Thursday, February 28, 2013 · 1:30 PM–3:30 PM · 2013–14 session
Finance, Ways and Means
1 NEW YORK STATE 2013 ECONOMIC AND REVENUE
CONSENSUS FORECASTING CONFERENCE 2 ------------------------------------------------------ 3
State Capitol, Room 124 4 Albany, New York 5 February 28, 2013
1:30 p.m. to 3:30 p.m. 6 7 PRESENT: 8 Robert L. Megna
Budget Director 9 New York State Division of the Budget 10 Senator John A. DeFrancisco
Chairman 11 Senate Finance Committee 12 Senator Malcolm A. Smith
Vice Chairman 13 Senate Finance Committee 14 Senator Liz Krueger
Ranking Member 15 Senate Finance Committee 16 Assemblyman Herman D. Farrell, Jr.
Chairman 17 Assembly Ways and Means Committee 18 Assemblyman Robert C. Oaks
Ranking Member 19 Assembly Ways and Means Committee 20 Robert B. Ward
Deputy Comptroller 21 New York State Office of the Comptroller 22 23 24 25 1
SPEAKERS:PAGE QUESTIONS 2
Hugh Johnson 14 3 Chairman, and Chief Investment Officer
Hugh Johnson Advisers, LLC 4
Chris Varvares 32 110 5 Senior Managing Director, Co-founder
Macroeconomic Advisers 6
James Diffley 51 110 7 Vice President and Chief Economist
IHS Global Insight 8
Jason Bram 79 110 9 Senior Economist
Federal Reserve Bank of New York 10
Ronnie Lowenstein 92 110 11 Director
New York City Independent Budget Office 12
Robert B. Ward 109 110 13 Deputy Comptroller
NYS Office of the Comptroller 14 15 16 17 18 19 20 21 22 23 24 25 1 ROBERT L. MEGNA: Good afternoon. 2 I think I would like to start the festivities 3 today of the 2013 Economic and Revenue Consensus 4 Forecasting Conference. 5 And, today, we have no name tags in front of 6 us, so I guess I will have to introduce people, but 7 I know you know everyone that's here. 8 First let me recognize: 9 Senator John DeFrancisco, Chairman of the 10 Senate Finance Committee; 11 Senator Malcolm Smith, Vice Chairman of the 12 Senate Finance Committee; 13 Assemblyman Herman Farrell, Chairman of the 14 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 let me also recognize, on the other side 20 of the table, Bob Ward, Deputy Comptroller. 21 As we do every year, each member will have an 22 opportunity to provide some brief opening remarks. 23 Afterwards, we'll hear testimony from a 24 cross-section of experts who will offer their 25 perspectives on the current economic and revenue 1 situation for the state. 2 I guess I'll start, since I'm already 3 talking. 4 Clearly, there's some positive news in the 5 New York economy. 6 The state labor market remains strong, adding 7 136,000 private-sector jobs between the third 8 quarters of 2011 and 2012, ranking, I believe, 9 seventh in the nation, so we're actually in a place 10 in New York often is not in, which is, growing 11 faster than the nation, on a whole, on the 12 employment situation. 13 New York remains a tourist mecca, drawing 14 visitors from all over the world to our state's 15 unique and natural attractions. 16 The state's business-services industry serve 17 a growing global market. 18 And the social-media world, which is a new 19 industry to New York, is transforming New York's 20 already important information and communications 21 sector. 22 But, what we are always most concerned with 23 in government, given the difficult fiscal situation 24 we've had to live through in the past few years, is 25 how we manage risk. 1 And let me just identify a few of the risks 2 that we have, and I know that most of the panelists 3 will address these. 4 You know, perhaps the biggest risk we face, 5 is that Wall Street firms have been altering their 6 executive compensation practices in response to both 7 the Dodd-Frank legislation and to the economic 8 realities of the world we live in now. 9 We've observed dramatic reductions in the 10 cash portion of bonuses in favor of equity grants, 11 with large portions of compensation being deferred, 12 and subject to clawback. 13 And the folks that we talked to say that this 14 is the world we're going to be living in for the 15 foreseeable future. 16 These changes have challenged our forecasting 17 models in ways that we really have not fully sorted 18 out. 19 This is exactly the right forum for folks to 20 give us their opinion on this uncertainty, and where 21 we must be going, and how we should face our revenue 22 projections in that kind of world. 23 Obviously, the other piece that's having a 24 very significant impact on our revenue structure is 25 fiscal policy at the federal level. 1 We entered 2013 under a vastly different tax 2 regime than that of 2012. 3 The end of the payroll-tax holidays taking 4 $100 billion in disposal income out of the national 5 economy, and we still don't know how this will 6 affect household spending. 7 Probably more importantly for state tax 8 revenues, at least in the short run, is the 9 January -- on January 1, marginal tax rates at the 10 federal level rose on the nation's wealthiest 11 households, and we know that the anticipation of 12 such changes evoked profound changes in the pattern 13 of tax collections. 14 We are able to actually observe some of this 15 shifting. 16 For example, we observed a surge in 17 withholding collections in December and early 18 January. 19 And we can say with some confidence, there is 20 evidence of firms paying their employees early in 21 order to avoid higher 2013 federal taxes. 22 But taxpayers also respond to tax changes in 23 ways that are not that easily observable, such as, 24 realization of capital gains, and partnership and 25 dividend distributions, that, in many cases, won't 1 show up under our April due date for federal and 2 state taxes. 3 Under these circumstances, we need to be 4 particularly careful not to misinterpret a one-time 5 revenue change for a recurring positive benefit to 6 the state's revenue structure. 7 Again, adding further to the veil of 8 uncertainty that we're facing is the federal 9 sequester cuts, the magnitude of which we are going 10 to see over the next few days and few weeks. 11 It's against this backdrop of these 12 uncertainties that we embark on the 13 revenue-consensus process. 14 It's important to note, that while there are 15 differences in our forecast at a fundamental level, 16 there is broad agreement that New York is facing a 17 sea change in the nature of its revenue base because 18 of some of the issues we've discussed. 19 We all believe, it seems that our revenue 20 situation is particularly fragile in this 21 environment. 22 Again, we would continue to urge that we take 23 the tough, responsible, necessary actions proposed 24 in the Executive budget, to strengthen, and continue 25 to strength, the state's fiscal position, which we 1 believe, with the help of the Legislature, and the 2 folks on this panel, that we have been able to do 3 over the past two years in a very significant and 4 successful way. 5 Again, I don't want to talk too long, so I'm 6 going to turn it over to Senator DeFrancisco. 7 SENATOR DEFRANCISCO: Thank you very much, 8 and -- Budget Director Megna. 9 And thank you, to all the guests here who are 10 going to speak today. 11 We're here to get your opinion -- opinions on 12 an economic forecast for New York State. 13 And having been here before, I know that it 14 will be a unanimous opinion, there will be no 15 disagreement among any of you, and it will be clear 16 and definitive. There won't be any waffling, one 17 way or the other, in any of your statements. Like 18 true economists, give information. 19 But in all seriousness, it is extremely 20 important, because if we're off on our revenue 21 forecasts, the budgets will be off. 22 The budget will be off, and we can find 23 ourselves in another financial disaster that we're 24 trying to get ourselves out of, under the leadership 25 of the Governor Cuomo and the Legislature now. 1 So, your opinions are very important. We're 2 going to listen to them carefully, and so that we 3 can reach a consensus among us at the table, as far 4 as, what revenues and what taxes we can reasonably 5 expect in this upcoming year. 6 So, with that said, I thank you, on behalf of 7 the Senate, for being here, and we will take very, 8 very seriously your expert opinions, because of your 9 qualifications, and your reliability from past 10 budget-forecast meetings, such as this one. 11 Thank you. 12 ROBERT L. MEGNA: Well, I guess while we're 13 with the Senate, Senator Smith, have any... 14 SENATOR SMITH: Thank you very much, 15 Budget Director Megna. 16 And, again, as my colleague 17 Senator DeFrancisco has indicated as well, we are 18 looking forward to the information that you will 19 impart to us today. 20 Obviously, we are in a very fiscal uncertain 21 period, as you know. We have varying distinctions 22 as to the revenue forecast in each of our houses. 23 And, clearly, accuracy of that is going to be 24 critical, as we look to dispense or utilize those 25 forecast reserves for what we consider to be very 1 important areas of our budget. 2 So, we appreciate you being here today. 3 And as my colleague Senator DeFrancisco 4 said, I know that there will be consensus from each 5 and every one of you, and we look forward to your 6 expert opinion. 7 Thank you very much. 8 ROBERT L. MEGNA: Thank you, Senator. 9 And, now, Assemblyman Herman Farrell. 10 ASSEMBLYMAN FARRELL: Thank you. 11 I am pleased to be here today. 12 I look forward to hearing the panel's 13 thoughts on the economic outlook for both the state 14 and the nation, with particular focus on your views 15 about the outlook of New York State's economy, and 16 the risks we face going forward. 17 I'm also interested in hearing your 18 assessment of the pace of the national recovery, and 19 how that will affect the progress of this state's 20 economic recovery. 21 This analysis is important to us as we look 22 to gauge the economy and the acts as effectively as 23 possible. 24 Your independent viewpoints, along with 25 today's discussion, helps to prove a solid 1 foundation as we discuss and debate various aspects 2 of the budget. 3 And I thank you for being here, and I look 4 the forward to hearing your comments. 5 Thank you. 6 ROBERT L. MEGNA: Thank you, Assemblyman. 7 Let me turn it over to Senator Krueger. 8 SENATOR KRUGER: Thank you, Bob. 9 I also appreciate everyone coming and 10 participating this and each year. 11 As has been said, we are in the process of 12 coming to revenue consensus, and it's a context of 13 the expenditures that we can make in our state's 14 budget. 15 As we all know, budgets are a combination of 16 a political document, a policy document, an attempt 17 to be as close to the facts as we can with be with 18 the numbers. 19 I always find this process extremely 20 valuable, to hear from the outside experts, because 21 we are attempting to make our best guestimates about 22 what the future will be. 23 We need to budget for our 12-month periods, 24 but we have to make a huge number of assumptions 25 about what the economic realities facing our state 1 and our nation are going to be, and that's a moving 2 target. 3 And you are all in the business of trying to 4 keep track of that very complicated moving target. 5 So, the more we can learn from you, 6 hopefully, the more fact-based our political and 7 policy decisions, about how to deal with the budget 8 of the state, are. 9 So I appreciate, very much, your coming and 10 giving us your expertise each year. 11 Thank you. 12 Thank you, Bob. 13 ROBERT L. MEGNA: Thank you, Senator. 14 Assemblyman Oaks. 15 ASSEMBLYMAN OAKS: Thank you, 16 Budget Director Megna. 17 Thank you all for being here. 18 This is -- each of our conferences, as well 19 as the Governor, have put out our estimates, and our 20 conference came in a bit under the estimates of the 21 Governor's, and the lowest of the other conferences, 22 kind of projecting where we're going to be, and, 23 both in -- or I should say, both in personal income 24 taxes and user taxes, but, also more so, to a 25 greater degree, in the corporate taxes that the 1 state might realize in the coming year. 2 And so I think uncertainty is an issue. 3 And I know that the Budget Director, you 4 know, obviously referred to taxpayers' actions and 5 corporate actions in this year with some of the 6 uncertainty. 7 We've created some in the state. We've 8 deferred some business tax credits and other things, 9 so I think we've changed the tax structure. 10 Whether we make that permanent, or let expire 11 the other one, I think those are messages that we 12 need to do. 13 But I guess, from the panel, as you give your 14 differing considerations, certainly, I'll be 15 listening, and would hope to have you maybe respond 16 to the corporate thing of, you know, Do you concur, 17 or are we right to have some greater concern in that 18 way? -- as well as your other comments that you 19 make. 20 So thank you very much for being here. 21 ROBERT L. MEGNA: Thank you, Assemblyman. 22 Now I would like to ask if 23 Deputy Comptroller Ward has some comments? 24 ROBERT B. WARD: Thank you, Bob. 25 I just want to, on behalf of 1 Comptroller DiNapoli, express our appreciation to 2 the expert panel of economists who are here with us, 3 and we look forward to learning from you today. 4 ROBERT L. MEGNA: Okay. I think we have 5 traditions in this conference, and our tradition 6 usually is, that we start from left to right here. 7 So, I'd ask if Hugh Johnson would like to 8 start off our panel. 9 HUGH JOHNSON: Thank you very much, 10 Director Megna. 11 Members of the Senate and Assembly, thank you 12 very much for, once again, inviting myself, and all 13 of my associates here, to talk to you about what's 14 currently going on, to give you our assessment of 15 what might lie ahead for the national economy and 16 the state economy, how it might affect -- as 17 Senator Krueger said, affect some of the important 18 variables with the current revenues for fiscal year 19 2013 and fiscal year 2014, and beyond, if we can. 20 I'm going to pretty much follow the way I've 21 done it in the past. 22 You all received a handout, and to some 23 extent, more so than in the past, I'm going to refer 24 to specific pages of that handout, and, hopefully, 25 I'm not going to take too long a time. 1 The first five pages summarize -- summarize 2 our -- mine and our view of what's going on in the 3 school of Oz, and tell us a lot about some important 4 parts of the current financial and economic 5 environment. 6 The methodology which I used in the past, and 7 continue to use, is to identify important trends 8 that are unfolding in the financial markets, in 9 addition to identifying the state itself, important 10 trends in monetary and economic variables. 11 And the purpose of doing that, is to identify 12 where we might be, in the beginning, the middle, or 13 the end of the current cycle, a cycle which consists 14 of three parts: a stock-market cycle, followed by a 15 business cycle, followed by an interest-rate cycle. 16 And our work has suggested that the financial 17 markets perform, and the economic, monetary, and 18 economic variables perform, very specific ways at 19 different stages of the cycle. 20 So before we get on to quantifying what the 21 outcome would be in 2013 and 2014, it's useful to 22 know where we are in the current cycle. 23 It's also useful to know if there happened 24 to have been a mania -- and there certainly was in 25 the housing sector of the economy -- where we are in 1 that mania, because it will affect the magnitude of 2 the outcome. 3 So, having done that, and, again, I'll be 4 brief, and summarize what's contained in the first 5 four pages of my handout. 6 And it essentially says something I think 7 that is fairly well recognized, and that the 8 financial-market performance has been quite 9 positive. 