscal 2013 for high-income tax earners, 5 resulting in a very radical change in the pattern of 6 tax payments. We observed that shifting in 7 real time, in late 2012 and early 2013. 8 Taxpayers respond to tax-rate changes in ways 9 that are not easily observable, such as realization 10 of capital gains and partnership and dividend 11 distribution. 12 These changes have continued to affect 13 collections up to today. 14 Under these circumstances, we need to be 15 particularly careful not to misinterpret transitory 16 receipts with underlying base growth. 17 Nevertheless, there's much positive news. 18 The state has labor market remains strong. 19 We added 133,00 jobs since the third quarter of 20 2012. 21 We remain a tourist mecca in New York, 22 drawing visitors from all over the world. 23 The state's business-services industry serve 24 a growing global market. Our real-estate and 25 construction sectors are leading the nation. 1 So, we look forward to brighter days ahead. 2 Our optimism is tempered with caution. 3 At some point down the road, the current 4 environment of low-interest rates and easy access to 5 capital will come to an end. 6 The national unemployment rate has fallen 7 more quickly than the Federal Reserve's forecast. 8 As a result, that day could come sooner than we 9 think. 10 Historically, whenever the Federal Reserve 11 shifts from an expansionary to a contractionary 12 policy stance, the impact on financial markets and, 13 consequently, on New York's revenue base, has been 14 negative. 15 It is against this backdrop of uncertainty we 16 embark upon revenue consensus. 17 It's important to note, that while there are 18 differences in our forecasts, at a fundamental 19 level, there is broad agreement that New York faces 20 substantial risk, given our revenue base. 21 The logical conclusion is, that we will 22 take -- need to take the types of tough, 23 responsible, necessary actions that are in place in 24 the executive budget, on both the revenue and 25 spending side. 1 For three years, we have worked together to 2 enact on-time fiscally responsible budgets that 3 embrace the principle that state spending must grow 4 more slowly than the overall economy. 5 With the establishment of the 2 percent 6 spending benchmark, the unsustainable trends of 7 yesteryear have been reversed, and we are seeing 8 measurable improvements in the state's financial 9 position. 10 By controlling and managing spending growth, 11 we have reduced the need to engage in overly 12 aggressive revenue projections. 13 All parties deserve credit for this 14 responsible budget-making. 15 Each of the forecasts before us today 16 represents a good-faith contribution to the 17 consensus process. 18 Looking ahead, I know that we are all 19 committed to meeting the March 1st statutory 20 deadline for revenue agreement. 21 Revenue consensus is an important component 22 of achieving our shared goal of a timely and 23 responsibly enacted budget. 24 And, I have talked way too long, so now I'm 25 going to turn it over to Senator DeFrancisco. 1 SENATOR DeFRANCISCO: Thank you, Bob. 2 Now I have absolutely nothing to say, 3 because, basically, everyone knows why we're here. 4 And why I'm specifically here, is I want to 5 hear the experts, as to what they have to say about 6 the economy, heading into the rest of this year, and 7 also into next fiscal year. 8 What's really significant, I think, here 9 today, are two things: 10 Number one, that we're here, and when we're 11 here, well in time to reach a consensus by the 12 scheduled date, as was set in the 2007 Budget Reform 13 Act, which will put us in an excellent position to 14 do the discussions that we have to have, and, come 15 up with a budget in a timely fashion, and a good 16 budget, for the state of New York. 17 So, I'm looking forward to continuing that 18 trend; listening to what you have to say. I may 19 have a question now and then, if I understand what 20 you're saying. 21 If I don't, I'll look like I do. I'll nod my 22 head frequently. 23 [Laughter.] 24 SENATOR DeFRANCISCO: So, with that said, 25 I look forward to what you have to say, and 1 I respect each of your opinions on the most 2 important issue; namely, What revenues will there 3 be, likely, in arriving at our budget? 4 Thank you. 5 ROBERT L. MEGNA: Assemblyman Farrell. 6 ASSEMBLYMAN FARRELL, JR.: Thank you. 7 I'm pleased to be here today. 8 The Ways and Means Committee staff forecasts 9 a slow but steady improvement in employments and 10 personal income in 2014 and 2015 for both the nation 11 and the state. 12 So, I look forward to hearing the panelists' 13 thoughts on the economic outlook of both the state 14 and nation, with a particular focus on your views 15 about the outlook for New York State's economy, and 16 the risk we face going forward. 17 The independent analysis you will share with 18 us today will provide a solid foundation as we 19 discuss and debate various aspects of the budget. 20 And, I thank you for being here today, and 21 I look forward to hearing your comments. 22 ROBERT L. MEGNA: Senator Valesky. 23 SENATOR VALESKY: Yes, thank you, 24 Director Megna. 25 I'm just gonna share a very brief statement 1 with our guests today, on behalf of the 2 Independent Democratic Conference, and its leader, 3 Senator Jeff Klein. 4 The national and state economy has continued 5 to stabilize in the aftermath of the 6 Great Recession, but there is still uncertainty as 7 to how widespread the recovery in New York State 8 will ultimately be. 9 While corporate profits are at record levels, 10 employment in the state has barely reached 11 pre-recession levels, and wage growth has remained 12 weak. 13 This slow economic recovery, coupled with the 14 exorbitant costs of everyday life in New York, 15 continue to present a challenge to working 16 New Yorkers. 17 The IDC believes that this is a persistent 18 problem that requires the State's attention. 19 It's also important to remember the broader 20 context in which we are working, because there are 21 still many risks that threaten the state's 22 economy -- or, its economic recovery, rather. 23 New York's role in the national economy means 24 that disruptions at the national and global levels 25 can have immediate impacts on New York. 1 Therefore, today's discussion will be crucial 2 in assessing the realities of our economic 3 situation, so that we can develop an understanding 4 of how best to move forward and to face our 5 challenges. 6 The consensus that I am confident we will 7 reach will lay the foundation for passing an on-time 8 budget, that will allow the state economy to 9 continue growing, and will enable New York's working 10 families to prosper. 11 I'm eager to begin laying the groundwork for 12 that process. 13 Thank you. 14 ROBERT L. MEGNA: Thank you, Senator. 15 Senator Krueger. 16 SENATOR KRUEGER: Just looking forward to 17 everybody's analysis, and hope that it will help us 18 get to a right-size budget, and a timely budget. 19 Thank you. 20 ROBERT L. MEGNA: Thank you, Senator. 21 Assemblyman Oaks. 22 ASSEMBLYMAN OAKS: Yes, thank you. 23 I really think, as the Assembly Minority 24 looked at revenue possibilities, we were extremely 25 close to the Governor, both being a little under 1 this year, and a little over next year, but, 2 probably as close as we've ever been. 3 But I think, as Budget Director Megna's 4 comments about tax policy, at the federal level and 5 the state level, impacts individuals, and how they 6 pay their taxes, and how they come in. 7 Businesses as well are affected by that; and, 8 so, I think that consistent tax policies, so that 9 they can make their decisions to move ahead, is 10 critical. 11 And, so, we're looking forward to hearing 12 where we are, but, also, hearing how we can help to 13 get us faster to where we want to be. 14 Thank you. 15 ROBERT L. MEGNA: Thank you. 16 Bob, do you have some comments? 17 ROBERT B. WARD: Yeah, but just briefly, Bob. 18 Thank you. 19 The Comptroller issued his analysis of the 20 executive budget earlier this week, and in 21 association with that, made the observation that the 22 state is at its best fiscal position in years. 23 And I think most people would agree with 24 that. 25 Clearly, an important part of getting the 1 state to that position is the work that the Governor 2 and the Legislature have done together, to take an 3 appropriately careful approach to the balance of 4 revenues and expenditures in recent years. 5 And, we know that today's observations from 6 the experts, who are here to give us their insights, 7 will be playing an important role in helping to make 8 sure that that continues. 9 So, we thank you folks for joining us, and 10 look forward to your insights. 11 ROBERT L. MEGNA: Thanks very much. 12 And without further ado, why don't we turn it 13 over to Hugh Johnson, of Hugh Johnson Advisors. 14 HUGH JOHNSON: Thank you very much. 15 I'm proud to be here. I appreciate being 16 invited back to be part of this -- part of this 17 process. 18 I very -- see enabled associates on this side 19 of the table, as well as yourselves. Nice to see 20 you again. 21 Hopefully, that I can make some comments on 22 the [unintelligible]. And, also, be somewhat 23 helpful in some of the comments that I'm going to be 24 making. 25 The -- you know, Bob made -- well, 1 Mr. Budget Director -- I'm not sure what the right 2 way of addressing you, or him, is -- but, made some 3 great comments about the success of both the 4 national and the state economy since 2010. 5 And, indeed, that there's been some 6 considerable accomplishments. 7 I think it's important, simply to point out, 8 and this is, maybe not as valuable as it sounds, 9 but, that the average duration of the ten previous 10 post-war -- uhm, post-war bull-market economic 11 recoveries was 57.1 months. The average magnitude 12 of the ten prior bull markets, 126.5 percent. 13 And we are currently -- we're, currently, 14 just about to finish the fifth year, with the 15 60th month. And the bull market, of course, is 16 156.4 percent, compared to, again, that average of 17 126.5. 18 So it may be that the most important 19 question, or contribution, that this group can 20 make -- especially because looking backwards is not 21 what we're trying to do; we're trying to look 22 forward -- is to be able to identify when the 23 current bull-market economic recovery, interest-rate 24 rise, or cycle, is gonna end, or in the -- as I've 25 said to the Assembly group on occasion, is the 1 immortal words of Gerald Ford, the American 2 President, his answer to Yogi Berra, "As the 3 pendulum has now come full circle." 4 [Laughter.] 5 HUGH JOHNSON: But that really, to me, is -- 6 is -- it's probably the second most-important 7 question. 8 The most important question being: How do 9 we -- whether we deal with this issue of the haves 10 and the have-nots of the employment conditions. 11 But, certainly, helping to identify if we're 12 at, or even near, the end of this cycle, because 13 that's gonna change everything. 14 It's gonna change everything in all of your 15 numbers. It's gonna change, certainly, your revenue 16 forecast. 17 So, that, if we can shed any light on that, 18 it would be very helpful. 19 What I ordinarily do -- and, incidentally, 20 there's a very strong consensus. I've looked at 21 these numbers on the one-pager, and I'm almost 22 thinking about Senator DeFrancisco's comment, that 23 we want to try to reach a consensus. And I'm almost 24 inclined to be extremely brief, and say: There it 25 is; take the averages and use those. 1 But it's -- it's -- life's not that simple, 2 and I usually try to talk a little bit more than 3 that, or shed a little bit of light. 4 Now, let me just say, first of all, in 5 starting out: The way I have approached this in the 6 past, and the way I have generally approached the 7 whole process of forecasting, is to -- first, to try 8 to look at the most important trends that are 9 unfolding in the financial markets. 10 What is the message of the trends that are 11 unfolding in the financial markets? 12 And then to try to reconcile those trends 13 with trends that are unfolding in important monetary 14 and economic variables, hopefully, to answer the 15 question: Where we are in the cycle, or do we have 16 further to go in the current cycle? 17 As I have given you a handout, and I'm not 18 going to labor through the handout. You can look at 19 this later if you're interested. 20 And in the first part, it sort of summarizes 21 my conclusions or findings on that issue, or 22 those -- that issue, which consists of two parts. 23 I've divided financial-market performance 24 into the third quarter and fourth quarter of last 25 year, as well as year-to-date this year. 1 And it's important just to note that there 2 has been a change in financial-market performance; 3 whereas, the performance in the third and fourth 4 quarter -- or, there has been a change, and not a 5 major change -- but, in the third and 6 fourth quarter, the performance of the markets. 7 And when I say "the performance of the 8 markets," I mean the performance of the equity 9 markets, sectors, stocks with different 10 capitalizations, styles, fixed-income markets; 11 meaning, quality spreads, yield curves...a lot of 12 technical stuff. 13 But the performance of the financial markets 14 last year was fairly clear that we had further to go 15 in the current stock-market, business, interest-rate 16 cycle. 17 That became a little bit unstuck in the first 18 part of this year, where investors began to shift 19 towards the defensive sectors of the market. You 20 saw all sorts of things happen, such as safe sectors 21 of the market, such as utilities and 22 telecommunications, along with health care, 23 performed very well. 24 You saw the quality spreads and the credit 25 markets start to widen out, suggesting that 1 investors were at less of an appetite to take risk. 2 Those kinds of things happen when investors 3 collectively believe that there may be problems 4 ahead for the economy. 5 The question, of course, then is: Is this 6 consistent with the performance of important 7 variables, if you may, monitary and economic 8 variables, that we've seen? 9 And the answer to that question is: Well, 10 hmm, ah, the -- no. 11 It's still the case that monetary and the 12 economic numbers, important numbers that I look at 13 and everybody looks at, seemed positive, but there's 14 no question that there's been some deterioration. 