10 Not only is it the case that the stock market 11 has been going up, it's also the case that investors 12 generally have been, not in all cases, but migrating 13 to the so-called "bull market," economically 14 sensitive sectors of the economy which they 15 ordinarily do when prospects for -- in the view of 16 investors, prospects for the economy improving. 17 Small capitalization, mid-capitalization 18 stocks are outperforming large-capitalization 19 stocks. 20 It is riskier small and mid-capitalization 21 stocks outperforming large-capitalization stocks. 22 It's also the case that we've seen interest 23 rates rising. 24 The yield curve is measured by the difference 25 between a yield and a 10-year treasury. 1 A 91-day treasury bill has been widening, or 2 steepening, as interest rates rise. 3 Quality spreads in the credit markets, as 4 measured by whatever the difference between the 5 yield on a Baa corporate bond and a treasury, or the 6 difference between the yield on a junk bond and a 7 10-year treasury, have been narrowing. 8 Again, a suggestion, a fairly clear and 9 strong suggestion, that investors are willing to 10 take greater risk. And investors, collectively, 11 don't do these things, or don't take greater risk, 12 unless they believe prospects for the economy for 13 2013 and 2014 are getting better or are improving. 14 The performance in the financial markets, 15 and, again, this is just a summary, a quick summary, 16 of what's contained in the first five pages of my 17 handout, confirmed by the performance of important 18 monetary and economic variables. 19 It's very clear that those curves continue to 20 be accommodative. And based on testimony that we've 21 heard this week from Chairman Bernanke, that they 22 are likely to continue to be very accommodative, at 23 least through 2013, and probably most of the way 24 through 2014, although, that, we can perhaps, as a 25 panel, talk a little bit about. 1 Nevertheless, the Federal Reserve has been 2 accommodative. 3 Bank lending, whether it's lending to 4 businesses or real estate, is improving. 5 Domestic money or liquidity conditions are 6 positive and improving. 7 There's enough money, as measured by M2, to 8 drive both the economy and the financial markets. 9 And as you might expect, leading indicators 10 for the economy, indicators that tell us where we're 11 going, not where we've been, have been -- generally, 12 have gone from a, sort of, on-again, off-again-type 13 performance to now. 14 I would say an on-again performance, with the 15 index doing fairly well in five of the last 16 six months. 17 So the message in the financial markets, 18 which is confirmed by the performance of important 19 monetary and economic variables, is that the -- we 20 have further to go in this current stock-market, 21 business interest-rate cycle, or, that the economy 22 should continue to expand in 2013 and 2014. 23 Embedded in, or implicit in, the performance 24 of the financial markets, is that, although there 25 needs to be concern about the sequester and fiscal 1 policy in Washington, although there needs to be 2 concern about other significant risks for the 3 forecasts that you hear of, that those -- those 4 events, or, phenomena, if you may, are unlikely to 5 derail the current cycle. 6 They may impact the current cycle, and I'll 7 get to that in just a second, but they're not likely 8 to derail the current cycle. 9 And that's very important, particularly for 10 the performance of the equity markets. 11 The next thing I would like to do is briefly 12 quantify what I think is -- in numbers, what's going 13 to be the outcome for the U.S. economy, as well as 14 the New York State economy. 15 If you turn to pages 6 and 7, particularly 16 starting at page 6, you'll see numbers which, 17 essentially, summarize what I think is going to be 18 the outcome for, the U.S. on page 6, and the 19 New York State economy on page 7. 20 There's a lot of numbers there, but, 21 essentially, if you look at 2012, '13, and '14, you 22 see that the economy is likely to continue to 23 expand. 24 I would urge those that care about all of 25 these numbers to spend some time on the numbers. 1 There is no number on page 6, regarding the 2 national economy, which I think is an outlier, or 3 one that you need to be really concerned about. 4 They're all very consistent with -- 5 And, incidentally, the starting point of this 6 forecast is the consensus forecast for the economy, 7 for consumer inflation, as well as the federal funds 8 rate, as a measure of Federal Reserve policy. 9 But all of these numbers, which will be 10 important in determining what happens to 11 New York State, and what happens to revenues, I 12 don't think there's any one that is really such an 13 outlier that it needs to be -- it needs to be 14 debated at length, except for perhaps, one; and that 15 is -- that is my forecast for the yield of the 16 10-year treasury, which both short-term and 17 long-term interest rates I have being fairly stable, 18 in response to unchanged Federal Reserve policy, 19 through 2013 and 2014. 20 The consensus, and many forecasters believe, 21 that the forecast for the yield on the 22 10-year treasury is wrong, or that it's going to 23 trend in an upward direction through 2013 and 2014. 24 That is, perhaps, the only number that's 25 debatable. 1 The next page contains, that's page 7, at the 2 top of the page, my forecast for the variables that 3 will impact the revenues -- the outcome for New York 4 State; and, therefore, its revenues. 5 I think it might be useful -- it might be 6 useful to go to -- to compare -- to compare the 7 numbers for New York State, and the -- a national 8 economy. 9 And to do that, I've included tables on 10 page -- at the bottom of page 12 -- a chart and 11 tables at the bottom of page 12, which are worth 12 looking at. 13 If you look at the chart on the top, on 14 page 12, it shows the year-over-year change in the 15 index of coincident economic indicators for the 16 U.S., and the year-over-year change in the index of 17 coincident indicators for the state of New York, 18 you'll see that they track each other, or that 19 there's a -- you know, a remarkable coincidence, or, 20 remarkable mapping, shall we say, of the two. 21 If you look at the table below that, it shows 22 what I -- what I believe will be the outcome for a 23 number of variables that measure the performance of 24 the national economy and the state economy. 25 And I think you should focus on the two kinds 1 to the right, 2013, 2014, and you'll see a 2 remarkable similarity that -- that when you look at, 3 not only GDP, whether we look at real GDP, 4 coincident indicators, employment, or the household 5 survey, you'll see that what we're likely to see in 6 2013 and 2014 is that the performance of the state 7 economy is going to look very much like the 8 performance of the -- of the national economy. 9 Now, having said that, there are a couple of 10 brief observations which I think are worth making. 11 First is, the observation, we're in the 12 45th month of this recovery. 13 If we look at economic history, there have 14 been 33 recoveries since 1854; the average recovery, 15 38.7 months. 16 There have been 11 recoveries since the 17 Second World War; the average recovery of 18 58.4 months. 19 I'm not sure that observation is worth much, 20 except to say, simply, that we're not at the stage 21 of the stock-market economic recovery, this cycle, 22 where we've got to be on our toes looking for those 23 signs of signals that tell us that we're at the end, 24 or near the end, of the current cycle. 25 As I said, looking at the performance of the 1 financial markets, and important -- important 2 financial and economic variables -- monitary and 3 economic variables, I don't see those signs that 4 tell us we're at the end, at least not yet, but we 5 need to be watching closely. 6 The second observation, which is, I usually 7 call it "whimsy," but it turned out to be a little 8 less than whimsy, and that is, that there's a 9 tendency of the consensus forecast of the national 10 economy, and therefore the state economy, to trend 11 in one direction during the forecast period. 12 And the forecast of 2013 -- for the national 13 economy in 2013, have been -- the consensus being, 14 now, at 1.9, have been trending low. 15 The implication of what I say, is that, 16 there -- it may be the case that our forecast for 17 2013 are too high, and may turn lower over the 18 course of the coming months. 19 The question which that raises is: Are there 20 any events out there, Hugh, or anyone else, that 21 might cause that forecast to turn lower. 22 And the answer to that question is -- I think 23 is, as Director Megna has suggested fairly clearly, 24 is there certainly are such events. 25 That, the first event that comes to mind, of 1 course, is the level of fiscal restraint -- or let's 2 just say, fiscal policy in Washington. 3 I've included a number of tables which -- 4 which -- 5 Let me just see where they are right now. 6 -- which measure -- 7 Excuse me for just a second. 8 This is all under -- this is all -- this 9 starts anew, on the bottom of page 7, but, really, 10 it's tables on page 8 and page 9. 11 And what the tables on page 8 and page 9 do, 12 is simply this: 13 It shows you that the forecast, first of all, 14 on page 8, of the national economy. 15 And then it also shows you, for comparison 16 purposes, a forecast for the national economy, and 17 all of the variables that are important, of -- as -- 18 as when -- when we look at the forecast submitted or 19 offered by the Congressional Budget Office. 20 And you should, again, focus on 2013 and 21 2014. 22 And if you do that, and no surprise to 23 anybody here, is seeing whether we look at real GDP; 24 nominal natural GDP; employment -- the employment, 25 rate; I'll talk in a second about personal income 1 and wages; but, corporate profits; you'll see that 2 if, indeed, the sequester takes place -- 3 Which incidentally, as we all know, is going 4 to take place on March 1st. How long it lasts, I 5 don't know. 6 -- but, if the sequester takes place and 7 nothing is done about it, then the outcome for the 8 national economy will be certainly less than the 9 current consensus forecast, or, real gross domestic 10 product in 2013 will grow by about .5 percent less 11 than the consensus; that makes 1.4. And also, in 12 2014, by about 2/10 of 1 percent. 13 And each of the other variables also we think 14 will be weaker. 15 The table that I have given you on page 9, 16 measures the impact of the sequester on the 17 variables for New York State. 18 And just as you might expect, the variables 19 for New York State are equally [unintelligible], if 20 that's the right way to say it, or weakened, as a 21 result of the sequester, again, in 2013 and 2014. 22 Nominal gross domestic product, 3.4 percent 23 in 2013. If the sequester takes place, it come in 24 at 2.9 percent. 25 Real gross domestic product, 2013, 1 1.9 percent, versus 1.4. 2 Again, you can go down through these numbers, 3 and it's important to do that. 4 But, nevertheless, you can see, quite 5 obviously, that the forecast that I offer, which is 6 the consensus forecast, would be too high if, 7 indeed, the sequester takes place, and continues. 8 And if you want to quantify it, I'll try to 9 do it. 10 I've done something else, which this is a 11 great risk, and that is -- 12 And I'll give this to you, Director Megna. 13 -- but, it's basically to quantify what that 14 means for the state of New York. 15 And the growth rate is just -- it's not a big 16 surprise, but -- [inaudible; speaker leaves his 17 seat]. 18 And, incidentally, I would say, forecasting 19 revenues is not something that I -- not something I 20 do, and I -- let alone, do well. It's not something 21 I do or do well, but, nevertheless, the point of 22 doing that is to try to determine, I know that the 23 sequester is going to have an impact on the national 24 economy, or at least we believe this, the 25 Congressional Budget Office. 1 Incidentally, I might add, the 2 Congressional Budget Office has a number of numbers 3 which you really should be suspicious of. 4 Their forecast for personal income -- 5 national personal income and wages are simply too 6 high, and I've adjusted those down. They're wrong 7 on those forecasts. 8 I mean, I don't know if they're wrong. Who 9 knows what the outcome's going to be, but they're 10 really very, very suspicious. 11 So, at any rate, I know you look at these 12 numbers very carefully, Bob, and you might look at 13 those. 14 So the point being is simply this, is that, 15 if the sequester takes place, it's something that 16 you all well know, it's going to affect the national 17 economy, it's going affect the state economy, and 18 it's going to affect the growth rate of revenues, 19 each of the tax revenues in New York State. 20 And my purpose is to quantify that for you, 21 and I've tried to do that in what I have given to 22 you. 23 The second risk, the second -- 24 So that's what I think is the biggest risk, 25 and, again, we're talking about an outcome which 1 doesn't -- is not a recession, but, nevertheless, is 2 a softer outcome, whether you look at the national 3 economy or the state economy or you look at our 4 revenues. 5 The second big risk is Europe. 6 And Europe is in a recession, as we know. 7 Based on what the IMF has suggested, as well 8 as looking at various things, such as leading 9 indicators for Europe, I don't see any chance 10 that -- well, let's put it this way, I don't see -- 11 it may be turning around in Europe, but I -- I don't 12 really see that. 13 Now, there's one chart that you just should 14 take a quick look at, and it suggests -- it suggests 15 something I think that might be of some interest. 16 The first -- and that is, the chart on the 17 top of page 10, this shows -- this shows the 18 performance of the consensus forecast, which is the 19 blue rung, for Europe. 20 And as you can see, like everything else, 21 it's coming down steady, as everybody has reduced 22 their views, or their forecast, for the outcome for 23 Europe. 24 At the same time, the bars show the index of 25 leading economic indicators for Europe. 1 And you'll see that, generally, the consensus 2 forecast for the outcome for Europe goes down. 3 You can see the leading indicators for Europe 4 goes down, but, the leading indicators for Europe 5 are now, perhaps, in response to a stabilizing 6 financial-market conditions, they're starting to 7 turn. 8 Which suggests to me that, yes, the IMF is 9 probably right, yes, Europe will probably be in a 10 recession through 2013, but, don't be surprised if 11 things turn in 2013 in Europe. 12 There's another reason I would downplay the 13 risk of Europe, and that's this: Is that 14 Federal Reserve policy has been very effective, in 15 my judgment, in keeping, for a variety of reasons, 16 downward pressure on the dollar, and as a result, 17 stimulating exports to other parts of the world to 18 offset the weakness in exports that we've seen in 19 Europe. 20 And they've been very effective, particularly 21 stimulating exports to Latin America. 22 And based on the testimony of the -- 23 Federal Reserve Chairman Bernanke, that that -- even 24 though he will say, and did say, very, very 25 strongly, that they're not in the business of 1 competitive currency devaluation or 2 "friendly neighbor" policy, it's very clear to some 3 members of the staff at the Federal Reserve, as well 4 as to some observers, that they're trying to 5 maintain downward pressure on the dollar, in part, 6 only in part, but an important part, to try to 7 keep -- to try to stimulate exports to other parts 8 of the world, to offset the weakness in exports to 9 Europe. 10 And they've been very effective -- very 11 effective in doing that. 12 So that's the second risk; and, again, I 13 downplay the risk. 14 If you take look at both risks; if we take a 15 look at the risk of the sequester, if we take a look 16 at the risk of Europe, they're risks that we really 17 have to be worried about, we have to be concerned 18 about. 19 And our forecast for the national economy, 20 the state economy, and revenues, and they're doing 21 it in March in Knoxville, our forecasts have to be 22 somewhat affected or impacted by both of those 23 events, but primarily by the sequester; that is, 24 perhaps the consensus forecast, or the forecast for 25 the national economy, might need to -- might need to 1 come down. 2 And we have to be very conservative -- very 3 conservative -- in forecasting revenues -- tax 4 revenues for the two -- not the 2013, but, 2013-14 5 fiscal year. 6 There's good news out there: housing. 7 Housing won't be as strong in 2013 as 2014. 8 I've got all the numbers in here. 9 It won't be as strong because of the very low 10 inventories, but it will still be very positive. 11 The rise in housing prices extremely 12 important to the deleveraging process. 13 The rise in housing prices, rises in stock 14 prices, is starting to create net worth, and the net 15 worth is making debt more manageable, so it's part 16 of the deleveraging process. 17 That's one of the positive, if not the most 18 positive component of the current financial and 19 economic landscape. 20 I'm going to finish right there. I've 21 covered a lot of ground. There's some other things 22 to cover, to talk about, but I think, in summary, 23 that's that, that's it. 24 And there's a lot of numbers there for you to 25 go through, to define more specifically, exactly 1 what's contained in my forecast. 2 It's basically a positive forecast, but one 3 that's -- that's -- I'm on the edge of my seat, 4 watching very carefully; particularly very 5 carefully, what's going on in Washington. 6 ROBERT L. MEGNA: Thank you, Hugh. 7 Do we want to do questions at the end, or do 8 we want to go to the -- 9 SENATOR DEFRANCISCO: Yes. 10 ROBERT L. MEGNA: Okay. 11 So I'm going to move right ahead to 12 Chris Varvares from Macroeconomic Advisers. 13 CHRIS VARVARES: Thank you very much. 14 It's a pleasure to be here again this year, 15 to share Macroeconomic Advisers' views on the 16 U.S. outlook. 17 As the title slide suggests, the U.S. economy 18 has been muddling through, and we expect it will 19 continue to muddle through, so we barely -- we 20 didn't make 2 percent growth last year, but we 21 expect to do somewhat better in 2013. 22 Economic policy hurts, and economic policy 23 helps. 24 Policy uncertainty out of Washington on 25 fiscal policy certainly is helping to restrain the 1 economy, as decision-makers and businesses are 2 uncertain of what will be coming down the pike. 3 Households and federal records are uncertain 4 of what they think may be, and so, certainly, 5 they're being more cautious in their spending plans, 6 across the board, and for businesses in their hiring 7 plans. 8 On the other hand, monitary policy has its 9 pedal to the medal, and it is helping the economy, 10 and we expect it to continue to remain very, very 11 accommodative through the forecast horizon. 12 Let me turn to Slide 2, and give you the 13 30,000-foot view of our forecast. 14 So, over the second half of 2012, growth was 15 restrained in a variety of factors that contributed 16 to that. 17 In the third quarter, the drought certainly 18 held us back. 19 And in the fourth quarter, "Hurricane Sandy" 20 played havoc. 21 And there were some other special factors, 22 including a very unusual and sharp decline in 23 federal-defense purchases in the fourth quarter, 24 that followed a spike in the third quarter, but, on 25 net, it was still negative for growth over the 1 second half. 2 In addition, we saw sharp declines in 3 inventory investment, for a variety of reason, some 4 related to drought bringing down farm inventories, 5 some related to production losses associated with 6 "Sandy," but all of that made for a pretty 7 poor-looking fourth quarter. 8 Now, we did get an upward revision to the 9 fourth-quarter number this morning. 10 I guess our expectation was that it would 11 have been a little bit higher, and so we're still 12 waiting for additional revisions, to see if we get 13 something up closer to plus a half a point. 14 [Unintelligible] to early 2013, we're looking 15 for growth around, call it 2 to 2 1/4 percent. 16 We'll get, in the first quarter, some boost 17 from a rebound in farm output. 18 USDA projections are suggesting that farm 19 output will rise rather dramatically, and that will 20 add to the economic growth in the first quarter. 21 And then we expect continued acceleration as 22 we move into the second half of the year. 23 The assumptions with respect to fiscal policy 24 that we've incorporated in our base forecast are, 25 that there is no sequester. 1 And, obviously, we'll be changing that 2 assumption when we update our forecast and release 3 it next -- early next week. 4 We did do a special study of what the full 5 effects of a sequester would be, if it came, and if 6 it were more or less permanent; that is, not unwound 7 relatively quickly. 8 So for 2013, our base forecast would be, we'd 9 be looking for growth of about 2.6 percent on a 10 full-year, four-quarter, basis. 11 That's basically telling us the average of 12 growth over the four quarters of this year, 13 irrespective of the base that we jump off from in 14 2012, what the full sequester growth would come in 15 at, about 2 percent. 16 So our estimate is very close to the CBO's 17 estimate, and we get about a two-tenths or 18 three-tenths upward revision to the path of the 19 unemployment rate relative to our base forecast. 20 Now, you know, this is not a catastrophe for 21 the macroeconomic economy, but given that we're 22 trying to move growth to that level that would lead 23 to a sustained decline in the unemployment rate, a 24 permanent sequester certainly is harmful, from that 25 perspective, and because, if it's not done very 1 carefully, the microeconomic perspective of 2 prioritizing the spending cuts, it's stupid policy, 3 from both a micro and a macro perspective. 4 In 2014 -- so let me continue on about the 5 fiscal-policy assumptions. 6 I think what we now believe is most likely, 7 is after the sequester is triggered, perhaps in 8 combination with a compromise to avoid a shutdown of 9 the government at the end of March, as the current 10 continued resolution expires, that there will be a 11 deal, but with extended resolution through the end 12 of the fiscal year, with additional budget cuts that 13 might not be as severe as would be in the sequester, 14 but would make both sides -- both sides happy. 15 [Unintelligible] growth this, year in the 16 neighborhood of 2 1/2 percent, let's call it. We're 17 barely growing above trend, so we would see very 18 little decline in the unemployment rate. 19 Employment growth would be in the hundred and 20 fifty to hundred and seventy-five thousand range. 21 Assuming that there's a little bit of an edge 22 up in the participation rate, you just can't make 23 much progress on the unemployment rate this year, so 24 we would end the year at 7.6 percent. 25 We might do a little better in 2014, where 1 economic growth is anticipated to move slightly 2 above 3 percent, we could push the unemployment rate 3 down into the low 7 percent range. 4 So, we're in a slow-growing economy with 5 considerable economic slack, certainly in the labor 6 markets, as well as in the, sort of, industrial 7 capacity and product markets, and so we expect 8 consumer price inflation to remain very well 9 contained. 10 Last year it came in around 1 1/2 percent, on 11 a fourth-over-fourth basis, looking at the core 12 personal consumption expenditure price index. 13 We have the same number, 1 1/2 percent for 14 this year, rising to about 1 3/4 in 2014. 15 So, inflation, very well contained, staying 16 well below the fed's now explicit target of 17 2 percent, which is for headline, but since we 18 expect energy prices to edge down over this period, 19 headline inflation will be very close or slightly 20 below core. 21 So the Federal Reserve is now missing on both 22 sides of its dual mandate. 23 Unemployment is well above. It's sort of a 24 notional target, if you will, of 5 1/2 percent. 25 And inflation is running, I'd call it 1 significantly below the fed's explicit target of 2 2 percent on inflation, and so the fed is being 3 very, very aggressive. 4 And they've gone so far as to give us 5 explicit guidance about when they might begin to 6 raise the federal funds rate, in an effort to guide 7 the markets to expect that the funds rate increase 8 will come later rather than earlier, and by doing 9 so, it puts downward pressure on long-term interest 10 rates, with the expectation being, that as investors 11 then try to rebalance their portfolios to earn 12 better yields, it will raise the prices of other 13 risk assets: stocks and bonds and corporate bonds, 14 et cetera. 15 And by doing so, it not only lowers the cost 16 of capital for the economy, for businesses wanting 17 to borrow, but it also has positive wealth effects 18 for consumers, which as Hugh noted, we're now 19 seeing, not only in equities, but in a significant 20 upturn in home prices. 21 So the fed we expect will continue its QE3 22 through the end of this year. It may begin to taper 23 those purchases after the second -- after the middle 24 of the year. 25 And we do expect, we sort of take the fed at 1 its word, we're not going to see increases in the 2 federal funds rate, probably until at least the 3 middle of 2015, and probably into the second half. 4 So going to Slide 3, this sort of just 5 displays in pictures, the various slow crawl out of 6 the hole that we're in, in terms of GDP growth. 7 Annualized growth of GDP, starting in the 8 first half of 2013, barely above 2 percent, moving 9 to slightly below 3 percent by the end of the year, 10 and then, finally, to marginally above 3 percent 11 into 2014. 12 And as I noted, very little decline in the 13 unemployment rate. 14 If -- if you go on -- let's just skip ahead 15 to -- well, let's go to Slide 4. 16 So, really, uncertainties we're facing is, 17 the labor-force participation rate has declined 18 2 percentage points since the beginning of the 19 recession. 20 As a result, there has been more of a decline 21 in the unemployment rate than we would have 22 expected, given the rather weak growth of employment 23 that we've seen. 24 And I just -- I highlight this because it 25 means there's a lot of uncertainty around an 1 unemployment rate forecast if there is a cyclical 2 rebound in the participation rate. 3 It's certainly plausible to think that we 4 would have one, but the behavior of the 5 participation rate has been so anomalous, I think 6 we're just kind of in a bit of uncharted waters at 7 this point. 8 And that's important, because if you're 9 running any models that are calibrated on -- that -- 10 with -- with changes in the unemployment rate, they 11 may be somewhat misleading indicators, because we 12 may see not -- no decline in the unemployment rate 13 at a time when we're seeing rapid growth in 14 employment, if that labor-force participation rate 15 rises very quickly. 16 So it's just something to keep an eye on, if 17 you use the change in the unemployment rate in your 18 forecasting models. 19 Let's jump ahead to Slide 6. 20 So the inflation picture, basically, is one 21 where inflation remains very benign. We stay with 22 inflation running below 2 percent. 23 The red line in this chart is the annual 24 four-quarter change in the core consumption price 25 index. Very well behaved. 1 As you can see, ever since the recession, 2 with -- inflation fell, from slightly above 3 2 percent to slightly below 2 percent, and it's been 4 bouncing around in the 1 1/2 to 2 percent range, and 5 that's sort of where we would expect it to continue. 6 Notice that union labor costs also were very 7 weak; in fact, fell outright following the 8 recession, as firms moved very aggressively to cut 9 workers, and as wage growth decelerated, so that 10 union labor costs declined outright. 11 And that corresponded to a period when, 12 inflation running above the growth of the union 13 labor costs, profit margins expanded very, very 14 rapidly, and we pushed corporate profits to 15 record-high territories as a share of GDP. 16 So, here's a question: 17 Well, do we expect that that profit share 18 will remain at record highs, will it continue to 19 push higher, or will it turn around and decline as 20 it usually does a few years into a recovery? 21 Our expectation is, that because there's 22 still so much slack in labor markets, that wage 23 growth will be -- will continue to be well 24 contained, and, so, profit margins will not compress 25 very soon; that, basically, will remain at very high 1 levels. 2 But that would never be a risk to the 3 corporate-profits' forecast. 4 Of course, it's offset a little bit, if the 5 reason the corporate profit share is falling is 6 because compensation growth is growing faster than, 7 you get an offset, in terms of personal tax revenues 8 in place of corporate tax revenues. 9 Let's go on to Slide 8, please. 10 So, again, with the Federal Reserve missing 11 on both sides of its dual mandate, you can see here, 12 the green line is the federal funds-rate forecast; 13 so, no increase in the federal funds rate out 14 through 2014, as shown on the graph. 15 And, again, we believe the markets are -- 16 have been influenced by the feds, and did not expect 17 any increase until we get to twenty -- mid-2015, or 18 later. 19 Nevertheless, we do show that long-term 20 interest rates will begin to rise. 21 And the reason we do so, is because markets 22 don't sit around and wait for the federal funds rate 23 to rise. 24 The current level of the 10-year yield should 25 be somehow related to the expected 10-year average 1 of the federal funds rate, or other short-term 2 interest rates. 3 So, as you move closer to the date of the 4 eventual first tightening of policy, you're dropping 5 off zero from that 10-year average, and you're 6 adding 4 1/4 to the 10-year average, and so the 7 average is going to be rising as you roll forward in 8 time, even though the fed has not yet done anything 9 to raise rates. 10 With that, we would expect to see mortgage 11 rates rise also. 12 Now, that all sounds bad, but if you look at 13 the levels that they rise to, even by the end of 14 2014, they remain in historically very low levels. 15 So when we're looking at the cost of mortgage 16 finance, we would expect that mortgage rates would 17 remain very, very affordable, and housing would 18 remain very, very affordable, even though we're 19 seeing rates -- rates rise. 20 And the same would be true if we looked at 21 corporate borrowing costs. 22 The Baa yield that many -- most businesses 23 will pay, would remain at levels that are very, very 24 low. 25 In any case, there's been such dramatic 1 balance-sheet restructuring, referring to 2 rolled-over high-cost debt for low-cost debt, that 3 they just remain in very, very good shape. 4 If you look at Slide 9, this all decomposes 5 the growth of the economy into the -- so where it 6 comes from, personal consumption expenditures, which 7 is the biggest single component of GDP, of course, 8 always makes the biggest contribution. 