15 So, for example, although Federal Reserve 16 policy is certainly very accommodative, you couldn't 17 describe it in any stronger words, we do see things, 18 like, bank lending continues to be positive, but, is 19 slowing. 20 That's true, whether we're looking at 21 commercial and industrial loans. And particularly 22 true if we're looking at real-estate loans, where 23 they're no longer expanding, but now contracting. 24 As a result, somewhat as a result of changing 25 liquidity condition -- or, lending conditions, 1 domestic liquidity conditions have -- are still 2 positive, but they -- they've deteriorated some. 3 The growth rate and the money supply, the 4 relationship between the money supply and the growth 5 rate of the economy, couple of technical things: 6 again, still positive, but, not what they used to 7 be. 8 And then -- and then the final thing I looked 9 at, or we -- or some of us looked at, is the Index 10 of Leading Economic Indicators, which continues to 11 point upwards, or saying, essentially, that, yes, it 12 may be the case that some of the monetary and 13 economic numbers aren't quite as good as they were. 14 It's still the case, they've put it all 15 together, that the outlook for the economy, for 16 two thousand -- at least the next six months, and 17 probably all of 2014 and '15, remains -- remains -- 18 remains positive. 19 So I think that, what I would say is, if 20 I put all of that together, the performance of the 21 financial markets with the performance of the 22 economy, from a sort of a level of 30,000 feet, 23 I think the answer, as to what it's all -- what it's 24 saying for us, is -- is, essentially, what I think 25 "The Economist" magazine said for us a couple of 1 weeks ago, where he said -- where they basically 2 concluded that "we're experiencing a worldwide 3 wobble; not a tumble." 4 And I thought that put it about right. 5 And I think that's correct, and, particularly 6 correct, since we've seen a recovery in the 7 financial markets since, basically, the first part 8 of February, which, essentially, is consistent with 9 that conclusion. 10 Having said that, let me get to a couple of 11 observations, looking at the numbers. 12 What I've included is not only the consensus 13 forecast on the overall economy, and a lot of the 14 variables that you really have to worry about. 15 I've also included my own forecast on the 16 economy, and a lot of variables you have to worry 17 about. 18 I've done that for the national economy. 19 I've done that for the state economy. 20 And I've also done something that I do 21 somewhat cautiously; and that is, make a forecast 22 for revenues, based on the forecast for the national 23 economy, forecast for New York State economy -- for 24 the New York State economy. 25 And all of -- everything looks particularly 1 good, but, let me -- and there's a lot of 2 consistency between the forecasts that we've seen 3 from various groups. 4 Let me make a couple of observations, though, 5 that are a little bit troubling. 6 First of all -- and, Bob, you know, we've 7 talked about this in the past -- I'm always talking 8 about inflation. I'm always wrong, but I'm always 9 talking about it. 10 And, what I've noticed, I -- I -- yes, 11 there's a strong consensus about what inflation, 12 especially the Consumer Price Index, is going to 13 look like in 2014-'15. 14 1.6 percent, roughly, in 2014. 2 percent or 15 so in 2015. 16 But, it's worth noting, and I just noted, is 17 that leading indicators for inflation, which I pay 18 pretty close attention to, are up fairly sharply 19 over the course of the last eight months. Up 20 9.3 percent in the last 8 months. 21 And I'm sure you haven't missed the fact that 22 we see a rise in commodity prices concurrently 23 unfolding, and a rise in the price of gold. 24 A lot of this can be attributed -- or, some 25 attributed to weather conditions; particularly the 1 rise in commodity prices. 2 I'm not so dead-sure; particularly when I see 3 the rise in the leading indicators of inflation, of 4 9.3 percent, which is fairly strong, over the course 5 of the last 8 months. 6 So it very well may be the case, that 7 we're -- if we're gonna be wrong on any of these 8 numbers, and I would have guessed, where we're gonna 9 wrong, I would be willing to bet, it's gonna 10 probably be on inflation, and we may be a touch low 11 on inflation. 12 I've looked -- I read through all your 13 numbers, the department budget numbers. 14 I've read through all the Assembly numbers as 15 well. 16 And you folks know, I've talked to you about 17 that, and this -- the work that's being done at the 18 Department of Budget, and the Assembly, and I'm sure 19 at the Senate as well, is just really incredibly 20 good. I mean, it's just really good. 21 Policymakers in this state should be really 22 proud of the work that you're doing. It's 23 comprehensive. It's internally consistent with what 24 I'm trying to -- not always, but, I generally look 25 for. 1 Just a couple of comments. 2 And I've looked at your numbers, that you've 3 unfortunately had -- didn't have the luxury of 4 recent data, but published back in January, so 5 I know there's some problems. 6 But, your forecast for the national 7 economy -- now, I say "your forecast," I'm talking 8 about the department -- Department of Budget -- is 9 fairly subdued. It's subdued when compared to other 10 forecasts. A little bit on the subdued side. 11 At the same time, when I look at your 12 forecast for consumption, imports, personal income 13 and wages, it acts up sort of subdued. 14 So, either your forecast for the economy's 15 gotta come up a little bit -- this is all fun with 16 numbers, it's all statistics, you know that. 17 Either your forecast for the national economy 18 has to come up, or your forecasts for some of those 19 important variables has to come down. 20 I try to reconcile, also, your New York State 21 numbers, of personal income and wages, with your 22 forecasts for employment. 23 Either employment forecast has to come up or 24 your personal-income and wage numbers have to come 25 down just a little bit. 1 I think I may be right on that. 2 Let's talk a little bit about Federal Reserve 3 policy. 4 You have a fairly consensus-oriented, or 5 benign, forecast -- well, first of all, you have a 6 benign forecast for inflation. I've already 7 mentioned that. 8 And I know your forecast for the unemployment 9 rate was made in January, so you didn't have the 10 benefit. And I know that's got to -- you don't see 11 it, but I know that's got to come down, then 12 revised. 13 Also looking at the January forecast, you had 14 a real spike in short-term interest rates for 2015, 15 which implied a very strong move; stronger than 16 I think is generally accepted by the Federal Reserve 17 towards restraint. Or, raising their target on the 18 federal-funds rate from zero to 25 basis points. 19 The implication being, up to as high as 20 1 percent. 21 It's very hard now to judge what the 22 Federal Reserve is gonna do, particularly when they 23 effectively said, that even when the unemployment 24 rate, as you know, gets to 6 1/2 percent, that's not 25 necessarily a trigger. Even when the rate of 1 inflation gets to 2 percent, when the forecast for 2 inflation gets to 2 1/2 percent, that's not 3 necessarily a trigger. 4 I think that's the implication, which I think 5 is a great move in policy: that they're getting 6 way -- backing away from strict targets. 7 But it's very hard to judge what the 8 Federal Reserve policy is gonna turn out to be, or 9 their interest-rate policy. 10 I might add, that quantitative easing is not 11 even worth talking about. It's been fully 12 discounted by the markets. 13 The fed will continue to take risks. 14 They're -- any quantitative easing, it will be all 15 over. I've tried to demonstrate that in my work. 16 The markets have totally discounted it. 17 What really matters is Federal Reserve 18 interest-rate policy. 19 As I say, it's very difficult to judge what 20 it's gonna be, but I -- I don't -- I see, maybe, 21 some shift towards restraint as we get to the latter 22 part of 2014, because I see employment numbers 23 getting better, especially growth-rated non-fund -- 24 well, you know, the unemployment rate's gonna be 25 below 600 percent, we know that. 1 And we'll start to see inflation maybe edge 2 up a little bit. 3 And maybe some will move towards restraint, 4 both second half of 2014, first half -- all four 5 quarters of 2015, but not a significant shift in 6 that direction. 7 It's hard for me to believe that this fed is 8 gonna make a hard shift towards restraint. 9 So, that's important to keep in mind. 10 I wish I could quantify it more specifically. 11 I have done that in my work, but, it's very 12 difficult to quantify. 13 I wanted just to add one other point, though, 14 here, and here's where I differ from the whole 15 world, and that's -- and I could be wrong, and I get 16 criticized for it, but I'll just tell you; and that 17 is: That the primary driver of both short-term 18 interest rates -- and I think everybody agrees, the 19 primary driver of short-term interest rates is 20 Federal Reserve policy or interest-rate policy. 21 I would argue that the primary driver of 22 longer-term interest rates is also Federal Reserve 23 policy, or, the target for federal-funds rate. 24 If you look at the performance of interest 25 rates, historically, or, if you do a statistical 1 analysis that tries to quantify what's gonna be the 2 outcome, given an assumption about Federal Reserve 3 policy for longer-term interest rates, it turns out 4 to be much more benign than the consensus; and 5 certainly more benign than your numbers that 6 I looked at. 7 The 10-year treasury at 4 percent, in 2015, 8 is too high. Way too high. 9 But -- but especially given my forecast, 10 which is, yeah, rates should rise, but I wouldn't be 11 at all surprised -- and here's where everybody's 12 gonna disagree with me, but I'll say it anyway -- 13 I don't think the yield on the 10-year treasury is 14 gonna even get to 3 percent. 15 It might even get a little above 3 percent. 16 It's not gonna get to where the consensus is, 17 which is three -- three -- in my view, it's not 18 gonna get to where the consensus is. 19 And what I'm saying is consistent with 20 history, and also consistent with, I think, sound 21 statistical analysis. 22 Not many people agree with that. 23 So that's one thing. 24 It's -- that's a comment on Federal Reserve 25 policy, it's a comment on interest rates. And 1 I would try to incorporate that a little bit into 2 your -- into your trying to find the consensus 3 forecast for the variables that are gonna try and 4 drive up revenues. 5 The -- let me say one thing about your 6 revenue numbers: They look great. 7 From my 2015, I can only do PIT, to come up 8 with anything that I have any comfort with. 9 And, PIT, you look low on 2015. 10 Trying to think if I said calendar or fiscal, 11 but, you look a little bit low there. 12 So much for that. 13 Okay, emerging-market crisis: 14 The biggest -- some think this is the biggest 15 problem right now, are a political hurdle, or 16 challenge or risk. 17 I give you some charts. 18 And what I like to do, is to throw -- put 19 some charts that show a superimposed of the OECD's 20 composite index for leading economic indicators for 21 different countries, on the consensus forecast for 22 the economy of that country. 23 And what we saw last year, was the consensus 24 forecast for Europe coming down, and the leading 25 indicators have turned up. 1 And that led me to conclude that you're gonna 2 see, not only the numbers coming out of Europe get 3 better, but the consensus forecast will turn the 4 corner. 5 All of that's happened. 6 Now the question is: What does it look like 7 for the emerging markets? 8 And the answer is: It's different. 9 India still looks like a problem. 10 But, China looks just about as stable as 11 could be. 12 So we're talking about 7.6 percent growth in 13 2014. Maybe 7.4 percent growth in 2015. 14 And that's consistent with leading indicators 15 for China, which are fairly flat. 16 Looks better, interestingly, for Brazil. 17 Looks like Brazil might be turning the corner. 18 And -- and, uhm -- so, you got China, Brazil. 19 India is not -- not looking -- not looking 20 good at all. 21 And Russia is looking good also. 22 Russia looks like the leading indicators 23 there are turning positive, even though the 24 consensus forecast is deteriorating -- continuing to 25 deteriorate. 1 So I'm -- I'm -- what I'm saying is, that 2 three out of four countries are not gonna be the 3 problem that you see in the financial press. 4 Not true of India. 5 There still will be problems in Chile, 6 South America, the -- South Africa, in Turkey, 7 Indonesia, and Israel. That's where I don't see any 8 turn right now. 9 That's point one. 10 Point two, is that even if emerging markets 11 were to experience the kind of difficulties that you 12 read about all the time, there's no question that 13 that stuff gets transmitted. 14 It gets transmitted around the world through 15 psychology. Markets go down, everybody gets scared, 16 markets go down here; 17 Trade flows; 18 Capital flows; 19 Commodity prices. 20 Those are the four transmission mechanisms. 21 The emerging market, if you take all their 22 economies, they're not big enough. I mean, they're 23 substantial, and they're important. I don't mean to 24 take away from that. But they're nowhere near what 25 we experienced in 1997 -- '96 and '97 with the 1 Southeast Asia crisis. 2 That was very big, that was very substantial. 3 So, secondly, the declines in the currencies 4 related to or associated with the current so-called 5 "crisis" in these countries is nowhere near what you 6 saw in '96 and '97. 7 The point being -- I meant '98. 8 The point being, is that, I think that the 9 worries about that risk -- the emerging-market risk 10 have been way overstated. 11 And I don't -- although you'd have to watch 12 it and you have to continue to monitor it, I don't 13 think it's gonna derail the current recovery -- 14 bull-market economic recovery, and rise -- and, 15 quote, rise in interest rates. 16 Fiscal policy: I don't have to tell you, 17 U.S. fiscal policy should be certainly less of a 18 drag. 19 Deficits are gonna continue to come down, so 20 long as the economy recovers; particularly if the 21 economy recovers anywhere near the consensus of this 22 group. 