9 I think what's normal here, is that, after 10 2010, when we had a good release of pent-up demand, 11 consumer spending grew fairly sharply and 12 contributed a lot to overall growth, we did see a 13 slowdown over the next couple of years. 14 And, it's going to take us a while to get 15 back, and it's -- it has to do with, you can almost 16 think of a boot-stepping: 17 Higher growth of consumer spending will make 18 businesses more confident to hire more workers; 19 When they hire more workers, it raises 20 income; 21 When income is rising, consumers feel more 22 confident and spend more. 23 So, we've got have that boot-step process 24 that we expect to continue gradual, as we go 25 forward. 1 Part of the story is, you know, Where does it 2 start? 3 Well, we think it's going to start on the 4 consumer side, because, again, as Hugh noted, we 5 have had some very positive wealth effects coming 6 from the very sharp rise in equity prices, as well 7 as more than a 7 percent increase in home prices 8 last year. 9 We expect that increase in home prices to 10 continue, but to slow a bit. Maybe a 5 percent gain 11 in 2013, followed by something like a 3 to 4 percent 12 gain in 2014. 13 So household balance sheets are in very good 14 repair. 15 I want to jump ahead to Slide 13. 16 Underlying the improvement in the overall 17 economy that we see is this gradual healing in 18 financial conditions. 19 There are two lines on this chart. 20 The red line at the bottom is the 21 interest-rate spread between the Baa bond yield and 22 the 10-year treasury yield. 23 We consent that this blowout during the 24 recession, during periods of financial stress, does 25 tend to move out. It's a good marker for financial 1 stress in general, even outside of this corporate 2 bond market. 3 And you can see that, in the last few months, 4 it has narrowed fairly sharply. And we the expect 5 some modest additional narrowing to a level that is 6 manageable, a little bit higher than the recent 7 historical average, but -- but, still, that 8 narrowing does continue to help the economy. 9 In addition, when we look at -- you know, the 10 other issue that we know is holding the economy 11 back, is the availability of credit to households, 12 especially mortgage credit. 13 We don't have a long history of a measure 14 called "banks' willingness to make mortgage loans," 15 but we do have a long history of this willingness to 16 make consumer installment loans. 17 And the important story here is, that this 18 line shows the new percentage of banks who are more 19 than willing than they were in the last survey 20 period to make those installment loans. 21 So when it's positive, it's good. It means 22 credit conditions for households are improving. 23 We even see, after a sharp drop during the 24 recession, when banks completely closed their doors, 25 they subsequently moved into possession -- position 1 of being much more willing to make these loans. 2 We've seen actual increases in consumer 3 credit at a very healthy pace, even outside of the 4 well-known expansion of student loans. 5 And so this very, sort of, gut picture on at 6 least slowly easing credit conditions to households 7 is something, in combination with the increase in 8 household balance sheets, that's going to make 9 consumer spending continue to be a -- at least a 10 slowly improving and consecutively larger 11 contributions to economic growth. 12 I want to jump ahead just to Slides 31 and 13 32, because I know these are -- maybe have some 14 relevance for the New York State economy. 15 Slide 31 shows the recent history of natural 16 gas and oil production, and we know that both of 17 these have turned up recently, and natural gas 18 especially, due to the application of fracking 19 technologies and horizontal drilling. 20 And, we don't have any reason to believe that 21 that won't continue to rise at a pretty heady pace 22 over the next several years. 23 And, of course, New York State is benefiting 24 directly from that, because some of that activity's 25 occurring close on the border in western 1 Pennsylvania -- or, eastern Pennsylvania. 2 So, it's -- it's something that should 3 continue to benefit the state, and may help to 4 cushion the state's economy relative to the national 5 economy; so, certainly, something that I would want 6 to take account of. 7 If you go on to Slide 32, this shows the 8 relative price of natural gas in the U.S. and in 9 Europe and China. 10 It's important that this divulsion in natural 11 gas prices can occur because, unlike oil, natural 12 gas is not traded in the global market. It's very 13 costly, and slow to move across, because it has to 14 be liquified, and then de-liquified. 15 So, the U.S. now has a tremendous energy-cost 16 advantage when natural gas can be used in 17 manufacturing plants to heat and power the plants, 18 as well as in the petrochemical industry, where 19 natural gas is a huge feed stock. It's used to make 20 fertilizers, solvents, plastics. And, so, the 21 petrochemical industry in the U.S. should have an 22 enjoy -- a very healthy expansion over the next 23 several years as a result of this big cost 24 advantage. 25 In addition, manufacturing, generally, 1 because of the cost advantage. 2 As a result of that, that's one factor in the 3 background for us, says that we will get a positive 4 contribution from that export over the next couple 5 of years, and it's one reason why our forecast is 6 slightly above consensus, because we're putting some 7 weight on this, that the consensus forecast 8 typically, over recent history, has shown no 9 positive contribution from the exports; in fact, a 10 small decline. 11 And our expectation is, that we'll have a 12 slight positive contribution. 13 And I -- so I think that's something that 14 needs to be wrapped into any forecast, and why the 15 U.S. may, in fact, perform slightly better than the 16 consensus forecast. 17 I'm sorry, let me just finish one point, one 18 last slide, Slide 36, because the question was asked 19 about key risks in the outlook. 20 And, so, this one does list, in relative 21 order, what we view to be the key risks. 22 So, we got a reminder of this with the 23 Italian elections, that the Europe -- Europe's fix 24 may fail. 25 After [unintelligible] comments last summer, 1 that he'll do what it takes, and after the 2 announcements of the so-called "LTROs," the 3 long-term repurchase operations, it looked like 4 Europe was on a path towards sort of getting its 5 problem fixed. 6 There seemed to be consensus towards a 7 banking union, that would sort of help shore-up the 8 banks, and -- which has -- turns out to be an 9 important lynchpin, for example, in the -- in 10 Spain's situation. 11 So, the risk here, still, as we're reminded 12 with the Italian election, is that Europe's fix, 13 which seems to be in the making, could still get 14 unwind. And every time it does, financial markers, 15 for example, the VIX spiked with the -- you know, 16 with the Italian election, and sovereign spreads did 17 widen out again in Europe, surprisingly, not very 18 much. 19 So it's telling us the markets are not all 20 that concerned about Italy. 21 China, we think could slow. 22 You know, we had a big worry that China would 23 slow sharply. 24 Now it seems like we've turned the corner. 25 The Chinese economy is firming, so that is a 1 downside risk that seems to be receding. 2 Home prices, again, we had a nice recovery in 3 home prices. 4 Every month, or quarter, that goes by that 5 home prices continue to rise, is a month that that 6 downside risk recedes, because it is more -- sort of 7 tells us that recovery is more for real. 8 And, you know, the other one, that's the 9 biggest near-term risk, is that, the sequester, and 10 other near-term fiscal restraint, simply comes too 11 much, too fast, and it restrains growth, hurts 12 confidence, and the economy just back to that 13 2 percent, or worse, growth path. 14 ROBERT L. MEGNA: Chris, thanks very much. 15 I guess we'll move to Jim Diffley from 16 Global Insight. 17 JAMES DIFFLEY: Thank you, Director Megna. 18 And, good afternoon, Senators and Assembly 19 members. 20 I'm glad to be here again. 21 I took your hint. A few of you mentioned the 22 need for a desire for consensus, and I think we've 23 gotten very close to consensus here. 24 I agree with everything they said -- well, 25 I'll say it a little differently, but, you know, 1 we're [unintelligible] a couple of similar themes. 2 I think my baseline forecast -- our baseline 3 forecast is pretty close to Hugh's, but Hugh 4 emphasizes the uncertainty, particularly with the 5 federal fiscal policy. 6 And I think, you know, now, that's the key 7 source of uncertainty. 8 I was in Washington yesterday, so, you know, 9 I was right in the center of it, in a sense. 10 But, you know, really, what's going on in 11 Congress, and with the federal budget process, is 12 really the key uncertainty. And it could be huge, 13 and -- in a negative direction, if you think about 14 going to the end of March, and think about the debt 15 limit, and what might, in a worse-case scenario, 16 happen. 17 Chris's forecast, a little more optimistic in 18 2013, but then he didn't have the sequester. -- I 19 believe you said; right? 20 And we had the sequester, but a short 21 sequester, and that becomes a key uncertainty for 22 us. 23 So let's move on, we've got a number of 24 slides here. 25 The -- our basic takeaway here is that the 1 economic outlook is brightening. It's brightening 2 from what seemed to be a severe slowdown in the 3 second half of 2012, and Chris explained sort of the 4 special factors that were behind that. 5 I won't. 6 We've already had, of course, the hit, as 7 Director Megna mentioned, from the ending and the 8 expiration of the payroll-tax cut, which we think 9 caused about a -- I think a 0.4 percent drop in what 10 would have been 2013 GDP growth, because of the 11 reduction in consumer spending. 12 But underlying all of this, and despite the 13 fiscal policy headwinds, we think the economy is 14 gaining momentum now in 2013. It's not going to be 15 fast growth. It's going to be a positive growth, as 16 my colleagues, I think, both agreed with earlier 17 today. 18 The immediate fiscal threat is sequestration. 19 That's the threat now. It's set to begin tomorrow, 20 and apparently it will. 21 Of course, Congress always surprises. 22 In our base-case forecast -- 23 I don't have a slide to describe exactly how 24 we view this. 25 -- we anticipated this about a month ago, 1 predicted it, guessed it, about a month ago, but we 2 think it would end by the end of March, in time for 3 the debt-ceiling agreement. 4 So, we'll see whether that's true, of course, 5 but that's a big uncertainty. 6 The two main factors I think, during the 7 year, if we go back to when we all were here last 8 year, that have brightened, one is the European 9 crisis, although, you know, there's still some 10 uncertainty there. 11 The financial problem in Europe seems to be 12 contained. 13 Sure, Europe's in a recession, and that's a 14 negative. It's a negative for New York exports, to 15 be sure. The northeastern part of the United States 16 is most adversely affected by that. 17 But the contagion of a financial meltdown in 18 Europe, the risk of that, the probability besides 19 that, is lesser than it was a year ago, okay, for 20 various policy reasons, in Europe. 21 The second thing, though, is housing has 22 clearly turned around. Real-estate markets, 23 residential real-estate building across the country, 24 is clearly on the upswing. 25 There's some uncertainty as to how strong 1 that is; and, frankly, the northeast, particularly 2 New York and New Jersey, has been not benefited from 3 that as much as the rest of the country. 4 But from the country as a whole, housing is 5 now a contributor to the growth, and we think will 6 continue to be so. Okay? 7 And that's my third bullet there: Needs 8 Support Growth. 9 Business fixed investment continues to be a 10 key driver. Businesses are sitting on a lot of 11 cash, and can, in fact, expand, and will, when 12 demand for their goods and services rises, as it has 13 been rising, albeit slowly. 14 Consumers are -- have been cautious, continue 15 to be cautious. 16 The payroll-tax cut works in the opposite 17 direction, of course, but we do have moderate and 18 consistent gains in employment now, and after-tax 19 income; and net worth going up in the stock market; 20 and with some, now, improvements in home equity, 21 less underwater mortgages, you know, some prospects 22 for savings from real-estate wealth. 23 We think that the -- for all the risks 24 distributed out there, the upside and downside of 25 this are pretty evenly balanced. 1 We have a moderate growth forecast, so there 2 is an upside potential there. 3 The -- there are some big negative risks, in 4 terms of fiscal policy, but we think, in terms of 5 probability sense, they're pretty evenly balanced, 6 more so than they have been in the last couple of 7 years, where we had a greater risk of the 8 pessimistic scenario, as we all called it. 9 The graph on page 3 shows our forecast in 10 GDP growth. 11 In the blue box, you see the last quarter 12 report as the one to the left of the line. 13 It's slightly negative here, but, 14 yesterday -- or, this morning's release, we reversed 15 a minus 0.1 percent fourth-quarter GDP, to 16 plus 0.1 percent. 17 Effectively zero, and for the reasons that 18 I've already mentioned. 19 The -- we see GDP growth going up. 20 You notice the growth rates, though, are less 21 than 3 percent. 22 The "3 percent" line's important here 23 because, you know, in a rough sense, 3 percent GDP 24 gains are healthy. Anything less is barely denting 25 unemployment, as Chris mentioned correctly, and 1 substandard growth, but, growth nonetheless. 2 So, it takes a few -- a couple of years yet 3 to get back up above 3 percent, and then we can 4 proceed up-pace. 5 As a result, the unemployment rate slides 6 down very slowly. 7 You'll see in our New York forecast, we've 8 actually got the unemployment rate creeping up in 9 2013, because New York performed a little relatively 10 worse than the U.S., as opposed to what's happened 11 in the last few years, where New York's gains post 12 recession, been faster. 13 But, the unemployment-rate increase is not a 14 reflection of declines in employment. It's a 15 reflection of labor-force growth coming up, and 16 that's to be expected also in an expansion, so it's 17 not in all -- not all bad news there. 18 The next slide, the Institute of Supply 19 Management has become a key indicator for us in 20 monitoring business confidence. 21 We have both the manufacturing index. 22 Manufacturing grew very strongly post 23 recession. Slowed down. 24 We see signs of manufacturing now coming back 25 up and being in positive territory. 1 Non-manufacturing, a bit higher in the last 2 six months. 3 You see this -- the scale there of 2012, 4 through December. 5 So if we look at these -- page 5 here, you 6 see our GDP outlook. 7 The number for 2013 is slightly less than 2; 8 1.9 percent. Effectively, close to the same as 9 2012. We had those special factors in the second 10 half. 11 Consumption, down. It would have been higher 12 if it had not been for the payroll-tax cut. 13 Residential investment numbers have 14 double-digit growth, almost 20 percent growth, going 15 forward. But, again, that's coming off a very 16 severe low level -- decline at low level in home -- 17 housing construction. 18 Business fixed investment, muddling along a 19 little, but leading GDP growth, to be sure. 20 The federal government, of course, is a 21 negative, with budget cuts. 22 You can be for them, against them; it's a 23 question of their size now. They're not going to be 24 negative -- they're not going to be positive, that's 25 for sure. 1 State and local government, finally turning 2 into balance on net. Still slightly negative in 3 2013, but, we're all aware of the difficulties that 4 the recession has imposed upon state and local 5 governments. 6 And, export growth being strong, but not so 7 strong in 2013 as it will be. 8 And, imports follow U.S. consumption, 9 particularly. 10 One -- I'll go ahead and discuss here, and 11 Assemblyman Oaks asked for a discussion, but Chris 12 gave a nice discussion, of corporate profits. 13 Corporate profits have, sort of, sometimes a 14 counter-intuitive pattern in recession and recovery: 15 Very strong, and then weak, when the economy seems 16 to be recovering, because, as Chris mentioned, wage 17 demands start coming up. 18 We have a slightly more pessimistic view on 19 corporate profits in 2013 than I think I saw Chris 20 with here. The -- but it's for the reason, I think, 21 that wage growth would be slightly higher than 22 compared to output growth. 23 But, corporate profits are volatile for 24 precisely that reason. You're looking at two 25 growing variables, and it's the difference between 1 them that determines profits. And that can be quite 2 volatile as a difference, rather than as a level, 3 moving the way other variables move. 4 Turning to employment, again, we have 5 positive employment. Less than 2 percent, again -- 6 per year. 7 I guess you could consider 2 percent sort of 8 a normal recovery, and we haven't had that for a 9 while. It's a nice benchmark, but we do have 10 positive growth. 11 We look, though, and always think this number 12 is very interesting, that the January 2008 peak in 13 U.S. employment, when employment started to fall in 14 the recession, will not be achieved again until the 15 middle of 2014 for the U.S. 16 So that's how long it's taken to recover. 17 And, in fact, the jobs lost, we see the big 18 negative bars there in 2009, indicating that. 19 And, remember, that's a level of employment 20 at the same time the labor-force population growth 21 has been increasing. 22 So, unemployment remains high in 2014, as we 23 all agree. 24 I brought in a regional map at this point, 25 page 17, to show the pattern of that return to peak 1 employment across the country. 2 New York, as we mentioned, the state as a 3 whole, has outperformed the nation in terms of 4 gains. 5 And, in fact, late last year, did regain its 6 peak, which was at approximately the same time. It 7 might have been the fourth quarter of 2007. 8 I don't have the numbers right in front of 9 me, but this map is tailored for each state's 10 particular peak. 11 Okay? 12 On the other hand, that also leaves New York 13 in a position where growth -- recovery growth, 14 bounce-back growth, rebound growth, if you will -- 15 will be slower, in terms of rate of change, going 16 forward. 17 And that's noticeable in our forecast, as 18 you'll see. 19 I mentioned manufacturing-production growth 20 having slumped, you see just before the vertical 21 line here, but we think that is poised to return to 22 the natural cycle of manufacturing, as inventories 23 are repleted, and then rebuilt. 24 Remember, the deep, deep cuts in 25 manufacturing employment back in 2008 and 2009. 1 I think Chris mentioned it indirectly, I'll 2 mention it more straightly, that we think that 3 increase in crude-oil supplies will ultimately 4 restrain prices. There's a bit of a risk premium 5 built into prices. 6 Lately, you've seen gas prices edging up, 7 based on events in the Middle East, but the overall 8 supply is pointing towards moderating prices in the 9 future, for the reasons we suggest here. 10 And I didn't add it in here, but we've been 11 discussing natural gas quite a bit, as Chris did. 12 And we agree, the vast reserves of natural 13 gas in the U.S. that have been untapped, or 14 unleashed, now are -- have clearly decreased natural 15 gas prices by a lot. And U.S. manufacturing, 16 U.S. household, benefit from that, including 17 New York State, to be sure. 18 So on to consumer spending, I think, 19 generally, positive forces and negative forces 20 coming out of the recession, pent-up demand is very 21 important. 22 The durable side of the consumer spending has 23 been leading the gains that we have, auto sales in 24 particular. I'll show a graph of that coming up. 25 But rise in employment, finally, consistently 1 rising employment, gives consumers a lot of 2 confidence. Finally, income growth. 3 Easing credit conditions: Credit conditions 4 are still tighter than they have been, but they're 5 clearly improving, albeit slowly for the sector. 6 And includes what's happening in the housing 7 markets. 8 On the other hand, the negative side: 9 Tax increases, both, what just happened with 10 the payroll tax, which is sort of a special case, 11 the tax increase in the settlement, if you will, the 12 agreement that went into effect in January on 13 higher-income workers; 14 And then with respect to tax increases in the 15 future, as we do resolve, however Congress and the 16 President come to agreement, we expect tax increases 17 at some point in the future; 18 And, of course, there was the special case of 19 the capital-gains tax and dividend tax, going from 20 15 to 20 percent; 21 And there's another tax, that wasn't subject 22 to the agreement, based on the healthcare act, where 23 the capital-gains tax also went up by a couple of 24 percentage points, as scheduled on January 1st. 25 And then, of course, there's all sorts of 1 budgetary implications, in terms of timing of 2 income-taking, between late 2012 and 2013, that 3 Director Megna is so, quite justifiably, concerned 4 about. 5 The high unemployment, of course, there's 6 still high unemployment. You know, 8 percent in 7 New York State, over 7 percent for the U.S. 8 Relatively weak wage gains, although, they'll 9 improve with the labor market. 10 And then the continuing adverse effect on 11 household balance sheets, and the demand for savings 12 from lost housing wealth. 13 The housing market's improving, but there's 14 still a lot of equity lost in the housing bubble 15 bursting. 16 And, that, we don't think, in some places, 17 will ever be made up, or, certainly, over the long 18 time. It takes a lot of 3-to-5 percent gains in 19 house prices to make up the type of equity that was 20 lost in the few short years through the year 2007 21 and 2009. 22 Consumer sentiment: If you look at 23 sentiment, indices remain fragile. 24 And, what's happening in Washington clearly 25 doesn't help. 1 As part of the equation as well, I mentioned 2 the pent-up demand, we're in Slide 12, now. 3 Pent-up demand for durable goods driving the 4 growth. 5 Those blue bars are the durable side. 6 And "pent-up demand" just means, you know, if 7 you withhold, don't buy new cars for a few years, 8 there's going to be a natural demand for replacement 9 of cars. After all, they wear out. 10 Similarly with appliances, et cetera, there's 11 always some -- and it's a natural response of 12 households under budgetary stress. 13 So, that's a positive sign, moving forward. 14 On the other hand, remember, that those fast 15 rates in durable growth will eventually peter out as 16 well. Because of the pent-up demand, as you replace 17 those items, is gone. 18 Right? 19 So you need the underlying income growth to 20 support continued retail-sales gains and spending 21 gains. 22 Housing markets are recovering, turning to 23 Slide 13. 24 Houses are affordable again. People are 25 confident about jobs. 1 Credit standards are relatively strict, but 2 they've loosened, compared to what they were in 3 2009. 4 Multi-family housing led the recovery, but 5 now single-family housing is picking up, for sure. 6 We do have baby-boomers active in the market. 7 That's -- you know, there's a lot of concern. 8 You hear about the new normal in demographics 9 and housing demand. 10 What the baby-boomers do is very important, 11 in terms of the type of housing demand, going 12 forward. 13 But, it's also very important what, you know, 14 the younger generation does: 15 Do they move into multi-family housing? 16 Do they prefer urban living? 17 I think we all expect the demise of the 18 demand for the McMansions, you know, from that 19 generation, but that's all very uncertain, going 20 forward. 21 So, fiscal policy -- turning to fiscal 22 policy, I think you all know the details. I won't 23 go over the slides here on page 14. 24 Let's turn to page 15. 25 You know, we started the year, worried about 1 the fiscal cliff on January 1st. We're now worrying 2 about it on March 1st. 3 But, we can tally up the numbers, at least. 4 We may not know where, and one of the 5 difficulties about understanding how much, say, 6 New York will be affected by the sequester versus 7 the rest of the country, is that we don't really 8 have the details, although the White House released 9 a lot this weekend, as to where the cuts will occur, 10 department by department, let alone, you know, 11 regions of the country within those departments. 12 You know, there are certain areas that, 13 obviously, are more affected by defense cuts. And 14 Washington, D.C., and that metro area, are more 15 affected. 16 New York, on balance, seems like, as a state, 17 would be relatively less affected, on average, but 18 that doesn't mean it's not negatively affected. 19 At any rate, for the nation as a whole, we've 20 got columns here for the threat. 21 The size of the impact from the -- well, we 22 mentioned the Bush tax-cut expiration occurred. The 23 payroll-tax cut was $113 billion, as was mentioned. 24 The sequester, seventy-two. 25 And you can tally them up and see, relative 1 to size of the economy, how large the fiscal 2 tightening is. 3 The [unintelligible] in the third column is 4 4.1 percent of GDP. 5 In terms of the threat, the outcome, thus 6 far, was 1.3 percent of GDP. 7 Okay? 8 But, we still got the sequester spending cuts 9 to now go into place tomorrow, for an unextended 10 time -- undetermined time, I should say. 11 Our scenarios based around that are in the 12 color-coded page, on page 16. 13 On the bottom, in blue, is the baseline 14 forecast. 15 What do we have built in the forecast? 16 Now, you know, all of my colleagues here, 17 when you do an economic forecast, you have to make 18 assumptions about fiscal policy, and they're largely 19 political assumptions, or political guesses, in this 20 case, and certainly very importantly here, but, we 21 have to put something in our models, right, in terms 22 of what's happening. 23 So what do we have in our baseline forecast 24 that you're seeing in these numbers today? 25 The sequester: The automatic spending cuts 1 are replaced in the second quarter. That is some 2 time over the April-to-June period. 3 So the sequester takes effect, but it lasts a 4 month or so, and just into the next quarter, and 5 then there's a reaction; some sort of agreement that 6 imposes tax increases. 7 We think it will be, most naturally, through 8 limits on deductions. But, of course, you know, 9 that's very much uncertain. 10 And some reductions in entitlement spending 11 and non-defense spending. 12 But, monetary policies remain the common 13 [unintelligible] here. 14 That's clearly reinforced by what 15 Chairman Bernanke has been saying, even recently. 16 Housing markets do gradually recover. It's 17 an important aspect, you know, of continuing the 18 recovery. 19 We do think the Euro Zone survives, even with 20 the Greek exit. 21 You know, Italy and Spain are much more 22 important, in terms of their movement, but we're 23 much more confident, with the only negative recently 24 being, the Greek -- or, the Italian election, which 25 just throws some uncertainty into the process. 1 I see the comedian has refused to give up his 2 hold on -- from the election results and enter into 3 a coalition government. 4 So, that's -- that becomes a little amusing 5 to watch that. 6 Anyway, let's look at the negative, in yellow 7 on the top, which we put at 20 percent probability 8 on the -- that the recovery stalls. 9 So what do we have? 10 Federal spending cuts: These -- you know, 11 the sequester takes place throughout 2013. 12 Chris gave a 0.6 percent estimate of the 13 impact on GDP. 14 We have a 0.5 percent impact, so we're 15 relatively close there. 16 Again, consensus, I think, you can -- 17 But that policy gridlock damages confidence, 18 stock prices go down. 19 At the same time, it's possible that -- well, 20 the European Zone recession deepens. It doesn't 21 mean, the euro, there's a monetary or a financial 22 crisis there, but the recession is deeper than we 23 thought. 24 And, China, you know, you're right, we've 25 been worried an a hard landing in China. 1 China's done better in last few months than 2 feared, but it could still slow; right? 3 And, so, when we construct a negative 4 scenario, we build that in bit. 5 The results of this are on the graph on 6 page 17, and this highlights the uncertainty around 7 the baseline forecast that we would have. 8 You see the red line, showing how low GDP 9 growth could be. 10 That's not quite a recession, technically, 11 this year, under that pessimistic scenario, but, 12 effectively, zero growth on net for the year. 13 And then the upside is strong growth, which, 14 again, emphasizes that we do put -- this is 15 subjective, by way, but we do put an equal 16 probability of 20 percent optimistic investment. 17 Okay? 18 So bottom line for the U.S. economy: 19 The expansion has momentum, and, suddenly, 20 it's a bit weak, relative to the high unemployment, 21 et cetera, and recovery of the past. But -- and it 22 faces headwinds from Washington. You know, fiscal 23 tightening is underway. 24 It's a question of, what form it takes, how 25 tight we -- whether we pull too tight, or not. 1 We think real GDP growth will pick up in 2014 2 and 2015, as housing continues to grow, and business 3 investment comes back strongly. 4 I mentioned the upside and downside risks are 5 evenly balanced, with those downside risks also 6 being, you know, in addition to the fiscal policy -- 7 fiscal uncertainty, the debt crisis and recession in 8 Europe, and then oil prices, you know, I guess we 9 could always have this as a negative potential shot 10 in our -- in our world. 11 On the upside: 12 Easy credit conditions and stronger 13 housing-market recovery. 14 You know, there's a lot of room for housing 15 strength to rebound. 16 We're not expecting another bubble, but, the 17 depth of the housing market, relative to periods, 18 not just in 2005 and 2006, but normal periods before 19 that, is still the norm. 20 Turning to the regional activity, I won't go 21 through all of these factors, but, as we examined 22 activity across the country, there's a couple of 23 themes in this recovery that have been important. 24 First, the hangover from the real-estate 25 crash really matters. It has a different impact in 1 different regions. 2 All right? 3 Depending on how much house prices went down, 4 that determines the state of household balance 5 sheets in that region. 6 It's a lot different in upstate New York, for 7 instance, than it was in downstate New York; right? 8 The foreclosure pipeline in place, so-called 9 "judicial states," still have a large foreclosure 10 pipeline, because the foreclosures have been held 11 up. 12 That's true in the northeast, true in 13 New York, the shadow inventory, or general 14 inventory, of homes for sale. 15 So there's a lot of regional differences in 16 how housing markets are recovering, and they have 17 effects on the real economy. 