23 And, so, fiscal policy's not gonna be the big 24 issue. 25 Probably the -- New York State economy is 1 gonna be, as I do the numbers, is gonna map the 2 national -- the reason we look at the national 3 economy, is because New York State economy, I hate 4 to tell you, but, as much as we'd like to change the 5 outcome and make it much better than the national 6 economy, the truth is, it really matters: the 7 national economy. 8 And that's true of almost all of the 9 variables. And I've never seen that change. 10 The, uhm -- the big challenge for 11 New York State is -- and I'll just sort of say it 12 this way: The part that bothers me, it bothers me 13 about the national economy, it bothers me about 14 New York State, it bothers me when I look at all the 15 different parts of New York State, metropolitan 16 statistical areas, is the growth of the labor force. 17 Yeah, the unemployment rate is coming down, 18 and I'm sure we all look at that as being a welcomed 19 event. 20 But the reason it's coming down is -- is the 21 labor force is declining, and it's -- it's -- as 22 I look at it, in 2014 and 2015, there are only 23 two municipalities, two MSAs, where the labor -- 24 growth of the labor force is gonna rise in 25 New York State; and one is Ithaca, and one is 1 Glens Falls. You can explain it to me. 2 So, you got the unemploy- -- and, there, the 3 unemployment rate will come down, but not as much. 4 The unemployment rate will come down a lot in 5 other places, but it's primarily because of the loss 6 of the labor force. 7 The loss of labor force is not -- is part, 8 because of -- part, because of, you know, the 9 demographics. 10 People that are my age drop out of the labor 11 force, or younger. And, uhm -- but it's -- a much 12 bigger part of it is that discouraged-worker issue. 13 And that's true in New York State. 14 That's, as you know, is a function of -- in 15 my view, of the fundamental shift that's going on in 16 the world economy, in the national economy 17 particularly, driven by exponential progress in 18 technology, which is a shift from a labor-intensive 19 economy to a knowledge-driven economy. 20 That, is simply not going to go away; and 21 it's not gonna go away for a very, very long time. 22 And that's going to create a bigger divide, 23 in my view, between the haves and the have-nots. 24 Create -- you know, part of this, with the 25 slow-growth unemployment, has been certainly a 1 result of the hangover from the financial crisis, 2 2005-2006. But a bigger part of it is the 3 fundamental shift that's going on in the economy. 4 It's gonna put enormous policy -- pressure on 5 policymakers: How do you deal with that? 6 Because there's not gonna be -- I don't 7 believe -- I wish somebody knew -- I don't believe 8 there's any really simple solution to it. 9 There's a lot that can be done, but I don't 10 think there's any -- and that's the biggest problem 11 I think that we, and the state of New York, face. 12 And I'm not dead-sure what you do. 13 I know some of the things you might do. 14 So, that's basically it. 15 Most important thing: A wobble, not a 16 tumble. 17 When I looked at the financial markets, 18 performance of important monetary and economic 19 variables, I'm led to that conclusion. 20 Growth is gonna be a good, roughly, 2.9 in 21 this year. 3 percent next year. 22 I think your primary budget is a little bit 23 low. 24 I'd take a hard look at interest rates; the 25 interest-rate forecast. 1 And -- and that's basically it. 2 I don't see the risk of emerging markets 3 being something that you'd worry about, or you 4 should -- is significant. 5 It needs to be monitored, but not -- let's 6 not get obsessed with it or caught up in it. 7 Uhm -- and that's basically it. 8 I think this is a -- the forecast, the work 9 that everybody has been doing, has been really 10 great. And, fortunately, we are coming to pretty 11 close agreement on most of these -- most of these 12 variables. 13 Once again, thank you very much for being -- 14 for inviting me to be with you. 15 Hi, Joe. 16 ROBERT L. MEGNA: Thank you, Hugh. 17 Any questions from the panel then? 18 If not, I think we'll jump right to 19 Chris Varvares. 20 CHARLES VAVARES: Thanks very much. 21 It's a pleasure to be here, and have the 22 opportunity to share the views of my colleagues, and 23 myself from Macroeconomic Advisers, again. 24 Because there is fairly broad agreement on 25 the big themes, with what we just heard, I think 1 I want to highlight a bit, say, at a fairly high 2 level, and try to highlight some of the risks that 3 we see to the outlook. 4 So there is, in your stack there, if you want 5 to follow along, feel free. 6 The presentation packet, it looks like that. 7 So I think, as we look at this year and the 8 couple years ahead, we begin by taking a look back. 9 In 2013, with growth, over the four quarters, 10 of 2.8 percent, it was fairly impressive, given the 11 headwinds that the economy faced. 12 We had huge fiscal drag from the increase in 13 the payroll tax, as a result of the expiration of 14 payroll-tax holiday; implementation of ACA taxes, 15 'and the high-income-earner tax; as well as the fact 16 that interest rates jumped fairly significantly in 17 the middle of the year. 18 So, the economy gets a hardy pat on the back 19 for producing 2.8 percent growth last year, 20 suggesting some amount of resilience. 21 Certainly, the economy carried good momentum 22 into 2014; however, that momentum was, in part, due 23 to a bit of an inventory cycle. 24 There was a bit of an excessive 25 stock-building towards the end of last year. 1 We think the rates of accumulation that are 2 unsustainable, and there will be a price to pay for 3 that, with slower growth up front this year. 4 We don't view that as a fundamental thing, 5 but it does means that manufacturing output growth 6 is going to be fairly slow, if not stagnant, early 7 this year. 8 So that's a challenge that the manufacturing 9 sector, both in terms of output incomes and 10 employment, will be facing. 11 In addition, weather does play a role in the 12 economy. 13 December was unusually cold. January was 14 unusually cold. February is turning out to be 15 unusually cold. 16 An analysis that we did not too long ago 17 suggested that the cold weather, just based on 18 December and January, accounted for about 19 three-tenths weaker growth in GDP in the 20 fourth quarter of last year, and about four- to 21 five-tenths weaker growth in GDP in the first 22 quarter. 23 And a return to normal weather in February 24 will give us about a seven-tenths contribution to 25 growth in the second quarter. 1 So, therefore, just the weather effects of 2 holding us down in Q1 -- Q4 of last year, Q1 of this 3 year, gives us a little bit of extra momentum coming 4 into Q2. 5 And I should say, that analysis did not take 6 explicit analysis account of snow, which we know 7 probably also had a little bit of a role in holding 8 back the economy, certainly, early this year. 9 So, a little bit of a wiggle in the numbers. 10 And as we see the first quarter coming in a 11 little bit soft, we see these numbers. 12 I think we need to take those with a large 13 grain of salt, thinking that a lot of it is weather 14 effects, possibly inventory cycle, and not as a sign 15 of a more fundamental slowing in the economy. 16 The key, sort of, big-picture factors that we 17 see affecting the economy are the lack of the fiscal 18 drag that we had last year, which I alluded to with 19 the payroll-tax increase. But, also, there was big 20 spending restraint last year, that we're not gonna 21 see repeated this year. 22 So, overall, the economy will be freed from 23 about 1 1/2 percentage points of drag from 24 contractionary fiscal policy. 25 That's the federal level. 1 State and local budgets, as you know, are 2 also easing up a little bit; and, so, we'll get a 3 little bit of a help from that increase in state and 4 local spending this year, in contrast to what we've 5 had the last couple of years. 6 Another sort of challenge that we face, 7 however, is the rise in interest rates that we've 8 had. 9 Markets are looking ahead to the date when 10 the fed will begin to tighten policy. 11 I think there was some confusion about 12 whether tapering was tightening. 13 Tapering is less accommodation. It's not the 14 same thing as a turn towards tightening. 15 But, nevertheless, the markets did respond 16 with a rise in interest rates, and that did have an 17 impact in slowing some spending, especially in 18 housing construction, and probably put a little bit 19 of a pause in some capital-spending plans. 20 So we would -- we would expect that we will 21 work through that. If the economy has enough 22 momentum, that it's not going to push us back to 23 2 percent growth. 24 We think there's still enough underlying 25 momentum and pent-up demand in improvement in 1 financial conditions that will push us to growth, 2 closer to 3 percent than the 2 percent we've 3 experienced the last several years. 4 So the two big forces: Lack of fiscal 5 restraint. Improvement in financial conditions and 6 building confidence. 7 With that, we see improvement in employment; 8 not big, but a little. 9 So, last year, average monthly employment 10 gains of the establishment survey, of about 185,000, 11 building to about 200,000 a month this year, 2015, 12 beyond. 13 So, not great, but better than where we've 14 been. 15 And that will contribute to the increase in 16 the employment-population ratio, and further 17 declines in the unemployment rate, which, we hope, 18 but we have very wide confidence bands around this, 19 are going to be motivated by improvements on the 20 employment side; not simply by declines in the 21 labor force participation rate. 22 We think we're close to the bottom on that. 23 So in that environment where we have, still, 24 a declining, but maybe a somewhat slower decline, in 25 the unemployment rate, there's still a lot of slack 1 in the economy. And we think some of it does help 2 put downward pressure on inflation; not a lot, but a 3 little. 4 And, so, we expect inflation to remain 5 well-contained. It is currently running very low. 6 Recent rates have changed on the core 7 Personal Consumption Expenditure Price Index, 8 running just barely above 1 percent. 9 We do see for the year, though, coming in 10 around 1 1/2, one-six; rising to 1 3/4 over the next 11 year; and getting, maybe, to 2 percent, or slightly 12 below, all the way out through 2016. 13 So, inflation really not a big concern on the 14 radar right now, remaining well-contained. 15 So with that, with still high unemployment, 16 even though, as Hugh noted, following through the 17 fed's 6 1/2 percent threshold, inflation remaining 18 low. 19 And the fed has warned us, that inflation too 20 low is just as dangerous as inflation too high. 21 So, the fed will remain accommodative. 22 We expect it will continue to taper, roughly, 23 reducing its open-market purchases as part of QE3, 24 by about 10 billion per meeting; meaning, that 25 they'll be completely done sometime late in the 1 year. 2 And -- and then the question is: When will 3 they begin to tighten the policy rate? 4 We recently moved up in time. 5 Our expectation for the first tightening, 6 from the third quarter of 2015, to the second 7 quarter of 2015. And, it maybe worked of out to 8 four months, not quite six months, but somewhere in 9 that range. 10 And part of it was simply because you cannot 11 ignore the fact that, because of what happened in 12 the last two months of the employment reports, the 13 unemployment track is now about a half a point lower 14 than what it was in our prior forecast. 15 So, if you missed -- if you missed December 16 and January declines in the unemployment rate, and 17 you take those into account now, it's a very 18 different picture of the degree of labor-market 19 tightness. 20 Secondly, there's an emerging body of 21 evidence that suggests that the overall unemployment 22 rate -- and I'm going to spin this the way -- the 23 opposite way that you hear on CNBC: CNBC says the 24 real unemployment rate's 15 percent. 25 Well, guess what? 1 The employment rate that matters for 2 inflation is really the short-term unemployment 3 rate, and it is back to its cyclical low point. 4 There are other measures of labor-market 5 tightness, including this -- you may be aware of the 6 matching of employed to vacancies, and this thing 7 called a "vacancy yield"; that is: For any number 8 of vacancies, how many people are hired? 9 When labor markets are tight from an 10 employer's perspective, the vacancy yield is low; 11 that is, they can't hire very many people to fill 12 those available vacancies. 13 We're now back -- the vacancy yield is now 14 back at the same level it was at the prior two peaks 15 and cyclical -- cyclical peaks in economic activity. 16 So that suggests, one, there's a lot of 17 economic -- there's a lot of uncertainty about just 18 how tight are labor markets today. 19 And, so, we have to be aware of that. 20 And because of that, while we think 21 inflation's gonna be low, we think there's some 22 uncertainty about what the -- about what the 23 inflation outlook is. 24 Now, hourly compensation growth has been 25 exceptionally weak. 1 Last year it was only 0.4 percent, on a 2 fourth-quarter-to-fourth-quarter basis. 3 This has given rise to the very slow growth 4 of incomes that have bedeviled the revenue 5 estimators. 6 And, our guess, I -- it's only a little more 7 than a guess, that we're gonna move up towards 8 something more normal; maybe, 2 to 2 1/2 percent 9 growth of hourly compensation. 10 But given the recent track record, I think we 11 have to put, again, very large confidence bands 12 around the growth of that income. 13 But, nevertheless, inflation remaining low, 14 perhaps too low, the fed being very cautious, 15 tightening, narrowing, the second quarter of 2015. 16 I want to illustrate just a couple of charts 17 to show. 18 Let's jump up to Slide 3, to show -- I'm 19 sorry, Slide 2 -- 20 Let me put my glasses on. I'm sorry. 21 -- Slide 4, let's make it. 22 I hate that. 23 [Laughter.] 24 CHARLES VAVARES: So you can see, in the 25 fourth quarter of 2012 and first quarter of 2013, 1 this shows the change in personal tax and non-tax 2 payments, at the federal -- at the national level, 3 in total -- it's all personal tax and non-tax 4 payments -- as a share of GDP. 5 And look at the massive jump that occurred in 6 the first quarter of last year. That's the extent 7 of the tax increases that we saw. 8 That took a big wallop by the disposable 9 income of households, and it accounted for the very 10 slow growth in consumer spending we saw last year. 11 So when we look at fiscal drag, that was the 12 biggest part of it, were the tax increases. 13 It held the growth of consumer spending, last 14 year, to 2.3 percent. 15 Without that same drag this year, we expect 16 consumer spending to grow closer to 3 1/2 to 17 3 3/4 percent. 18 So the primary motivation for seeing economic 19 growth step up in 2014, relative to last year, is 20 the absence of those tax increases, and the 21 acceleration of consumer spending. 22 If you look at the next chart, Chart 5, this 23 is another way of looking at the waning of fiscal 24 drag, as we like to call it. 25 So this chart shows both the federal and 1 state and local level. 2 The green bar is the federal, the pink bar is 3 the state and local; the contributions of those 4 spending components directly to GDP growth. 5 And, of course, you can see, over the last 6 couple of years, those green bars have largely been 7 strongly negative, suggesting the direct drag of 8 declines in federal spending on economic growth. 9 Because we now have a budget deal that does 10 away with the part of the sequester that was gonna 11 cause more drag this year, we basically go to a flat 12 line. 13 So we don't really have stimulus coming from 14 federal spending, or, state and local spending, 15 really, for that matter; but, pretty much, a flat 16 line. 17 There's a little bit of a wiggle there, as 18 you see, between the fourth quarter of last year and 19 first quarter of this year. 20 There's a very large anomalous decline in 21 defense spending, and we do expect to recoup some of 22 that, so there's -- some of that big drag in the 23 fourth quarter of last year we expect to be offset a 24 little bit this year. 25 I think -- Slide 6 talks again about the -- 1 focuses on the labor-market story. 2 You see that the decline in the labor force 3 participation rate, a 3-percentage-point decline 4 since the beginning of the recession, to where we 5 are today. 6 Some of that would have been expected, based 7 on the aging of the population. 8 So, as age groups move into the -- those -- 9 as cohorts of the population move into those age 10 groups, they have lower participation rates, the 11 aggregate participation rate falls. 12 And that explains, roughly, one-half of the 13 decline in the participation rate, as suggested by 14 that dotted line there. 15 There's a lot of speculation. 16 We've done some work to suggest what explains 17 the other half. 18 We think a quarter of that 3-percentage-point 19 decline is the normal cyclical response. 20 And we think that last one-quarter is related 21 to the fact that we have such persistent 22 unemployment; that is, the percentage of long-term 23 unemployed, those unemployed more than 26 weeks, 24 gives them a very tenuous attachment to the labor 25 force. It stigmatizes them. 1 Employers, as we know, and there have been 2 some really nice studies done on this, employers 3 just are unwilling to look at people who have been 4 unemployed more than 26 weeks. They think there's 5 something wrong with them. 6 Until the labor market tightens up 7 considerably, firms will continue that behavior. 8 I know the White House is launching a 9 campaign, to get firms to change their recruitment 10 behaviors, so that they're not -- they've actually 11 had robo -- you'll love this -- robo-processing of 12 applications, where the people -- applications are 13 just rejected if they determine that the person has 14 been unemployed for that long. 15 Workers are fighting back, though. 16 They're putting in white -- in white font, 17 key words they know HR departments search for, to 18 put them at the top of the stack. 19 So the robo guys put them at the top of the 20 stack, and the humans look at the applications and 21 can't figure out why that person was at the top of 22 the stack. 23 [Laughter.] 24 CHARLES VAVARES: Well, in any case, the 25 labor force participation rate is also a bit of a 1 puzzle. 2 We expect that, with a slight pickup of 3 employment, more consistent gains in employment, 4 that the participation rate will, in fact, 5 stabilize, and rise sort of sideways -- you know, 6 rise slightly, or go sideways, over the next couple 7 of years, suggesting, then, that further declines in 8 the unemployment rate will only be accomplished if 9 we see these consistent gains in employment; as is 10 suggested by the blue line, and shows the 11 employment-population ratio in that chart. 12 If you turn to Slide 7, this shows our 13 inflation forecast with a very long history. 14 I show the long history here to make a couple 15 of points. 16 The first is, that we -- since the late 17 1990s, we've really been in a -- in a relatively 18 low and relatively stable inflation environment. 19 We bounced around 2 percent since that time 20 period, well off the very high inflation of the 21 1970s and early 1980s. 22 Number one. 23 Number two, is that the cycle does have an 24 impact, because slack tends to depress the rate of 25 inflation, because there are unutilized resources in 1 labor and product markets, and there's competition 2 that puts downward pressure on wages. 3 So our forecast, again, is that the consumer 4 prices will remain growing probably below 2 percent 5 between now and 2016, remaining well-contained. 6 I already talked about fed policy. 7 Let me -- let me look at -- let's jump ahead 8 to Slide 10, where I list, again, some of the major 9 reasons why -- that are -- that are pushing the 10 economy to accelerate and to grow faster, with a 11 couple other concerns listed as well, as to why we 12 still need to be cautious. 13 So we have had very aggressive monetary 14 policy. Obviously, that helps. 15 Early on in the recovery, we had very 16 aggressive fiscal policy. 17 So, the American Recovery Reinvestment Act 18 tended to raise government spending, it tended to 19 put some income out in the economy, multiplier 20 effects...those were all good. 21 But, it's like the pig and the python: It's 22 good while it's going through, but on the backside, 23 it causes spending restraint. 24 That, on top of the initial moves towards 25 long-term control of federal spending, have caused 1 federal spending to be a reason, at least in the 2 short term, for the economy to grow more slowly. 3 So that's a bit of -- one reason, in fact, 4 why monetary policy has had to be as aggressive as 5 it has been. 6 There still remains pent-up demand in the 7 economy. 8 We know it's there in housing, where we've 9 been way below the trend in housing starts. 10 We're way below the trend in the stock of 11 motor vehicles. 12 And the question is: How quickly will that 13 pent-up demand be realized? 14 Clearly, what we hear from the automakers, is 15 that availability of credit is not an issue in 16 purchases of motor vehicles. 17 Employment, is. Credit scores, are. 18 In housing, it's a different story. 19 FICO scores now, on average mortgages, are 20 well above what they were in the pre-crisis era, and 21 even in the lead-up to the crisis in the housing 22 boom. 23 So, mortgage-underwriting standards are still 24 exceptionally tight. And until those loosen, we 25 think, we're afraid, that the recovery in housing is 1 going to be damped or delayed a bit. 2 I mean, we're still relatively optimistic 3 long term on housing. Our demographic analysis, 4 even before immigration reform, suggests that, 5 nationally, we should be building about 1.6 million 6 homes over the next decade. 7 And we're well short of that now, still 8 under, roughly, a million. 9 So there's a long way to go, and there's a 10 potential housing boom out there. 11 When exactly it will catch fire is hard to 12 know because of the remaining difficulties in 13 mortgage finance. 14 There have been uneven improvement in 15 financial conditions, to be sure. Lots of evidence 16 of this. 17 And this has a lot to do with a return of 18 risk appetite, which we view as absolutely critical 19 to getting business decision-makers to make those 20 hiring and investment decisions. 21 And return-of-risk appetite only happens as 22 assessments of downside risks are -- are mitigated. 23 So, early in the European crisis, as that 24 crisis flared up, it had the effect of really 25 putting a -- of throwing cold water on the recovery 1 in 2010 and 2011 again. 2 We seem to be getting past that. European 3 economies are beginning to recover. 4 But it's critical that, as those downside 5 risks recede, return-of-risk appetite comes in. 6 We see it, most clearly, in the gains in the 7 stock market last year. And we expect that we'll 8 see gains of about 9 percent again this year in the 9 S&P 500. 10 So my number, Hugh, to compare to yours, will 11 be year-end 2010. 12 2-0-1-0, on the S&P 500. 13 Not -- there are risks, as Hugh pointed out. 14 And to tell a story about that risk, at the 15 beginning of this year, as I was looking at our 16 forecasts of the stock market, and thinking about -- 17 in fact, let's just go look at that "stock market" 18 story. 19 This would be, Slide 17. 20 So this is a -- this, obviously, is a -- the 21 reason runup has been huge in rebuilding household 22 balance sheets, but, look how it flatlines. 23 So, we have another 9 percent gain this year. 24 A little bit of a gain in 2015, and then it 25 sort of goes sideways. 1 Well, what the picture makes clear, is that 2 the stock market never goes sideways. It either 3 goes up or it goes down. 4 So, as I look at that picture, and you never 5 know where the exact peak is gonna be, so I set 6 myself a reminder in Outlook that pops up now, every 7 two weeks, that says: Is it time to exit stocks? 8 [Laughter.] 9 CHARLES VAVARES: Because, I should pay 10 attention, and, oftentimes, I completely -- I'm so 11 busy making the forecast, I forget about the 12 implications for my own portfolio. 13 So, I think there's a risk there as well, 14 that we may have a bit of a correction in the 15 market. 16 And I think we're pretty -- we're safe for a 17 while here with the solid growth that we're 18 anticipating. 19 Let me go ahead to Slide 33, because it does 20 highlight some of the risks. And -- and because 21 there's not all that much disagreement in the base 22 forecast, I want to focus on those. 23 So there's seven bullet points here, and 24 every one of them, like a coin, is a two-sided risk. 25 Europe is improving; it's coming out of 1 recession. 2 I fear, however, that all of us have become a 3 little bit too complacent about Europe. 4 Italy still has not put in place the reforms 5 that will lead it to have, even in the medium term, 6 a sustainable fiscal outcome. 7 Now, we know, in the United States, we 8 haven't put in the needed fiscal reforms to give us 9 a long-term sustainable fiscal position, but, it's 10 different. People kind of expect us to get around 11 to doing the right thing, eventually. 12 Italy is a harder story. 13 And, so, it's possible that there could be 14 another flare-up. It's possible that Greece may not 15 be able to make good on the last round of deals that 16 it made with the -- the -- PREO [ph.] -- I -- 17 whatever -- the IMF, et cetera, and so there's a 18 risk there. 19 On the other hand, there's a positive risk, 20 too; and that is, the European recovery could 21 progress a pace and could surprise us on the upside. 22 The rise in long-term rates in the U.S. had 23 an effect in slowing our economy. 24 It also had a very important spillover to the 25 emerging markets, as Hugh pointed out, and then 1 there was the rebound effect that came back to the 2 United States. 3 Clearly, as Hugh believes, we think it was an 4 overreaction. 5 But you just have to be cautious, and try to 6 think about how the financial spillovers, what it 7 did to the stock market. How that could potentially 8 lead to some further headwinds on the U.S. economy 9 this year. 10 In 1997, clearly, was very, very different 11 than it is today. 12 But, I think 2008 makes us all a little more 13 cautious about how some of these seemingly benign 14 financial crises have a way of spinning out of 15 control. 16 And, so, that makes me just very wary about 17 some of the downside risks still to come out of the 18 emerging-markets story. 19 China I don't think is a big concern, but, 20 obviously, there are reasons to be concerned about 21 China, given the growth of their shadow banking 22 system, and the need to move from this hugely 23 investment-led economy to consumer-led economy, and 24 how they'll do that transition smoothly without it 25 having big ripples throughout the global economy, is 1 certainly a risk. 2 Home prices, I think we're in good shape. 3 The consensus is for moderate increases in 4 real-home prices over the next couple of years; 5 however, we know some markets are already a little 6 frothy. 7 And, so, there's caution there as well, as to 8 whether we'll get the boost from home prices. 9 I don't think we have to worry too much any 10 more about fiscal restraint, at least for next 11 couple of years, with the two -- two-year deal. 12 So, we can maybe set that one aside. 13 Commodity prices, obviously, are always a 14 wild card, subject to geopolitical concerns, and 15 political uncertainty in the oil-producing parts of 16 the world. 17 The U.S. is less vulnerable to those shocks, 18 as we've had big increases in our oil and natural 19 gas production. But, still, oil is something that's 20 priced in global markets, and so we're not 21 completely immune to those issues either. 22 The real wild cards that are out there are 23 Iran and North Korea, and moves in those countries 24 towards developing nuclear weapons, that can be 25 very, very destabilizing to markets. 1 And so that, again, while it's a very, very 2 low risk, it's out there. 3 And, it's one of those things, that when you 4 least expect it, you know, would you really be that 5 surprised if you -- six months from now, maybe the 6 talks with Iran are not progressing very well, and, 7 you pick up the newspaper, or you turn on the TV, 8 and you find out that there's been some sort of an 9 attack on an Iranian nuclear research facility? 