18 Industry structural has been very important 19 across the country, because different types of 20 investment took off earlier in the recovery, and 21 continue or not to be strong. 22 High-tech manufacturing and service 23 production was strong throughout, so you saw a quick 24 recovery in the Bay Area of California, for 25 instance, and then parts of Texas, Boston's doing 1 relatively well, as opposed to areas in the regions 2 that were specializing in other industries, 3 essentially. 4 Durable manufacturing had a cycle. 5 So if you look, you'll be jealous of the 6 growth rates, in a sense, of Ohio and Indiana in the 7 last couple of years, because the manufacturing 8 cycle has propelled that forward. 9 That's easing off now, but... 10 Leisure spending, again, a critical consumer 11 factor. 12 And then, exports, we've mentioned. 13 Longer run, you know, migration and household 14 information is very important. 15 House-by-household formation, I mean, you all 16 heard that household size has grown. There's less 17 household formation. Young students have gone home 18 to live back with their parents, you know, and 19 families becoming implicitly larger, in terms of 20 living arrangements. 21 The question is, how well -- how much that 22 unwinds. 23 We have good news on household formation in 24 2012, finally, in the official stats, after very 25 restrained growth in the last few years. 1 The question of the new normal is, you know 2 What becomes the new normal? 3 And, then, migration has been very muted 4 across the country, for a number of reasons. 5 Does the migration patterns in the U.S. from 6 this area, the northeast and midwest, back to the 7 Sunbelt, resume in the way it had? 8 The housing bubble and the recession had huge 9 effects on that. 10 Florida is actually losing population, so -- 11 in terms of migration. It wasn't losing total 12 population. 13 So is Nevada. 14 And by the way, the Census Bureau just 15 revised, downward, its estimates for U.S. population 16 growth, and those are reflected in our new state 17 forecast. 18 Two reasons: Lower birth rates, right, and 19 decreased immigration assumptions, going forward, a 20 substantial amount about .2 percent per year for the 21 U.S. 22 Anyway, let's turn to the results in our 23 forecast for New York employment growth on slide -- 24 I lost the numbers here -- Slide 20. 25 Again, New York outperformed the U.S. than 1 underperforming in the forecast. 2 There's still reasonable growth. 3 Remember, New York has lower population 4 growth, generally, than the rest of the country, 5 so -- so it's somewhat less of a concern to be less 6 than the U.S. 7 We think the momentum in New York tapered off 8 at the end of 2012, and so we have problems from -- 9 without getting strong growth from Wall Street, and 10 the financial-sector continuing risk there. 11 We're a little bearish on New York itself, 12 relative to the nation, as we move forward, although 13 it going to be positive. 14 The other aspect here is, remember, there's 15 still a lot of rebound employment catching up in the 16 deep Sunbelt that really had lost, in the percentage 17 terms, two or three time more jobs than New York did 18 during the recession. 19 Wage and salary growth, a starker figure 20 there. 21 What happened in 2012, that's, largely, bonus 22 payments on Wall Street, which have been mentioned 23 as a concern, and we don't see them bouncing back 24 strong. 25 Director Megna asked about that explicitly, 1 and, you know, it is a new environment there on 2 Wall Street. 3 And all I can say is, I don't know how to 4 deal with it either. You don't have a history of 5 it, and we're sort of thinking it in an ad hoc 6 basis, you know, Okay, let's think about what might 7 be the case with bonuses this year. 8 But the issue of clawbacks, and the issue of 9 non-cash-- different requirements, in terms of cash 10 bonuses versus stock bonuses, really has a dynamic 11 that you're going to be dealing with for a number of 12 years. 13 I appreciate the concern. 14 It's not all -- you know, I'm sure your 15 people are developing models of it and testing them. 16 And good luck to that. 17 All right, looking at the consumer side, 18 [unintelligible] cars and housing are two big things 19 to watch. You see the growth in both sectors. 20 New-car registrations measured on the 21 left-hand side, in red; housing starts on the 22 right-hand scale. 23 So, relatively bullish. 24 There's pent-up demand there, but a very 25 important factor for sales-tax revenues, and growth, 1 in general, in the state. 2 Summarizing on the next slide, Slide 23, in 3 compiling this on a fiscal year basis, to be sure, 4 so the numbers may not -- are not directly 5 comparable to the annual calendar-year basis you've 6 seen, but, you see a relatively weaker 2013 in many 7 variables, but growth resuming in 2014 and 2015. 8 I think most of these I showed in the graph 9 mentioned. I the unemployment rate, et cetera. 10 And then, just wrapping up for New York, 11 bottom line: 12 We found momentum was lost in 2012, 13 particularly across upstate. By the way, we haven't 14 focused on the regional issue, but upstate showed 15 that downward cycle was -- it was actually very 16 stable in -- relative to the rest of the country, 17 and downstate, during the recession, and then 18 boosted by manufacturing and export demand that 19 dissipated in 2012. 20 We'll watch that. 21 Real-estate markets downstate are improving, 22 you know, but lagging in national improvement. 23 And they're not improving as much as they are 24 in the west, for instance, in one area. 25 Wall Street retrenchment is occurring. 1 And -- was it was JPMorgan just announced 2 another downsizing earlier in the week? 3 And continues to be a threat. 4 So, it's not a driver of the economy in terms 5 of employment, and even for income and -- in many 6 ways, if you think about the variable-income 7 component that's so much changed now. 8 So expect on that, moderate growth -- well, 9 the moderate growth in New York for the near future. 10 Thank you. 11 ROBERT L. MEGNA: Thanks, Jim. 12 I'd like to now turn it over to Jason Bram 13 from the Federal Reserve Bank of New York. 14 JASON BRAM: Thank you, Budget Director, 15 Assemblyman, and Senators. 16 I'm going to focus on the region. I'm going 17 try of move through this chart package fairly 18 quickly, to leave time for Ronnie, and questions, 19 and also because no one has ever accused me of 20 rambling on for too short. 21 Let me start off saying, that the views I 22 express are mine, and not those of the 23 Federal Reserve Bank of New York or the 24 Federal Reserve system. 25 Going to Chart 1, basically, this is just a 1 look at unemployment rates nationally, 2 New York State, New York City. 3 I feel that's been pretty much covered by 4 everyone. 5 I don't have much more to add, except, you 6 know, unemployment is still quite high, even though 7 it's come down quite a bit, and the labor-force 8 participation, as is the case nationally, has 9 remained low. 10 So the upside is, that there's still a lot of 11 capacity for the labor market to expand if -- if a 12 stronger national growth kicks in. 13 Chart Number 2 is, the Federal Reserve Bank 14 of New York creates these -- we have these composite 15 indexes of coincidence economic indicators, much 16 like I know the State of New York has some of these. 17 We do one for New York State and 18 New York City. It's basically a composite of 19 employment, payroll employment, the unemployment 20 rate, and a measure of hours, and a measure of 21 income. 22 This -- these charts, these are indexed to 23 late 2007, which was the U.S. cyclical peak. 24 And, basically, I think that the things to 25 take away from this is that, we've had sluggish 1 growth in New York State in 2012, and that 2 New York City is leading growth. 3 I know Ronnie is going to talk a little bit 4 more in detail about New York City. 5 I should add that these data go up through 6 December. 7 Pretty soon, there are going to be some 8 benchmark revisions. We'll have to see. 9 I don't think they'll be that substantial for 10 New York State, but, there's been more current data 11 available. 12 For example, in our Empire State 13 Manufacturing Survey, that suggests a pickup in 14 early 2013, so that's very encouraging. 15 So, we'll have to see, you know, what happens 16 with the revisions, and other indicators for the 17 first quarter. 18 Now, turning to regional employment trends, 19 we are -- again, I know this has been covered pretty 20 well. 21 New York State, as I think both Chris and Jim 22 mentioned, are -- is back up to -- has recovered, 23 basically, all the lost jobs of the recession, which 24 is certainly not true at the national level. 25 And it's, again, led by New York City, where, 1 you know, growth has continued pretty strong. 2 You see that little blip here near the end of 3 the year. 4 Moving on to Chart Number 4, we just kind of 5 zoom in a little bit. We're focusing on the metro 6 New York City area, and we're focusing on the -- 7 basically, the fact that "Sandy," which we were very 8 concerned about, had an effect in November. 9 This is metro New York City. It does include 10 northern New Jersey, but, basically, it's the area 11 affected by "Sandy," and it's largely dominated by 12 New York City and Long Island. 13 Now, these data, again, are subject to 14 revision, but, what you see is, that the job loss 15 that looks like it's related to "Sandy" was not all 16 that severe. It's pretty comparable to what we've 17 seen in other disasters, "Katrina" excluded. That 18 was, of course, a much, much different thing. 19 And it looks like it was short-lived. So, 20 we've had a rebound. 21 And the reason we put construction on here is 22 that, you know, in past experiences with 23 "Hurricane Andrew," with earthquakes in California, 24 with other hurricanes, again, "Katrina" being one 25 exception, is that there tends to be a pretty quick 1 rebound, and you often get a strong boost to the 2 economy through channels, like, construction and 3 real estate, which is really where you need -- you 4 know, where there's a lot of work to be done to 5 recover from "Sandy." 6 And, so, we're looking to see a boost from 7 that in early 2013. 8 Chart 5, what we're doing here is, this is 9 just a different way of looking at the -- sort of 10 the big picture, the cycles. 11 And, again, these series, this is basically 12 employment indexed to the cyclical peaks of the last 13 three recessions. 14 This is nationally. 15 And we can see the light brown, I guess, 16 line, was the early nineties' downturn, a fairly 17 mild recession nationally, not here in the region. 18 The early 2000s' downturn was fairly mild, 19 but it was -- if you remember the phrase 20 "jobless recovery," it took a long time for 21 employment to get back up. 22 And, of course, this downturn is much, much 23 longer, more severe, and the recovery, although it's 24 kind of on the same trajectory, because the 25 recession was so much more severe, it's taken a lot 1 more time for U.S. employment to get back on track. 2 Now, if you look at New York State, it's -- 3 it's a really -- I mean, it's a kind of fascinating 4 contrast. 5 And if you were to go to people in Nevada or 6 Florida and show them this, they'd probably be a 7 little surprised that this downturn in New York was 8 actually less severe, in terms of employment, than 9 either the early 2000s' or the early 1990s' 10 downturn. 11 And, again, you can see that employment has 12 rebounded fully. 13 Income is another story. We'll get to that 14 in a minute. 15 And then, New York City, again, even more 16 extreme. 17 New York City was much milder than the last 18 two, and the recovery has been much stronger. 19 And I'm sure that Ronnie will, again, mention 20 this about New York City. 21 Now, Chart 8. 22 Chart 8 is something that, you know, everyone 23 here's touch upon, which is, just look at 24 New York State versus the nation. 25 You can see that the -- this is the 1 year-over-year percent change in employment. 2 You can see that the recession was not as 3 severe, but that, since -- you know, over the past 4 couple of years, New York State has been tracking 5 close, maybe a little bit below the nation, in terms 6 of job growth. 7 One of the -- you know, where is the job 8 growth coming from? 9 I'll get to that in a second. 10 I don't have a graph on it, but in terms of 11 industry, our disproportionate amount of the job 12 growth has been in professional business services, 13 and a lot of that has been driven by employment 14 agencies and temps. 15 And, now, you might think that sounds like 16 not a good thing. You know, you want permanent 17 jobs, and so forth. 18 But, typically, temp employment we found to 19 be a pretty good leading indicator of total 20 employment, because what happens is, if you're a 21 business owner, and the recovery is starting to take 22 hold, you're get a pickup in business, you're 23 gonna -- the first thing you're going to do -- the 24 first thing you're able to do, probably, is get on 25 the phone, get on the Internet, and get some 1 contract workers to pick up the slack. 2 Then, very often what happens is, these 3 workers turn into permanent workers. 4 And so that's, we consider, somewhat 5 promising. 6 Now, again, I won't spend much time on this, 7 but, just looking across the region, you can see 8 that, in the different areas, Buffalo, Rochester, as 9 has been mentioned, they weren't hit as hard by the 10 recession, but, you haven't seen the same kind of 11 job gains. We've seen, in fact, a slowdown in job 12 growth in recent months. 13 And we're hoping that that will reverse 14 somewhat, but we don't expect, you know, these -- 15 Buffalo and Rochester have never -- well, not never, 16 but, in recent memory, have had much slower trend 17 growth in employment than the nation. 18 So, I would say they're still doing okay. 19 Then we get into the Albany, Utica, 20 Binghamton; and, again, we're seeing pretty -- you 21 know, slowdown in job growth, in contrast with the 22 nation. 23 And then, really, most of the state's job 24 growth, recently, has been coming, again, from 25 New York City. 1 You know, the rest of the region has been 2 doing okay. It's not that anything is turning down, 3 but, New York City, again, has really been driving 4 the recovery, both in terms of employment, and 5 probably in terms of income as well, and, it's been 6 doing it without the securities industry. 7 We're on Chart Number 12 now. 8 Basically, I like to look at securities, 9 there's Wall Street employment, because it's such an 10 important sector in New York City. 11 And I won't get into going through all these 12 cycles, but, basically, it's always been, in the 13 past, a leading indicator of the city's economy as a 14 whole. 15 So what happens is, you'll get an upturn in 16 securities employment, and if it's sustained, you'll 17 then see an upturn in everything else. 18 And you get a downturn in securities, that's 19 usually followed by a downturn in everything else. 20 This recovery's been unusual, because we got 21 an upturn in New York City employment, overall, 22 before securities industry. 23 And if you look at the next page, you'll see 24 a little inset, a blowup, of the recent past, and, 25 basically, New York City is seeing pretty decent job 1 gains without help from Wall Street. 2 And -- and, you know -- for -- for a lot of 3 people, this could be a good or bad thing. 4 I know for people forecasting revenues, it's 5 usually not a great thing. 