10 And, what would that do to destabilize the 11 Middle East and throw a big monkey wrench into the 12 economy? 13 So, again, not a big risk, but one that would 14 have, relatively, at least big short-lived 15 consequences. 16 And, so, that's another thing that is in my 17 "worry closet." 18 So, just to summarize: 19 We think the preconditions are largely in 20 place for the economy to improve this year, to show 21 firmer growth, improved employment growth, but, 22 those risks are still out there. 23 They seem like this is a somewhat familiar 24 story over the past several years: The start of the 25 year, we're somewhat more optimistic, and something 1 seems to jump up and bite us. 2 This year, the one thing we can point to 3 that's really, really -- we can do the math, and 4 that's the fiscal restraint. 5 The absence of the fiscal restraint is the 6 single biggest factor that's gonna lead us to have 7 firmer growth this year, but there are all of these 8 other things that could get in the way. 9 ROBERT L. MEGNA: Any questions for Chris? 10 Okay, thank you. 11 Let's move on; Mr. Diffley. 12 JAMES DIFFLEY: Thank you. 13 And let me first apologize for being late. 14 As Chris can tell you, I was in Washington 15 with him the last three days. 16 CHARLES VAVARES: You should have taken my 17 plane. 18 JAMES DIFFLEY: And I -- well, I decided to 19 go home in between; so, my apologies. 20 And I'm sorry I missed the opening remarks, 21 which are usually very good, from which I usually 22 make some notes, and I didn't have that opportunity 23 today. 24 But, I'll be available for questions 25 afterwards, and during, if you want. 1 Let me summarize the forecast outlook now. 2 We're much more optimistic for the future 3 than we have been for the last couple of years. 4 It's not so much that we've revised upward 5 our forecast rates of growth; is that we're more 6 confident that they'll actually be realized. 7 There's less uncertainty out there, largely 8 because of what's happened in Washington. The 9 federal government budget is at least resolved our 10 issues, or are at least resolved for a couple of 11 years. 12 So that's the basic theme we have, going 13 forward, that go along with any presentation here. 14 We're on a moderate growth path. We're not 15 accelerating that much, but we are accelerating a 16 solid pace, as Chris went through the numbers, and 17 you did, through the end of last year, coming 18 forward. 19 The inventory accumulation, I certainly 20 agree, will make GDP growth look a little slower in 21 the first half of 2014, then are the underlying 22 fundamentals which were exaggerated in the last half 23 of 2013. But they're, nonetheless, strong. 24 Consumer spending reaching trend growth in 25 real terms of 3 percent, with employment gains, and 1 much improved household balance sheets, as you've 2 seen. 3 Home building, we agree, it will surge, and 4 it will take -- not that fast, though. It will take 5 until about 2016, until we get to the level which we 6 agree, about 1.6 million housing starts per year, 7 for instance, catching up to demand, as we say. 8 Business fixed investment, largely hampered 9 by uncertainty over action in Washington, will 10 accelerate, again, led by equipment spending. 11 We do have a significant increase in interest 12 rates. I won't go through the numbers. I'll let -- 13 I'll defer to you on that. 14 But, as monetary accommodation is gradually 15 withdrawn, I think I said that in a way that Chris 16 would agree with. Right? 17 And the North American energy boom will 18 continue to create jobs investment, and, most 19 importantly, give us, the U.S., a competitive 20 advantage in manufacturing -- certain manufacturing 21 sectors, particularly the chemical sector, that we 22 haven't seen in a long time. 23 The next slide, Slide 3, shows real GDP 24 growth in the unemployment rate, over time, with the 25 unemployment rate declining at a relatively fast 1 clip recently, as you know -- that's the bar there, 2 in orange -- getting under 6 percent, finally, in 3 the very near future. 4 The blue bars, with the little waggle over 5 the inventory accumulation that we saw at the end of 6 2013, the beginning of 2014, getting above 3 percent 7 for a solid two years, going quarter by quarter 8 there, which is the important part of strong. 9 Not as strong as we would have ever liked to 10 see coming out of the deep recession we had; but, 11 nonetheless, a strong, sustainable pace of growth 12 for the U.S. economy. 13 And I've extended the graph out to 2017 14 there, as well. 15 On the next page, you see in real terms, our 16 sectoral forecast with real GDP. 17 I think looking at the chart for 2015, at 18 3.3 percent, this is calendar-year basis, we're at 19 the highest amongst the group at the table here; so, 20 a little more bullish than, uhm -- than my 21 colleagues, but, continuing that way until 2016. 22 Consumption, as I mentioned, about 3 percent. 23 Double-digits in residential investment are 24 that buildup in housing starts. 25 I mentioned business fixed investment. 1 Federal government less of a drag, 2 significantly. Chris is exactly right, about 2013 3 there. The tax side is the other side of that, of 4 course. 5 And state and local government actually 6 contributing to growth, going forward, slightly, in 7 the future. 8 Exports -- I'll show you a graph in a 9 minute -- need to be a very important driver of 10 growth in the U.S., and we think will be over the 11 coming decade. 12 To give some more numbers here, other key 13 indicators that we like to follow, and you like to 14 follow, I think, industrial production. 15 Payroll employment, that's a key, getting, 16 finally, above the 2 percent range. And I'll show 17 how we fare in terms of employment levels back 18 before the recession. 19 The automobile industry has been strong. 20 You've noticed it around Buffalo. But, that's going 21 to level off, but, still, at a good level: over 22 16 million units per year in the U.S. 23 Housing starts you see ramping up to the 24 1.6-metal-unit -- -million-unit number per year. 25 CPI: I guess we're a little more muted on 1 CPI than my colleagues speaking before me. Under 2 2 percent for the foreseeable horizon. 3 Oil prices, of course, always a wild card. 4 Federal-funds rate moving up, and same thing 5 with 10-year treasury yields, which I guess is 6 higher than Chris -- than Hugh's forecast, if not 7 Chris's. 8 Couple of points to make by the sectors on 9 the next slide. 10 The natural gas boom in the U.S. has been 11 mentioned a couple of times. 12 What it's done is, set off natural gas 13 pricing trends as different from crude oil pricing 14 tends -- and you see that in the green and blue line 15 here -- continuing to benefit us. And, a very much 16 unexpected phenomenon in the U.S., if you go back a 17 decade; but, yet, very profound, certainly, in the 18 energy sector and the manufacturing sector. 19 Consumer market is very important for the 20 health of -- for the tracking of households, and 21 sales tax-receipts especially. 22 We have real consumption, following real 23 disposable income: what consumers have to spend, 24 after taxes, et cetera. 25 Household net worth, almost double-digit 1 growth in 2013, largely, stock market. 2 But, the home market, residential real-estate 3 market, has rebounded to a degree as well. 4 And then the other indicators that influence 5 consumer spending: Employment growth, wage growth. 6 We're still relatively muted on wage growth. 7 I agree the labor markets are getting tighter 8 and tighter, and, certainly, in some sectors, we 9 could see large upside gains on wages, which, of 10 course, have positive and negative effects. But, 11 from the household sector, that's a benefit. 12 Consumption [unintelligible] light-vehicle 13 sales, I mentioned that [unintelligible]. 14 Home sales, as opposed to home starts, it's 15 the last grow there. 16 Looking at a bar chart on next slide, 17 Slide 8, by category: 18 Vehicles, strong. Medical care, strong. 19 It should -- you would not be surprised in. 20 Transportation services, as well. 21 The bars are "green" for last year, "orange" 22 for this year, and "blue" for 2015, going forward. 23 Again, calendar-year basis, I'll warn you, 24 which is the normal way we think about things. 25 Of course, when we forecast tax revenues, 1 we think in a fiscal-year basis, you understand. 2 But, just as background there. 3 Computer and software continuing stronger. 4 Slide 9, light-vehicle sales ramping up 5 dramatically from the depths of the recession, 6 but -- and here you can calculate, you know, very -- 7 very much, what the height of demand is, as we do 8 with housing starts, and, largely, 9 demographically-driven and replacement demand, 10 et cetera. 11 So, we have good reasons to think we're gonna 12 tap off -- top off at slightly over 16 million units 13 in the U.S. 14 You may have heard, this is more of a 15 long-range issue, and more around the world, the 16 issue now, not of peak oil, but peak car. That the 17 overall car use in the world is about to head down, 18 for various urbanization reasons and the like. 19 That's another story. 20 Next slide, real export and import gains, 21 they track each other, you know, for a number of 22 reasons: world economy and exchange rates, and the 23 like. 24 But here we see, in blue, the bit of waggling 25 in exports; but, again, getting above the 5 percent 1 level in the medium term, 5 percent in real term, 2 which is an aid to you -- the U.S. growth and the 3 balance of payments; or, the balance of trade, 4 technically, here, improving, going forward. 5 Those interested in the exchange value of the 6 dollar, income competitiveness, will see our 7 competitiveness forecast there, "blue," versus the 8 major trading partners, Europe in particular. 9 Canada also important here of, course. And, 10 "green," the rest of the world. 11 So the bottom line for the U.S. is: 12 GDP growth picking up in 2013 -- '14 and 13 2015, with strengthening private-sector investment. 14 Home building continuing to rise. 15 And that's important, that the home sector 16 has added to the GDP growth, and contributed lot of 17 the recent GDP growth. 18 Consumer spending, in the virtuous cycle, 19 supported by employment income, and household 20 wealth. 21 Net exports continuing to support growth. 22 Interest rates rising, as we said, the 23 well-known and expected changes in Federal Reserve 24 monetary policy. 25 And longer term, fiscal imbalances can be 1 fixed, but the process is, of course, 2 [unintelligible]. 3 We can turn to regional economics here. 4 The bubble chart, on Slide 13, takes the 5 census regions and puts them in perspective of what 6 we like to think of as economic momentum. 7 Here, we're using employment. 8 On the horizontal axis, is year-over year 9 growth; growth from a year ago. Right? 10 And the vertical axis is growth in the last 11 three quarters. 12 So the question is: Is strongish growth -- 13 stronger or weaker growth in the last year supported 14 in the nearer term, in the more recent growth? 15 So, is momentum building, or not? 16 For the first time -- the last couple of 17 months here, for the first time, there's -- all the 18 census regions are in the upper right-hand quadrant, 19 and moving to the upper right, which is great. 20 The mid-Atlantic, in "green" there, though 21 you'll noticed, held back by New Jersey and 22 Pennsylvania, more than New York right now -- 23 although, New York is not really out surpassing them 24 by that much -- amongst the least -- the slowest 25 growing of the regions, for reasons we'll come to in 1 a minute, and expected reasons we'll come to in a 2 minute. 3 I'll also point out that BLS is about to 4 revise all their numbers in the standard annual 5 revision for 2013, so, some of the positions will be 6 changing. 7 The map on the next page, Slide 14, gives the 8 modest growth in 2013. 9 New York, in the second quartile, I guess 10 you'd call it there -- not "quintile" -- 11 second-lowest growth; so, from the bottom, below the 12 median. 13 But you see the median itself is less than 14 1.2 percent growth. 15 This is rather sluggish in 2013. And we saw, 16 you know, weak job gains in 2013. 17 You see the pattern in the country of the 18 Sunbelt leading? 19 Flip the page, in 2014, we're going to get 20 higher growth rates, but the Sunbelt is going to 21 continue to lead. 22 And, New York is gonna fall into the lowest 23 quartile, not because its growth slows here, but 24 because the growth of the rest of the country picks 25 up. 1 Now, there's a reason for that, having to do 2 with the overall shape of the business cycle here. 3 The Sunbelt had a much worse experience with 4 job gains than New York did and the northeast did 5 starting in 2007. 6 All right? 7 And it's had a much slower return to health, 8 as we'll see. 9 So, comparatively speaking, over the business 10 cycle, New York has actually been ahead of the 11 gain -- the gain, if you will. But, that's actually 12 directly reflected in slower growth rates now, 13 compared to the states, like Florida and Arizona, 14 which are finally, once again, growing very fast, 15 even though they have not come close to recovering 16 all the jobs they lost in the recession. A lot of 17 them in construction, of course. 18 That's, uhm -- that's summarized, in a 19 forecast sense, in the map on page -- the page 20 numbers are gone, sorry about that. 21 So, technically -- well, I lost them for a 22 while. Sorry. 23 But I think you'll see the colored -- the 24 colored map there. 25 New York, in gray, along with Texas and much 1 of the Upper Plains states, regained employment 2 levels -- record employment levels, if you will -- 3 for the state years ago -- a few years ago. Right? 4 California has not yet. 5 Florida has not yet. 6 Arizona has not yet. 7 Washington State just did. 8 Right? 9 So -- so, you know, the states in "gray" have 10 been ahead of the game, in terms of, either they had 11 a weaker, slower, lesser decline, or, they grew back 12 quicker. 13 And it's a little bit of both in 14 New York State. 15 Massachusetts, based on a very strong Boston 16 economy, joins that recent -- more recently here. 17 But you see the -- the difference in the 18 Sunbelt here, with the yellow and the green, 19 signifying that those states are not even getting 20 back to where they were in 2007 or so, until 2015 to 21 2017. 22 The map in each state places the job growth 23 at its peak level, which would have been 2006 in 24 California, approximately; 2007 in most of the rest 25 of the country. 1 It went down, and then, when does it get back 2 up to that level? 3 Okay? 4 What the map doesn't do is adjust for the 5 size of labor force, so labor force growth has 6 occurred since then. 7 So even when you -- parts of the country 8 regain all of the jobs they had, the unemployment 9 rate is higher than it was. 10 So, in that sense, it's not a complete 11 recovery of the economy. 12 Let's look at New York directly, on the next 13 graph. 14 And you see, there's a job growth, same 15 scale, percent change, year over year, in 16 employment. 17 Blue solid line for New York, red for the 18 U.S., in growth. 19 You see, New York -- New York -- and by the 20 way, the U.S. economy, as a whole, will not regain 21 the jobs, in total, that it lost in the recession 22 until a few months from now. 23 That's coming up close, but that's not quite 24 there yet. Till the middle part of this year, 25 approximately, the second quarter. 1 So U.S. -- and New York outpaced the U.S. in 2 2011. 3 If you look in 2010, you see that as well. 4 I guess I should have included that. 5 Then growth has fallen off. 6 I think last year I termed New York as having 7 lost momentum. 8 We're going to continue in our forecast down 9 the path, between 1 and 1.2 percent growth, which 10 is, again, which, demographically, is a 11 slower-growing area, New York State is. 12 So, you're going to expect lower growth. 13 But a large part of the red-line increase 14 there in 2014 and 2015, is a recouping of lost jobs, 15 a return to normalcy, in those Sunbelt states, and 16 that's what's driving it. 17 That will ultimately peak off, as well. 18 And I show that, yet again, to hammer the 19 point home: If I index job gains in both New York 20 and the country back in 2008, you see that New York 21 is still ahead. 22 New York, at one oh -- approximately, 102, at 23 the current time, it means it has 2 percent more 24 jobs than it did in 2008. 25 The U.S. is just now, in this year, getting 1 back to the levels it was in 2008. 2 So there's a sense in which New York has been 3 ahead of the cycle. 4 It's only out in 2016 when the U.S. had, in 5 effect, gained more jobs -- many jobs, 6 proportionally, over the last decade as New York. 7 Another way of looking at it. 8 Turning to other issues for revenue 9 forecasting, and the like, in New York: 10 Wage and salary growth: Now, this graph was 11 prepared before we had the January collection 12 experience that most of you are aware of now. 13 So, there's a lot of uncertainty about what 14 actual wage and salary growth is, and uncertainty in 15 the financial sector, that I'm sure Jason and Ronnie 16 will talk about. 17 For now, though, we're forecasting that, with 18 a relatively weak financial sector, relative to the 19 job gains they've seen in the past, we're going to 20 have lower average wage growth, and a bit lower 21 average wage growth in the country. 22 And, remember, the employment-growth forecast 23 is also embedded in that, since we're looking at 24 total wages and salaries; not on a per-worker, but a 25 worker basis. 1 Looking at other key variables affecting 2 New York taxes; in particular, sales taxes, and 3 other transaction-related taxes: 4 New car registrations in New York -- I was 5 looking at the U.S. before -- but, again, New York, 6 we see the rise, up through 2013, to almost a 7 million units. And that will stabilize now in our 8 forecast, as we -- for similar reasons as with the 9 U.S. 10 Housing starts, still a bit to go. 11 We've now -- we're approximately over 12 30,000-houses-per-year pace at the current time. 13 And we look for gradual increasing of about 14 thirty-five over the next year or two. 15 Summarize now, by fiscal-year basis, the 16 growth rates that we project for U.S. for gross 17 state products, employment, unemployment: 18 We have unemployment coming down 6 percent in 19 2016. That may be too slow, given the way -- the 20 dramatic acceleration of the fall in unemployment 21 we've seen, and the tough part, as Hugh was quite 22 correct to emphasize, that labor force participation 23 rate is behaving in a -- in a fascinating way, shall 24 we say. An uncertainty. 25 Personal income ramping up to 4 1/2 percent. 1 Wages and salaries are slightly less. 2 And I've mentioned the other numbers before. 3 Bottom line: 4 Trailing the nation since 2012, New York 5 economy, but trailing in terms of rates of growth, 6 I think, as being in a more mature stage of 7 recovery. 8 New York City clearly leading, and was -- is 9 responsible for the quicker recovery for the state 10 as a whole. 11 But Long Island, gladly, is now recovering 12 strongly now. 13 That's not so much true upstate. 14 There's weakness -- relative weakness in the 15 high-wage sectors. You know, financial sector only 16 being just one of them. 17 Very much notable is the new upstate promise, 18 especially in Buffalo, and even Utica, in the 19 high-tech sector. 20 Buffalo there, and also with -- on lake-front 21 development just finally proceeding, so, we'll see 22 if that jump-starts a new age for Buffalo, if you 23 will. 24 Wall Street retrenchment continues to be a 25 threat. All right? 1 I think, I'm sure, Jason and Ronnie will 2 follow up on that. 3 And, overall, we expect moderate growth for 4 the near term, for the state, most of the region. 5 Thank you. 6 ROBERT L. MEGNA: Okay, very good. Thank 7 you. 8 Any questions? 9 ROBERT B. WARD: I have a question. 10 JAMES DIFFLEY: Sure. 11 ROBERT B. WARD: You went back to 2008 in 12 comparing New York to the nation, in terms of 13 employment growth. 14 I believe that, if we go back to 2007, we 15 actually had five straight years of outperforming 16 the nation, which was the first time in history, 17 I believe. 18 And, you referred to the impact of the 19 recession and post-recession, and the nation growing 20 faster because there were sharper declines. 21 But, any sense as to why we had those 22 five straight years after a long period of the 23 reverse? 24 And, why we have now gone back to, as your 25 numbers show for the coming year, being in the 1 bottom quartile? 2 JAMES DIFFLEY: Oh, so I guess the question 3 is more, long term, and why is the -- what was the 4 anomaly? 5 With was the anomaly when New York was 6 growing very fast, leading up to the recession, or 7 after? 8 Well, the key difference in driving 9 economic-growth differences across the country, in 10 the time of the housing -- from the start of the 11 housing bubble, through the recession, has been 12 residential real-estate markets. 13 All right? 14 New York did participate in the rapid 15 buildup, and the stock market gains at the same 16 time, if we laid it back, and financial-sector 17 gains, and huge incomes in that sector, did propel 18 New York faster than the nation. 19 I would argue, I guess -- so to answer the 20 question, I think in the context you want: I would 21 argue that was the anomaly, rather than the longer 22 term, slower rate of growth generated by a mature 23 economy. 24 Okay? 25 And one of the big differences in the way -- 1 the reason that -- you know, what's driving the 2 difference in the Sunbelt behavior now is precisely 3 the hangover of the housing crisis, where, finally, 4 with real-estate markets normalizing, local demand 5 is accelerating once again. 6 And the same excessive bubble in housing that 7 caused the deeper declines there, that's caused 8 different relative timing of the cycles, so.... 9 Good question, though. 10 ROBERT B. WARD: Thank you. 11 ROBERT L. MEGNA: Thank you. 12 Thank you very much. 13 Mr. Bram. 14 JASON BRAM: Hi, it's great to be here. 15 I'm going to try to move through this fast, 16 and -- since a lot of what I'm saying is going to 17 sound a little familiar. 18 Turning your attention to this chart package, 19 I'll try to refer to the charts by numbers; so, 20 we'll start with Number 1. 21 We have our index of regional economic 22 activity that we've developed for New York, 23 New Jersey, and New York City. 24 And here you can see that, New York City -- 25 this, by the way, is, uhm -- what we do is, it's a 1 blend of payroll employment, the unemployment rate, 2 a measure of hours, a measure of wage and salary 3 income. And we view it as kind of a very rough 4 proxy for economic activity, with an emphasis on 5 "rough." 6 But, the main purpose is to kind of indicate 7 turning points, and give a sort of general idea as 8 to the trajectory of the economy. 9 You can see that New York City had a somewhat 10 milder recession than New York State as a whole, and 11 has had -- has really rebounded pretty rapidly. 12 New York State, as a whole, is kind of just 13 back to where it was at its peak back in 2008. 14 We don't do one that's based on the same 15 methodology for the U.S., but, I'll get into other 16 measures, like, employment, you'll see how, kind of, 17 we've done relative to the U.S. 18 Chart Number 2, that's called, uhm -- the 19 next few charts are gonna be all called "last three 20 downturns." 21 The first one refers to the U.S., and what we 22 do is, we index employment so that it's normalized 23 to the last peak, to allow for an easy comparison. 24 And this enables you to -- this is what we 25 call a "spider chart" at the fed. 1 This is -- enables us to kind of look at the 2 downturns, putting them in sync with each other, and 3 seeing how we've done. 4 And here you can see why this is called the 5 "Great Recession." 6 The very last downturn had a much, much 7 deeper and longer drop in employment, and a slower 8 rebound, to the point where we're, you know, in the 9 early '90s and the early 2000s, the early 2000s was 10 referred to as a "jobless recovery." 11 But, even that one, you can see it came back 12 to its peak well before we have in the U.S. 13 So, basically, the last recession has been 14 much steeper, longer, and a slower recovery. 15 Now, for contrast, New York State, on the 16 next page, Number 3, not that it wasn't a deep and 17 harsh recession in New York State, but, it's a very 18 different pattern than what you see nationally. 19 So here we have the early '90s downturn, at 20 least in terms of employment, was actually a much 21 steeper and longer recession than the brown line, 22 which is the most recent downturn. This is more, 23 kind of, similar to the early 2000s recession. 24 Now, of course, there are, in terms of other 25 things, such as, for instance, the financial sector, 1 in terms of housing, you know, there's still some 2 differences. 3 But, from the perspective of the overall 4 economy, this was a somewhat less-sharp recession, 5 certainly, than the nation, but, also, than the -- 6 certainly, than the early '90s recession. 7 And that's true even more -- even more so for 8 New York City, which is on the next page. 9 You can see New York City, the blue line, we 10 came back in New York City much faster than in the 11 last two downturns, to the point where employment is 12 reaching new all-time peaks; all-time, in fact, 13 exceeding the previous peak, I think it was in 1969, 14 in New York City. 15 So, let's look a little more closely at the 16 employment trends. 17 On Chart Number 5, we've done a similar sort 18 of so-called "spider chart"; but instead of 19 comparing it over different time periods, we're just 20 looking at the last business cycle, and showing 21 different parts in New York State and how they've 22 done. 23 And you can see that all of New York State 24 was -- saw a much milder -- "milder" is a bad 25 word -- less-steep job losses than the nation as a 1 whole. 2 And, in fact, they track pretty closely 3 together, in terms of job losses. 4 And what we've seen since then, is the 5 upstate metro areas have recovered; have gotten 6 pretty close to back to their overall peak. 7 And I'll get into a little bit more 8 geographic detail in a sec. 9 New York State, as a whole, as I know one of 10 you mentioned, is only just barely exceeded its 11 previous peak recently. 12 And, really, New York City, and I'll get to 13 the next -- in one of the charts coming up soon, 14 Long Island -- but, basically, Downstate New York 15 has led the recovery in employment in the region. 16 And this map kind of puts a little more 17 perspective on it. 18 You can see that -- what we've done is, we've 19 looked at the peak-to-trough job losses in the 20 different parts of the state, and then asked the 21 question: How much of that job loss has been 22 reversed? 23 So in a worst-case scenario, none of it has. 24 There's been really no recovery, so to speak. 25 And that's what you're seeing in Binghamton, 1 and some other areas that are in gray, have not -- 2 have only -- have recovered less -- fewer than 3 75 percent of the lost jobs. 4 Within that, I will say, that there are some 5 areas that are pretty close to Binghamton, in terms 6 of not having much of a recovery; and those would be 7 Elmira, the Kingston, and Poughkeepsie areas. 8 Then you see a large swath of 9 Upstate New York as sort of in the -- you know, 10 partway there, but certainly not having recovered 11 that much of -- certainly not all of the job losses. 12 Buffalo and Rochester, interestingly, 13 these -- Buffalo to -- historically, has had, 14 barely -- you know, weak trend growth in employment. 15 Yet, Buffalo and Rochester have both 16 recovered most of the -- reversed most of the job 17 losses. 18 And, then, to save the best for last, you 19 have, basically, New York City, Long Island, and the 20 Ithaca metro area have recovered all of the lost 21 jobs, and then some. 22 So those are really the -- kind of the 23 booming areas of the state. 24 On Chart 7, we -- this is kind of looking at 25 the rate of job growth on a 12-month-percent change 1 basis. 2 And to get -- Mr. Ward, to get to the 3 Deputy Comptroller -- so, New York State, you're 4 absolutely right, going into the recession, and 5 during the recession, outperformed the U.S. 6 But, actually, during most of the 2000s, it 7 was pretty on track with the U.S. 8 And it's actually fairly rare that you see -- 9 because of the fact that it is a mature economy, 10 that we do have slower population growth, it's 11 fairly rare that you see New York State or 12 New York City outperform the U.S. 13 And, so, I guess the point I'm trying to make 14 here: Recently, we've been a little bit below the 15 national average, but that's -- I would consider 16 that more of a normal thing. 