6 But I guess the positive thing is, is that, 7 to the extent that New York City is diversified 8 enough that it can generate growth without the 9 securities industry, and if things pick up there, 10 which, based on what I've heard in the past hour, 11 I'm not all that hopeful for it in the near future, 12 but, nevertheless, it's -- it's something that we're 13 looking for. 14 I want to skip over, the next chart is kind 15 of an interesting chart, but by the time I explain 16 it, it will -- it's just sort of a look at the 17 different industries, and where they stand in terms 18 of income and employment concentration. 19 So I want to skip ahead to the wages and 20 salaries of Number 15. 21 And, again, this has been touched upon: 22 We -- again, I think largely because of the 23 unusually weak relative performance of the 24 securities industry in this recovery, among other 25 things, we've seen wage and salary growth not quite 1 keeping up with the nation. 2 This is -- yeah, this is nominal growth, so 3 you really -- over the past year, you've seen very 4 little growth. 5 Now, I know I've read some reports that 6 Wall Street bonuses this year are up, by varying 7 amounts, which is encouraging, but, I think to get 8 sustained growth in wages and salaries, 9 New York City really has to get growth from 10 Wall Street. 11 And, so, you know, everything I've said up 12 till now about employment, again, unlike some of 13 the -- unlike the other panelists, I don't have any 14 kind of quantitative forecast. It's sort of trying 15 to give you a qualitative assessment, but, you know, 16 given the fact that employment is so strong, I'd be 17 a little bit cautious, as I'm sure that you are, on 18 the revenue side, because of the -- you know, the 19 fact that a lot of the job growth is in areas with, 20 you know, lower than average -- well, certainly 21 lower than finance-sector income, like leisure and 22 hospitality and a lot of the professional business 23 services. 24 And then, finally, I'm just going to close 25 out with a couple of charts. 1 We use a -- there's an index by CoreLogic, a 2 house-price index, and it's based on repeat sales, 3 so it tries to measure how much the price of the 4 comparable home has changed. 5 So, if one month you're having, you know, all 6 the homes on the poor side of the railroad tracks 7 are selling, and then the homes on the other side of 8 the railroad tracks, [unintelligible] apples and 9 oranges. 10 So we think this is a pretty good measure, 11 and this really shows how -- this is kind of a 12 downstate area. We're in Chart Number 16. 13 New York State, New York City, were not hit 14 nearly as hard by the housing bust, in terms of 15 prices. There hadn't been any recovery, but -- 16 until recently, but now we're seeing some expansion. 17 But, there's still parts of the region, like 18 Long Island and parts of the lower Hudson Valley, 19 that really still have to show any signs of an 20 upturn. 21 And then, in upstate New York, which in 22 itself is striking, the -- and -- I mean, it was -- 23 part of what helped upstate New York, in all of the 24 past few recessions, and even in expansions, upstate 25 New York has tended to underperform the U.S. 1 And this time, the -- I guess the one 2 advantage of not really having a housing bubble or a 3 big housing boom, is that when things go bad, 4 there's no bubble to burst. 5 And, so, you can see Buffalo, Rochester, and 6 to some extent, Albany, didn't really have a housing 7 decline, and their housing markets actually seem to 8 be doing pretty well. 9 So, I guess -- I don't even need to -- the 10 recap is here. 11 The only two things that I think I'd like to 12 emphasize on here are: 13 You know, "Superstorm Sandy" is not going to 14 have any long-term effects, but it could have some, 15 I think -- it has a little negative effect, and it's 16 likely to have some positive effect in the short 17 term. 18 Professional business services seem to be 19 driving job growth, and we're looking for a more 20 broad-based expansion in 2013. 21 And, again, the problem with Wall Street, is 22 that other sectors have picked up the slack in job 23 growth, but not really income growth. 24 So, I'll just finish there. 25 Thank you. 1 ROBERT L. MEGNA: Thank you, Jason. 2 And now we'd like to move to 3 Ronnie Lowenstein from the New York City Independent 4 Budget Office. 5 Don't let me forget that. 6 Thanks. 7 RONNIE LOWENSTEIN: Thank you very much for 8 inviting me. 9 Much of what I'm going to say probably sounds 10 familiar from what you just heard from Jason. 11 Hopefully, I'll be able to push it beyond what's 12 been happening over the last year or two, and into 13 the forecast period. 14 What I'm going to be talking about is our 15 forecast that will be released on Monday. 16 So, if some of the numbers you see here today 17 aren't exactly the same numbers that you see on 18 Monday, that's because it will have been a very long 19 weekend at the office. 20 My main point is basically the point Jason 21 was making, that you have -- that there's a huge 22 distinction to be made between your forecast for 23 employment, and the forecast for wage and salary 24 growth. 25 In a nutshell, employment growth in the city 1 of New York has been strong, and we expect it to 2 continue strong, despite the fact that the 3 securities industry is facing difficulties. 4 And, conversely, compensation growth is weak, 5 and will continue to be weak, because of those very 6 same problems. 7 We always talk about New York City, you know, 8 that the securities industry is being the engine of 9 the city. 10 We can't say that any longer, particularly 11 with respect to job growth. 12 And I think, longer term, perhaps not even 13 income growth as well. 14 My plan here is to talk a little bit about 15 the big picture, then focus more narrowly on 16 securities. From there, briefly touch on a couple 17 of other industries that we think are worth 18 watching. And, conclude with a couple of -- just a 19 couple of big points on the city's fiscal condition. 20 But starting with the city's big picture, and 21 starting with 2012, according to the "BLS" data -- 22 the Bureau of Labor Statistics data -- the city of 23 New York added nearly 75,000 jobs on a 24 year-over-year basis, public and private, in 2012. 25 That would be the second year of strong, 1 like, really strong, roughly, 2 percent employment 2 growth for the city. 3 And to give you some context, the very best 4 year ever, since these numbers started coming in, 5 was about 100,000. 6 So if you get 75,000, that's great. 7 Moreover, they are going to be benchmark 8 revisions to these numbers in a little over 9 two weeks, and based upon the data that we've been 10 able to sift through, we expect that the number is 11 going to increase. 12 So after the benchmark, we're expecting a 13 2012 number to be a job gain of about 85,000, or 14 very much closer to a spectacular year. 15 Both Jim and Jason have talked about the 16 extent to which the U.S. and New York State 17 economies have recovered jobs. 18 Just to [unintelligible] a little bit, to use 19 the Yiddish, I'm happy to say that the city has 20 recovered, at this point, over 150 percent of its 21 jobs that it lost during the downturn, versus about 22 100 percent for the state, and about 60 percent for 23 the nation as a whole. 24 Okay, so that's 2012. 25 So far, so good. 1 That's employment growth, though, and I 2 haven't told you yet about what's happening to total 3 wages and salaries. 4 So I'm going to be talking about nominal wage 5 and salary growth, or, aggregate compensation 6 growth. It's in nominal terms, and I'll tell you, 7 you know, how the real would differ. 8 But, total wage and salary growth for the 9 city of New York for 2012 actually declined, and 10 nearly -- nearly 1 percent. 11 In real terms, the decline is, of course, 12 significantly steeper. 13 We've looked back in the data, back to the 14 1950s, and we still haven't been able to come up 15 with a year in which employment grew strongly, and 16 wage and salary growth declined. It just doesn't 17 happen, but it happened in 2012. 18 It just doesn't. And we don't expect nominal 19 wages and salaries to increase this year either. 20 We're still expecting employment growth to be 21 solid in 2013. We've got something on the order of 22 60,000 jobs for this year. I think that's 23 conservative. 24 Our employment forecasts are almost always 25 conservative. We bring them up as the year goes on, 1 but we're anticipating that wage and salary 2 growth -- I'm going to blow this -- well -- will 3 increase, but only modestly. And we've got it south 4 of 3 percent. 5 In real terms, that's virtually nothing, and 6 that's a problem, no question. 7 So, again, we're expecting for this year, 8 continued strong employment growth, but, really, 9 very little wage and salary growth to speak of. 10 Then for 2014, we've got pretty much the same 11 levels of employment growth, about 65,000 jobs, year 12 over year, but it's not until 2014 that we really 13 see wages and salaries start to take off again, and 14 there we're seeing 6 percent nominal growth, double 15 what we're expecting for this year. 16 So, you know, the New York City big picture 17 is, just the way Jason laid it out: Employment 18 growing strongly, wages and salaries barely at all, 19 near term, and not until 2014, significant growth. 20 And in a nutshell, compensation growth is 21 weak due to the problems in securities, and 22 employment growth is strong, despite what's 23 happening in the sector. 24 So having said all of this stuff about 25 securities, let me talk a little bit about the 1 challenges facing the industry which are, I think, 2 well-known. 3 Some of them are regulatory in nature, some 4 of them continuing fallout from what happened during 5 the downturn, but the regulatory reforms are going 6 to require firms to reduce leverage. They're going 7 to be holding more reserves. And with less 8 leverage, they're not going to be able to realize 9 the same sorts of profits that we saw during the 10 boom. 11 The reforms are going to be limiting 12 proprietary trading, which is trading on the firms' 13 own accounts, and they're going to be changing the 14 structure of compensation, which has also been 15 discussed. There's real pressure to reduce cash 16 bonuses, pressure to defer some part of the bonuses 17 to future years, and tie those bonuses more closely 18 to performance. 19 The other major part is going to be an 20 increase of transparency, particularly with respect 21 to derivatives, that we expect to have an impact -- 22 well, certainly, firms expect to have an impact on 23 their bottom line. 24 But, it's been 2 1/2 years since the 25 enactment of Dodd-Frank, and at this point, only 1 about 40 percent of the rules have actually been 2 finalized. 3 The Volcker Rule, which is what's going to be 4 used to limit proprietary trading, is expected to 5 come out now within the next couple of months. But 6 even if it does, it's not going to take effect until 7 mid of next year. 8 And firms are still dealing with the 9 aftermath of the crisis. There are billion-dollar 10 settlements being paid right and left to resolve 11 disputes that range from the quality of those 12 mortgage-backed securities. 13 It wasn't long ago that Bank of America, what 14 was it, a $12 billion settlement, because the 15 mortgages in those securities weren't nearly as good 16 as, somehow, they represented them to be. 17 Foreclosures without proper processes or 18 documentation, remember last year's horror over the 19 robo signing? 20 And there's lots of that going on still, and 21 lots of settlements associated with it, to say 22 nothing about the manipulation of interest rates and 23 lab work, international interest rates. They're 24 going to lead to significant payouts from some of 25 New York City's biggest institutions. 1 Okay, despite all of these pressures, which 2 is amazing, New York -- in New York City, 2012 3 New York Stock Exchange member-firm profits were 4 just reported at $24 billion for the year. 5 If you turn to the first chart in my package, 6 what you'll see on the top part of the chart is 7 New York City member-firm revenues, and the bottom 8 panel is expenses. 9 Now, I'm talking about New York Stock 10 Exchange member firms. That's not all of the 11 securities industry by far, but it's a good proxy 12 for the securities industry as a whole. 13 Oh, you can see what's been driving revenues, 14 is that blue mass on the top, which is labeled 15 "Other Income." 16 "Other Income" is mainly propri- -- income 17 from proprietary trading. These are the time bets 18 the firm makes with the bank's money; your money, 19 perhaps their money, however you want to think of 20 it. 21 And if you look back to the boom years, that 22 income from proprietary trading was, roughly, twice 23 the level it is now. 24 Okay? 25 So revenues are particularly from proprietary 1 trading, which was huge. It's, basically, been cut 2 in half. 3 So, how could they have earned $24 billion? 4 Well, if you look to the bottom panel, you 5 see that their expenses have been cut even more 6 dramatically. 7 So the top group, which is that reddish-brown 8 color, it's interest expenses, and you can see that 9 interest expenses at this point, because interest 10 rates are down near zero, is about a tenth of what 11 they were back during -- back during the boom. 12 So revenues have come down by half, expenses 13 are down by nine-tenths, which has led to 14 $24 billion in profits for the year just ended. 15 To put that into some perspective, that's the 16 third best year ever on Wall Street, which is just 17 extraordinary. 18 Okay, so, it was an incredible year for the 19 industry, in terms of earning -- in terms of 20 profits. 21 And let me give you my -- well, the IBO's 22 forecast, at least as of this morning, for 23 securities-industry employment and earnings. 24 So for 2012, which is hindsight, but all the 25 numbers still aren't in, we're expecting that 1 industry employment decreased about 2,000, year over 2 year. I mean, it's not a hell of a lot. It's about 3 1 percent, but it's a decline nonetheless. 4 And then average wages, again, this is 5 nominal wages and salaries, which include bonuses, 6 we're about $333,000 ahead. 7 That's a big number, and most of us would 8 appreciate $333,000 a year, but that's still a far 9 cry from the over $400,000 average salary that the 10 industry was enjoying during the boom. 11 And you can send your -- I'll tell you where 12 to send your checks, if you're feeling bad. 13 2013, our forecast is for a somewhat larger 14 decline in securities-industry employment, of about 15 3,000 jobs. Very modest increase of about 4 percent 16 in average wages, to about 345,000 a head. 17 And, for 2014, we're expecting employment 18 increase, just barely a little over 1,000 jobs, and 19 average employment -- I'm sorry, average wages of 20 about 360,000, another 4 percent gain, roughly 21 speaking. 22 Now, please turn to the second chart, and let 23 me talk about what's happening in some of the other 24 industries. 25 The top panel -- the top pie chart is 1 employment growth, and the shares of the pie are 2 shares of New York City employment growth from 3 2013 through '17. That's New York City's 4 financial-plan forecast period. 5 So we've got employment on the shares of 6 employment growth -- not shares of employment, but 7 shares of growth -- on the top pie; and we've got 8 shares of aggregate wage growth on the bottom pie. 9 If you look at securities, you probably can 10 barely see the share of employment growth. It's 11 just 1 percent for the '13-through-'17 period. We 12 don't get any -- you know, barely any 13 securities-industry employment growth until the end 14 of the forecast period -- or late in the forecast 15 period. 