17 It's kind of what saw in the 2000s. 18 This graph doesn't go back that far. It's 19 what we saw in the '90s. 20 And, it's actually much better, or, less bad, 21 than what we saw in the 1970s, when New York State 22 was, you know, on a very un- -- much underperforming 23 the national average. 24 And then you see a similar situation; for 25 example -- oh, I'm sorry, here we -- we have, 1 Rochester and Buffalo, just to give you an idea. 2 This -- basically, the purpose of this is to 3 show you how the areas have done -- the individual 4 areas have done across the last few cycles, and how 5 they've done specifically relative to the U.S. 6 And you can see that 7 Western New York State -- I'm counting Rochester. 8 From a New York City perspective, I guess 9 Rochester is Western New York State. Kind of the 10 same way New Yorkers consider -- some New Yorkers 11 consider Bronx upstate, but, we won't go there. 12 But, anyway, Rochester and Buffalo have -- 13 admittedly, they've seen a weaker recovery than the 14 nation, for sure. But, again, they weren't hit as 15 hard by the recession. 16 And then, you know, basically, they, 17 typically, during booms, they haven't been seeing 18 that much job growth, but they've been more mildly 19 affected during the last couple of recessions. 20 And this is sort of consistent with long-term 21 trends. 22 Now, keep in mind, this is employment. 23 I'm gonna get to some graphs on housing in a 24 minute, that paint a very different picture of 25 western New York State. 1 Chart 9, we have job growth in the -- some of 2 the Southern Tier. We've sort of grouped that as 3 central New York State, I guess. 4 And what really jumps out here, again, is 5 Binghamton, and to some extent, Utica, have been 6 lagging the rest of the state and the nation. 7 And, in particular, Binghamton. 8 We don't have it here; Elmira is kind of 9 similar to Binghamton. 10 Those areas are really still kind of 11 depressed. 12 Albany, on the other hand, you know, has seen 13 a reasonably good rebound, though not quite in line 14 with the nation. 15 On Chart 10, we have kind of what we call the 16 "downstate areas." 17 And here you can see that New York City and 18 Long Island have really led the state, and have 19 exceeded the nation in job growth during this 20 recovery expansion. 21 Poughkeepsie has had, you know, mid -- it's 22 Mid-Hudson Valley, Kingston is the same sort of 23 thing, has been somewhat of a laggard. 24 I should add that the recent drop, I'm not 25 really quite sure, a little -- it looks a little 1 disconcerting, but keep in mind that these data are 2 preliminary and they're subject to revision. 3 So, when we see a big drop like that, and 4 find it hard to explain, we like to usually wait, to 5 see what the revised data look like. 6 But, certainly, the Mid-Hudson Valley is not 7 one of the -- a strongest part of the state. 8 Now, switching our focus to New York City, 9 because I know that, when you're looking at revenue, 10 New York City, and particularly New York City's 11 securities industry, is a very important component 12 of that. 13 And this goes back, I probably have shown 14 this every time I've been here, but, there's always 15 new data to add; so, just very briefly: 16 I think the point of this chart, is it shows 17 securities-industry employment in New York City, and 18 employment in the rest of, basically, New York City. 19 Any -- what -- what -- what to take away from 20 in this is, pretty much, that every downturn in 21 New York City's economy has been preceded by a 22 downturn in the securities industry, in terms of 23 employment. 24 And, similarly, every upturn in 25 New York City's economy has been preceded by an 1 upturn in the securities-industry employment. 2 So, it's kind of like a leading indicator of 3 New York City employment. Or, you can think of it 4 as almost a driver. You know, this is a very 5 important. It's widely considered New York City's 6 key driving sector of the economy. 7 And, so, every upturn has been preceded, 8 except for the last one. 9 And if you look around 2010, when 10 New York City employment started to turn up, 11 securities employment turned up a little bit, and it 12 did so after the fact. 13 So, this was the first time, really, that the 14 securities industry hasn't led, at least by a little 15 bit, an upturn in New York employment. 16 And, you can see that we've had this fairly 17 sizable expansion in New York City's employment, 18 really, without any help from Wall Street. And that 19 is unprecedented, at least in the last, what is 20 this, 40? 50? -- 50 years. 21 So, it's an unusual situation. 22 And, you know -- well, let's get to the next 23 chart, because this is where it becomes relevant. 24 This is year-over-year percent change in wage 25 and salary -- aggregate wage and salary, which Jim 1 just referred to. 2 And you can see that the -- what we saw in 3 kind of, 2008-2009, was the biggest, really, 4 year-over-year decline on record, in both 5 New York State and New York City -- New York City 6 being a big component of New York State, of 7 course -- and far exceeding the nationwide drop. 8 And, you've seen that the rebound, although 9 there has been -- you know, it's gone above zero, 10 the rebound has been slower than usual. 11 So, typically, for example, in the '90s, and 12 even in, to some extent, the early 2000s, you see 13 some pretty big jumps in wage and salary income 14 coming out of, you know, at least during the later 15 stages of recovery, to a large extent, led by 16 Wall Street. But, to some extent, broad-based. 17 And these are a little bit more muted this 18 time. 19 And so this, of course, is a big challenge, 20 you know, for revenue, and something that everyone 21 has pretty much focused on here. 22 And then, coming into the final part, it's 23 important here to look at the housing -- the housing 24 prices. 25 And the price index that we tend to focus on 1 is from the -- an organization, CoreLogic. 2 They do, it's called, a "repeat sales index," 3 so that it accounts for kind of the changes in the 4 mix. 5 So if, in one-quarter, or in one year, 6 suddenly, all the nice homes are selling, it doesn't 7 look like there's this huge price pickup. It's 8 based on comparable home sales. 9 And what you see, first of all, what jumps 10 out, is the United States had a much deeper drop 11 than any parts of New York State. 12 Upstate New York really did not -- didn't 13 have a big boom, but, didn't really have a bust 14 either, the way that, you know, parts of 15 New York State, and certainly places like Florida 16 and Nevada, did. 17 So Upstate New York is sort of a -- has 18 been -- I guess the word I would use is "stability." 19 You know, when prices weren't going up that 20 much, it was considered a bad thing, because people 21 in Upstate New York were saying, Why aren't -- you 22 know, Why aren't we seeing some, you know, decent 23 appreciation? 24 But, things have been stable. 25 And as you see more recently, they've picked 1 up more so than downstate, in fact, as a whole. 2 And to get a little more geography in here, 3 you can see New York City, Long Island, Dutchess, 4 the downstate areas, kind of -- New York -- aside 5 from New York City, a little bit lagging the 6 rebound. 7 This is on -- I'm sorry, we're on Chart 14. 8 And then on Chart 15, you can see some of 9 the -- we picked a few upstate areas. 10 And you can see that Buffalo has seen, 11 really, no downturn, and, has seen prices -- prices 12 have kept going up. 13 So looking just at housing markets, Buffalo 14 looks very strong. 15 Now, keep in mind, as I know that, you know, 16 we have some economists at the New York Fed that are 17 stationed in Buffalo. And whenever we have a 18 conversation about home prices, it's like we're on 19 two different planets, because, what a house goes 20 for in Buffalo is what a parking space goes for in 21 parts of Manhattan. 22 Having said that, so, housing affordability, 23 of course, is an issue. You don't have the same 24 kind of pressure on population growth. 25 But, uhm -- anyway, it's important to focus 1 on, you know, some of the positives of 2 Upstate New York, to give a more balanced view of 3 the economy. 4 Another issue that we've looked at is -- that 5 we track, again, from CoreLogic, loan performance, 6 and some other organizations that we follow, track 7 the -- both -- well, we look at the flow in to 8 foreclosure, we look at the inventory of foreclosed 9 homes, distressed homes, delinquent, and so forth. 10 But I think the backlog of foreclosures tends 11 to be a good summary measure of what's going on, 12 and, this is a factor, of course, affecting the 13 housing market. 14 And what you see is that, whereas, this 15 backlog has come down nationally, it has -- it 16 remains somewhat stubbornly high throughout 17 New York State, particularly in some of the 18 downstate areas. 19 Part of the reason for this is that homes 20 stay in foreclosure longer. 21 But one way to think of this is, that, to 22 have -- for housing markets to get back to normal, 23 this backlog of foreclosures has to get down to, if 24 not where it was in the mid-2000s, at least a 25 lower level than it is now, to -- to not be kind of 1 a drag on the market. 2 Anyway. 3 And, finally, the last two charts I'm going 4 to show you, on Chart 17 and 18: 5 On Chart 17, the Federal Reserve Bank of 6 New York does two surveys. 7 We do a survey of manufacturers across 8 New York State: the Empire State Manufacturing 9 Survey. 10 And we've also been doing a survey of 11 service-sector firms across the district, at least 12 the continental part of the district, which is 13 New York, New Jersey -- Newark, New Jersey, and part 14 of Connecticut. But, a large majority of these 15 firms are in New York, so, it's largely a 16 New York State survey. 17 So you have, the blue line is the 18 manufacturers, the brownish rust-colored line is the 19 service-sector firms. 20 And one of the -- one of the things that we 21 like about this, is that it gives you -- we do the 22 survey, release it very quickly, so it gives you a 23 fairly timely read, at least on what businesses are 24 saying and thinking. 25 And as you can see, the surveys, both the 1 manufacturing, but especially our service-sector 2 survey, sort of presaged the, uhm -- or at least 3 signaled the downturn in 2008. 4 And it's a diffusion index, which means -- 5 well, basically, it's actually -- the index is 6 really a very simple thing. 7 It's simply the number of business -- the 8 percentage of businesses saying things have gotten 9 better in the last month, versus the percentage 10 saying things have gotten worse. 11 And when it's above zero, you know, the 12 balance is positive. 13 And, you can see a, little disconcertingly at 14 first, you might say, the service-sector index has 15 dropped below zero early this year. 16 However, what we saw the last -- I'm sorry, 17 in November of 2012, was a similar drop. That was 18 after "Sandy," which I'm sure everyone in this room 19 remembers well. 20 And, there is some evidence that we found, 21 anecdotally, that this recent drop is largely due to 22 the weather, that, I think you had said -- one of 23 you said, shaved a few tenths off GDP. 24 And in this region, it probably shaved quite 25 a bit more off economic growth, because it kind 1 of -- we're at the -- we were a big part of -- of -- 2 as the nation goes, we were hit harder than most of 3 the nation. 4 So -- and then the second chart here is our 5 forward-looking index, which didn't -- really, 6 those -- those have been really quite positive. 7 And so, I guess -- and these data are through 8 mid-February, so this is very current data. This 9 is, the latest readings are from early February. 10 And, in a nutshell, I think what I'd say is 11 that: I think -- again, this is -- this is sort of 12 a judgment call, but, we've been hearing an awful 13 lot about business being inhibited by the weather 14 in -- to some extent, January, but more in January 15 and early February. 16 And, right now, it's still cold. It's not -- 17 you don't have the snow and ice problems. 18 But, my sense is that this is having quite -- 19 has had quite a substantial but short-term effect on 20 economic activity. 21 And when the weather gets warmer, you could 22 see some pickup in demand. 23 And, I have -- the last slide I have is a 24 recap, and I don't think I need to read through 25 that. You guys can read them and look at them, but, 1 it's pretty much a recap of what I've talked about 2 for the last few minutes. 3 And, I should close off by saying what 4 I should have said at the beginning, which is: 5 These views are mine, and not those of the 6 Federal Reserve Bank of New York or the 7 Federal Reserve system. 8 Thank you very much. 9 ROBERT B. WARD: Thank you. 10 Thank you very much. 11 Any questions for Mr. Bram? 12 All right. 13 Last, but not least, Ms. Lowenstein. 14 RONNIE LOWENSTEIN: Okay, thank you. 15 And I will try to be brief, to get us all out 16 of here. 17 And I think that's not going to be too hard, 18 first of all, because Jason's covered some of what 19 I was going to cover; but, also, because my chart 20 package is largely self-descriptive. 21 So, you know, if you read through it, you'll 22 get to the same place. 23 The first chart, what I'm mainly talking 24 about is economic conditions in the city; and, 25 particularly, employment and real estate. 1 I'm going to end with some comments on the 2 city's fiscal outlook. 3 We'll be putting out our complete forecast 4 next week. 5 We've pinned the economics numbers, but, 6 definitely not the tax revenues; and, so, you know, 7 that will be just conjecture. 8 So starting off looking at city employment, 9 what you've got here is a long series, going from 10 '69 to the fourth quarter of '13. 11 We're starting at '69 because that's when the 12 reliable data starts. 13 And, it's seasonally-adjusted quarterly data 14 for the U.S., in green; and New York City, in red. 15 The shaded bars are the "U.S. recession" 16 shading. 17 And what you can see is basically what Jason 18 just said. 19 We hit an all-time peak, at least based on 20 reliable numbers. 4 million jobs in December, which 21 was great. 22 If you look closely at the downturns, and 23 Jason said a lot about all of the other downturns, 24 but, most recent downturn, if you look at 25 New York City's decline, you can see that city has 1 regained, roughly, twice as many jobs as it lost in 2 the downturn, which is a much better performance 3 than for the U.S., which, at this point, has 4 regained about 90 percent. 5 We, too, are looking at labor force 6 participation issues. 7 I think there are real issues about why, even 8 though New York City is gaining lots of jobs, the 9 unemployment rate has remained stubbornly high, 10 particularly contrasted with the U.S., where they 11 haven't gained nearly as many jobs, but the 12 unemployment rate has declined. 13 Some of that's labor-force-participation 14 conundrums. Some of that, I think, is the data 15 itself; and, particularly, the household-survey-data 16 problems. 17 And, we're looking more closely at the 18 demographics of it, and publishing on that in the 19 coming months. 20 Turning to where the jobs came from, and 21 where we expect them to come from, the -- there are 22 two pie charts on this page. 23 They both look at shares of New York City 24 employment growth. Not just employment, but 25 employment growth. 1 The left-hand pie shows what happened during 2 the expansion from 2003 to 2008. 3 The right-hand pie is our forecast for where 4 employment growth is coming from, from 5 2013 through '18, which is our forecast period. 6 The bottom line here is, we're still 7 expecting the biggest chunks of employment growth to 8 come from the four sectors that we got it from last 9 time, which is to say: Education and health care, 10 which grew even during the downturn; professional 11 and business services, leisure and hospitality, and 12 trade. 13 This time around, we're expecting a bigger 14 chunk of the jobs to come from the information 15 sector. 16 It's still pretty small, but it's growing 17 robustly. 18 But the big difference on the two charts is 19 securities, where, in the previous expansion, what 20 we got was, 9 percent of the employment gains were 21 coming from securities; while we're only expecting a 22 third of that, 3 percent of employment gains, going 23 forward, to come from securities. 24 Actually, we had that as a lower number, and 25 we ratcheted it up a little. 1 It's still, you know, just a third of the job 2 gains that we had seen before. But, of course, it's 3 not just jobs that count; it's the wages that come 4 attached to those jobs that matter, in terms of the 5 city revenues. 6 And there are big differences in wages across 7 sectors, which I'm sure all of us understand. 8 So, if you look at the next chart, on 9 employment-change forecast and average wage, you can 10 see that the four sectors that are contributing the 11 most jobs in our forecast, and they contributed the 12 most in the recent upturn, three out of four of them 13 are -- you know, have wages that are certainly below 14 the average for the city. 15 The exception to that is professional and 16 business services, where average wage is 107,000 per 17 year. 18 I should explain that, this is not -- this is 19 the wage that we're forecasting. We forecast 20 employment by subsectors. 21 And, professional and business services is a 22 really broad sector. You've got administrative and 23 support services on the low end, and you've got 24 professional and technical on the high end. 25 In our forecast, the split is pretty much 1 even between the two groups, which is giving us -- 2 producing the $107,000-a-year forecast for average 3 salaries that we've got. 4 If you go down a little further on the chart, 5 you can see that the information jobs we're 6 expecting to add also pay well. Roughly, $120,000 a 7 year, in 2013. 8 But then if you go down just a little 9 further, you see that, of course, by far, the 10 highest wages are coming -- wages and salaries are 11 coming out of the securities sector. 12 Those average wages and salaries include 13 bonuses -- cash bonuses. 14 They're are high. 15 They're much higher than other sectors; and, 16 so, every job you add in the securities adds a lot 17 more than multiple jobs in the others. 18 I should also note that, this number, this 19 343,000 we're forecasting -- well, which we've got 20 for 2013, is more than a fifth below what the 21 '07 peak was in real terms. 22 I don't expect collections or anything for 23 these people, but, yeah, they're certainly earning 24 less than they were. 25 And you can see that in Jason's charts. 1 Okay, so, wages are important. 2 So, the next set of pie charts shows you 3 what -- where the sources of wage growth are going 4 to be, going forward. 5 And, the bottom line on this is: Look at the 6 securities sector. 7 In the expansion of '03 to '08, the 8 securities sector accounted for 56 percent of all of 9 the increase in aggregate wages and salaries over 10 the period. 11 It's all the additional monies that were 12 earned in New York City. 56 percent of that amount 13 came out of this particular sector, that employs 14 about 5 percent of city employees -- city 15 employment. 16 If you go to the forecast, we're now 17 anticipating the securities sector will be 18 responsible for 13 percent of the increase in wages 19 and salaries over the period. 20 That's a huge difference. 21 I think it leads to one of the big questions 22 on our fiscal forecast, which is: Can the city of 23 New York continue to add jobs the way it's added? 24 And we've added jobs nicely, as Jason pointed 25 out, without a booming securities sector. 1 Okay, a closer look at the securities 2 industry is on the next page. 3 Without going into all the details: 4 The top panel looks at New York Stock 5 Exchange member firms' revenues. 6 The bottom panel is their expenses. 7 The difference between the two is, of course, 8 profits. 9 There, you can -- if you look closely, at 10 your leisure, you'll see there are humungous 11 changes, you know, really volatile changes, in both 12 revenues and expenses. 13 We swung from huge losses in '07 -- 2007 and 14 '8, on the order of $63 billion. 15 And this is just for Stock Exchange member 16 firms. It's a subset of the securities industry. 17 It's not all of it, but it's a good proxy for the 18 industry as a whole. 19 Lost 63 billion, from '07 -- in '07 and '08. 20 Then swung to profits of 61 billion in '09. 21 Since that rough ride, what we see is that, 22 on the bottom panel, expenses are remaining low. 23 That's primarily because interest rates have 24 been very low. 25 But revenue is, looking at the top panel, 1 roughly, half of what they were during the boom. 2 It's not at all clear that those revenues 3 will rise again. 4 For one thing, interest rates are going to be 5 going up. 6 And although the industry earns something on 7 this -- when interest rates goes up, it costs them a 8 lot more in terms of borrowing. 9 The other reason, is that -- let's see, 10 interest rates. 11 Oh, and the other reason is, of course, 12 tighter regulation. 13 So the combination of higher interest rates 14 and tighter regulations suggests to us that it's 15 gonna squeeze the profits' forecast. 16 So far this year, the New York Stock Exchange 17 member firms have earned $13 1/2 billion. 18 Our forecast for the year, as a whole, is 19 something on the order of 18 billion. 20 But going forward, we're looking at profits 21 more in the 14 billion -- 13, 14 billion dollar 22 range. 23 Turning to real estate, the tentative 24 property tax roll was just released last week for 25 the city. It shows that market values are up 1 6.6 percent. 2 Now, that's gonna come down a little as 3 people challenge their assessments, but it's still a 4 very strong growth. 5 And, the growth was strongest in the 6 commercial area, and less so in residential. 7 What you've got are pictures -- words on the 8 left side and pictures on the right side. 9 The two graphs on the right-hand side of the 10 page show Manhattan condos and co-ops. 11 Condos are in blue, co-ops are in red. 12 And the top panel shows sale price. 13 The bottom shows volume. 14 And what you can see is, that the median 15 sales price of condos rebounded to $1.1 million in 16 2013. 17 And, that the -- in the bottom panel, you can 18 see that the sales volume has also been rising since 19 2009. 20 And both sales price and volume are at or 21 below -- well, at or above, sorry, their 22 prerecession peaks. 23 Turning to co-ops: 24 Manhattan co-ops' prices have been, roughly, 25 flat over the last four years. Since these are in 1 nominal terms, they've been drifting down in real 2 terms. 3 And, median prices hit two hundred -- 4 $650,000 in 2013. 5 But, sales volume has been increasing over 6 the past few years; although, it remains more than a 7 fifth below the 2004 peak. 8 Here's the same story in terms of outer 9 boroughs. 10 Given the mortgage problems and the mortgage 11 crisis, and the role of mortgages in the financial 12 crisis, it's not surprising that the biggest 13 difficulties were in the one-, two-, and 14 three-family home sector, and they continue to 15 struggle more than any other category. 16 So, the top panel again shows prices. 17 The bottom panel shows volume. 18 And one-, two-, and three-family homes are in 19 green on the top panel. 20 And what you can see here is, that median 21 sale prices rose to 470,000 -- 475,000 in 2013, but 22 remained more than 10 percent below their 2007 peak. 23 Then if you look at the bottom panel, the 24 volume of sales in two thousand -- in 2013 was only 25 about half that in 2004. 1 So, that's where the real weakness remains. 2 And, the numbers of these units is huge, 3 swamp -- far swamping what you're seeing in 4 Manhattan, and far swamping the number of co-ops and 5 condos in the outer boroughs. 6 So, it's really something that's hugely 7 important, and, is a major factor in our forecast. 8 Let me skip forward to commercial real 9 estate. It's on the next page. 10 Commercial has rebounded -- well, commercial 11 hurt more than residential in the downturn, and has 12 rebounded more than residential in the upswing. 13 What you see on the left-hand side of the 14 chart, this -- it -- the chart is 15 commercial-property sales. 16 Well, I'm showing both taxable sales in 17 billions, and the total number of transactions on 18 the same left-hand scale. 19 And it just so happens that they both work 20 together. 21 The taxable commercial sales, in dollars, are 22 in the -- are the line. And the bars are the number 23 of transactions. 24 And so what you can see, just looking 25 quickly, the number of transactions tanked, as did 1 the value of transactions during the downturn, but, 2 they've skyrocketed since then. 3 So the -- in the rebound, they've reached 4 55 billion in 2013. 5 And, if you look across, that's not so far 6 from the peak. 7 And there were 80 large commercial sales in 8 2013. And by "large" I mean, valued at over 9 $100 million, which is nearly as many as there were 10 in 2006. 11 Now, given that most of us would characterize 12 the expansion as a speculative bubble in 13 real estate, you know, this is good news, but also 14 cause for concern. 15 Let me end up with just some observations on 16 the City's fiscal outlook. 17 First of all, the biggest heed to the City's 18 fiscal outlook is the labor settlements. 19 Every City union is now working without a 20 contract, some of them as far back as 2009. 21 That's an issue. 22 And, there's talk, there's a lot of, you 23 know, discussion of, Well, it's gonna cost 24 $7 billion to deal with the problem. 25 And, I'd like to just debunk that right away. 1 First of all, we were the people who first 2 put out that scenario. And, we were sitting around 3 the conference table, saying: Well, what would have 4 happened if the teachers who didn't settle in the 5 prior round of negotiations got the 4 percent and 6 4 percent increases that the other unions got at 7 that point, and, then, the teachers and everybody 8 else got 2 percent a year since then? 9 And that adds up to something in the 10 vicinity, a little over $7 billion. 11 But that was a scenario, one scenario, out 12 of, effectively, an infinite number of scenarios 13 that I could sketch for you. 14 And what this page does is sketch a bunch of 15 them. 16 There's gonna be some -- you know, it could 17 be anything. 18 It could be wage increases. 19 It could be retroactive pay. 20 It could be bonus payments. 21 There's a lot of room for negotiation here. 22 And, how much it's ultimately going to cost 23 the City depends upon where they wind up. 24 So, you know, just take a look at the 25 various -- you know, I just picked a bunch of 1 scenarios at random. 2 We'll be putting more information out on 3 this. 4 But the key here is, we don't know how much 5 it's gonna cost yet, and I'm sure the administration 6 doesn't either. 7 And, finally, that's not the only question in 8 the city's outlook. And, you know, I can go on, at 9 length, in this, but, I just put what I thought were 10 the four biggest issues that the city is facing. 11 Obviously, the labor settlements are 12 number one. 13 But, more fundamentally, can the city 14 continue to grow jobs the way it's been growing, 15 given that we're looking at expecting a smaller, 16 less lucrative financial sector, going forward? 17 The City has got real problems with its 18 health and hospitals corporation, and its housing 19 authority. 20 Those were -- you know, it's likely that 21 those are gonna weigh more heavily on the new 22 administration than it did on its predecessor. 23 And, that's going to be an issue for the 24 City, fiscally, going forward. 25 And, then, nobody's even talking about the 1 cost of sustainability investments, where there's a 2 lot of discussion about, Are we getting our 3 reimbursement for "Sandy"? 4 But that's federal reimbursement. 5 The question is: Going forward, how much 6 we're going to have to be spending to deal with the 7 next one. 8 So let me leave it at that. 9 Thank you. 10 ROBERT L. MEGNA: Thank you very much. 11 Any questions? 12 Okay, I think that concludes our session for 13 today. 14 Staffs will be meeting, I believe, beginning 15 tomorrow, to hopefully come up with a consensus 16 revenue forecast. 17 The work that you've done will certainly help 18 inform that. 19 So, I want to thank you for coming, and for 20 your guidance. 21 (Whereupon, at approximately 3:32 p.m., 22 the New York State 2014 Economic and Revenue 23 Consensus Forecasting Conference concluded, and 24 adjourned.) 25 ---oOo---