16 But, if you look down to the bottom part of 17 the chart, you can see the securities accounts for 18 about 19 percent of the total increase in wages and 19 salaries over the four years. 20 That's obviously because these people are 21 earning much higher salaries than most of us. 22 But, if you actually compared that 19 percent 23 share of the pie to the '03-to-'07 period, which was 24 the boom years, depending upon how you calculated 25 it, it was someplace between a third and a half of 1 the share of total wage growth that the industry was 2 responsible for during the last expansion. 3 So we're still expecting to drive a 4 significant share of the expansion, but not nearly 5 as much of the expansion as they drove last time 6 out. 7 Talking -- you know, finally getting to a 8 couple of other industries, there is solid growth in 9 a few industries, they're just not closely tied to 10 the financial industry. 11 One of them is in education and health, where 12 we're expecting employment to go up -- well, we were 13 expecting increases in education-health employment 14 to contribute 22 percent of the total increase in 15 the number of jobs over the period. 16 Education and health care have been 17 increasing year in and year out. They continue to 18 increase during the downturn, which is a terrific 19 thing, and was a large part of the reason 20 New York City fared as well as it did. 21 But if you look down to the bottom chart, you 22 can see that there are only contributing 12 percent 23 of the income growth. That's because these jobs 24 don't pay all that much. But they are, really, very 25 much independent of the securities sector. 1 Information, another subject that's been 2 touched on, we're expecting the information sector, 3 which is mainly new media here, where the growth is, 4 to contribute 5 percent of the increase in 5 employment over the period, which is terrific, and 6 7 percent of the increase in wages and salaries. 7 So they're more than pulling their weight, in 8 terms of the average wages that they pay. 9 That's a big difference from the '03 and '07 10 upturn. 11 Back then, media, which was largely old 12 media, was publishing, was shrinking, and was 13 actually a major drag on the expansion. 14 So now we've got the Googles and the Yahoo!s 15 of New York really contributing jobs, and reasonably 16 well-paying jobs, that are helping bolster the city 17 economy. 18 We're also -- interestingly, we're now seeing 19 strong growth in two industries that have become 20 less closely tied to the finance industry over time. 21 One of them, as Jason touched on, was 22 business and professional services, where we're 23 expecting them to account for 30 -- wholly, 24 30 percent of the increase in employment, but about 25 24 percent of the increase in wages and salaries. 1 Professional and business services is a very 2 diverse category. It run everything, from the temps 3 that Jason spoke about, to lawyers and accountants 4 and stage professionals. 5 As we look at our forecast, we're seeing 6 increases in all of those categories, which is a 7 good thing; not just the temps, although I agree the 8 temps can be a signal of what's going to happen, but 9 lots more lawyers, which may or may not be a good 10 thing; more accountants; more management 11 consultants. 12 And that's -- for all of those reasons, this 13 sector is increasing. It's clearly less tied to 14 finance than it used to be, and perhaps more tied to 15 the U.S. and global economies than it used to be, 16 which is also a plus. 17 And the last industry I would like to 18 highlight is, leisure and hospitality. 19 And everybody knows about the tourist boom 20 we've been experiencing, but I think it's less 21 obvious to people that much of this category is 22 really dominated by restaurants. 23 And in the past, restaurants really have been 24 closely tied to finance. They're the people who go 25 out and eat at Burger Den, and wherever else, but, 1 apparently, not any longer. 2 We're expecting the leisure and hospitality 3 industry to contribute 15 percent of the increase in 4 jobs, and about 5 percent of the increase in wages 5 and salaries. 6 These aren't highly paying jobs, but a lot of 7 it's not just hotel jobs, but restaurant jobs, and, 8 they're increasing left and right. 9 And we expect that to continue regardless of 10 what happens to securities. 11 Okay, I promised to finish up with just a 12 brief mention of our fiscal outlook. 13 I took a look specifically at our forecast 14 for this city fiscal year and the next city fiscal 15 year for non-property tax revenues. 16 And what we're seeing, particularly in the 17 withholding numbers, is a tremendous amount of 18 spin-up from calendar year -- from calendar year '12 19 into calendar year '13. 20 For that reason, we're anticipating that 21 non-property tax revenues for the city of New York 22 will go up nearly 7 percent during the current 23 fiscal year, versus just a little over 2 percent for 24 next fiscal year, but that's really, really 25 deceptive. 1 It's not that the econ forecasts are that 2 different. It's just that we think a lot of income, 3 both business and personal, plus real-estate 4 transactions, which are bolstering our real-estate 5 transaction taxes, are going to be logged during the 6 current fiscal year that would have otherwise 7 occurred next year. 8 The other big thing to say, I think, about 9 the city's fiscal forecast, is if you've seen the 10 administration's forecast and their GAAP numbers, 11 and our GAAP numbers which will be released on 12 Monday, they're benign. I mean, they're the lowest 13 they've seen in the 20 or so years that I've been 14 covering New York City fiscal policy, but they're 15 very misleading. 16 You can no longer use the GAAP number as -- 17 the budget GAAP number as an indicator of how much 18 fiscal stress the city is under, and that's because, 19 at this point, virtually none of the city's unions 20 are operating with contracts. 21 The teachers' union contract expired in 22 October of 2009. Their contract -- they were the 23 last union that was about to settle in a contract 24 round, where unions were getting 4 percent a year, 25 for 2 years. 1 They're still expecting to get their 2 4 percent a year, for 2 years. That may or may not 3 occur. 4 But, certainly, we've got a lot of people who 5 haven't had wage and salary increases for quite a 6 long time. 7 We've got a lot of mayoral candidates who, by 8 and large, are not nearly as independently wealthy 9 as the current mayor. 10 We expect something is going to give on that, 11 and, unfortunately, the city's labor reserves were 12 largely drawn down to deal with the downturn. 13 So there is not, at this point, money in 14 reserve for those contracts; therefore, those GAAP 15 numbers are wild underestimates of the fiscal 16 pressure the city will face. 17 And on that somewhat less cheerful note, I'll 18 conclude. 19 ROBERT L. MEGNA: Thanks, Ronnie. 20 We're fortunate enough to have Bob Ward with 21 us today, so I'm not going to let him totally off 22 the hook. I want to ask his impressions on 23 something. 24 The comptroller's budget report did suggest 25 that the Executive revenue estimates were, I think 1 I'm quoting, overly optimistic. 2 So I was wondering, given that, at least for 3 some of the legislative forecasts, they're even 4 higher than the Executive. 5 I just wanted to get some of Bob's thoughts 6 on that. 7 ROBERT B. WARD: That's very kind of you, 8 Bob. 9 [Laughter.] 10 ROBERT L. MEGNA: I thought you would think 11 so. 12 ROBERT B. WARD: In our report on the 13 Executive budget, as you note, we did express some 14 concern about potential risks on both the revenue 15 and the expenditure side. 16 If I recall correctly, we said that there -- 17 that there may be some overly optimistic numbers. 18 We are certainly going to be -- we are taking 19 a close look at the additional proposals you have 20 made in the 30-day amendments. We may have some 21 comments on those in the coming days. 22 So, as of right now, you know, we have not 23 prepared our own forecast or -- either in terms of 24 the economy or revenue, but, we are -- certainly 25 feel better informed after today's presentations 1 than we were before. 2 ROBERT L. MEGNA: Thanks, Bob. 3 Any other questions for the panelists? 4 SENATOR DEFRANCISCO: I just had a couple. 5 And it was -- the reports were very 6 consistent, surprisingly. 7 And -- but one thing I have a difficult time 8 figuring out, and maybe this is more long term, and 9 since I got four economists here, they can -- well, 10 one left, but I see you're economists as well, so -- 11 now, first of all, all these numbers about 12 unemployment rate going up or going down, or 13 whatever, that doesn't include people that are out 14 of the labor force, that decide they're not looking 15 anymore; right? 16 UNKNOWN SPEAKER: Right. 17 SENATOR DEFRANCISCO: And these people are 18 unemployed. They may not be employed, because they 19 don't want to be, or they're just fed up. 20 We've got -- we have unemployment checks that 21 they can get, and work under the table, if they 22 choose to, and I'll take the worst possible scenario 23 of the human person who might do that, and I got a 24 feeling we got a lot of people that do that. 25 What -- how would these numbers be affected 1 if you included everyone who's unemployed at this 2 point in time? 3 What kind of percentage increase would it be 4 in the unemployment level? 5 JASON BRAM: Sir, you're absolutely right, 6 there's always -- there's always people that are -- 7 potentially, could be working, that are not. 8 In addition to that, you got a lot of people 9 who are underemployed. So, someone who used to be, 10 you know, a stockbroker, and they're driving a cab. 11 Well, maybe they're not -- some would argue 12 that they're overemployed. 13 But -- but I think -- the thing is, that the 14 degree of underemployment and miscounted employment 15 tends to be correlated with the unemployment rate. 16 So, in other words, it's true that the -- you 17 could argue the true, if you want, level of 18 unemployment is a lot higher, but the reason that 19 everyone uses this measure of unemployment, is that 20 you have a very long history based on a consistent 21 definition. 22 So if you went back to, say, the 23 '82 recession, when unemployment was 10 percent, the 24 same things were true; you had people giving up 25 because they were discouraged, and this other 1 unemployment rate was much higher. 2 SENATOR DEFRANCISCO: But back then, did they 3 also eliminate from the calculation those who are 4 not participating? 5 JASON BRAM: Yes, they did. 6 SENATOR DEFRANCISCO: It was -- it's been -- 7 JASON BRAM: It's the same definition. 8 That's -- that's -- that's why -- you know, you can 9 argue that unemployment, you know, is really, sort 10 of, 8 percent understates the true essence of how 11 things are, but, it's been a consistent way. 12 I -- you might want to -- 13 CHRIS VARVARES: Yeah, you can -- the -- 14 there are other measures of the unemployment rate. 15 In fact, the BLS provides six different 16 measures, from U1 to U6. 17 And U6 in the -- I forget all the -- I would 18 have to look up all the things it includes, because 19 you also measure things, like, discouraged -- well, 20 discouraged workers, part-time workers who would 21 rather work full time, and the like. 22 And, you know, basically, double the current 23 unemployment rate, and you get a sense of the 24 labor-market stress. 25 There are other measures we use, such as 1 employment over population or employment over 2 labor -- employment over population, working-age 3 population. That takes out the consideration of 4 whether someone chooses to be in the labor force or 5 not. 6 So, we do -- we're well aware of that, and do 7 track it. 8 SENATOR DEFRANCISCO: All right. And -- 9 Yes, go ahead. 10 RONNIE LOWENSTEIN: Let me just add one more 11 thing, specific to the city. 12 As you probably know, there are two different 13 surveys of labor force and unemployment. 14 The establishment survey that, literally, 15 they call businesses and say, How many people are 16 working there? 17 And the household survey, where they call 18 households and say, How many members of this 19 household are employed, and unemployed? 20 And all of that stuff. 21 And for the longest time, for the city of 22 New York, over the last several years at least, 23 these numbers have been telling very different 24 stories. 25 We were seeing robust growth in the 1 establishment-survey numbers, and almost no growth 2 at all -- 3 SENATOR DEFRANCISCO: The house. 4 RONNIE LOWENSTEIN: -- in the 5 household-survey numbers. 6 The unemployment rate comes out of the 7 household survey, and people were very, very worried 8 that that unemployment rate was high, it still is 9 high, but might be signaling even deeper problems in 10 the labor force than people were -- were seeing, 11 day in and day out. 12 So I recently did some research that looked 13 at a third source of data on labor force, which 14 comes from the census, and what we did was, 15 basically, confirmed that -- for one thing, that the 16 establishment-survey numbers that showed significant 17 labor growth were right. 18 The household survey is a much smaller number 19 of survey participants, and they just didn't make 20 sense. 21 And perhaps equally gratifying, although we 22 confirmed that the unemployment rate was pretty much 23 where the household survey said it was, our data 24 suggests that a large part of the reason that this 25 unemployment rate is so high, is that lots of people 1 who had been discouraged, and had dropped out of the 2 labor force, are now reentering it. 3 Not everybody, certainly, but part of the 4 reason that the city's unemployment rate has 5 remained so stubbornly high, well into the 8 percent 6 range, is because we're getting lots of new entrants 7 into the labor force. 8 SENATOR DEFRANCISCO: All right, along the 9 same lines, I just have one other area beyond this. 10 Unemployment benefits have been extended, 11 extended, extended, extended. 12 The last time, unemployment compensation was 13 stopped. The length was not extended. 14 Was there an upturn in employment at that 15 point? 16 In other words, when you have to -- you have 17 to put bread on the table, are there -- is there 18 anything I could look at to see if that's the case? 19 CHRIS VARVARES: There are a number of 20 studies of the impact of unemployment benefits on 21 the unemployment rate, and they come to -- I think 22 the consensus would be, I think a 0.3 percent 23 increase in the unemployment rate owing to the 24 presence of extended unemployment benefits. 25 SENATOR DEFRANCISCO: Okay. 1 CHRIS VARVARES: So, between 8 percent and 2 8.3 percent, estimated back to that. 3 SENATOR DEFRANCISCO: So it's not very 4 significant? 5 CHRIS VARVARES: No. 6 SENATOR DEFRANCISCO: Okay. 7 The last area: We're talking about growth 8 over the next couple of years, and the fed Chairman 9 talking about, these policies are going to continue, 10 and stay, and making the market go up pretty high, 11 but we're at these artificial interest rates for it. 12 At some point, don't we have to pay the 13 price, the economy has to pay the price, when 14 these -- this policy comes out of the mix of all of 15 these economic factors that determine what's 16 happening in the economy? 17 CHRIS VARVARES: Ultimately, interest rates 18 with will go back up, yes, and with deleterious 19 effects at that time, but that would be the plan. 20 I imagine Jason can't comment, being from the 21 fed, but we're confident that the fed can unwind 22 these massive asset positions they've taken, I think 23 Jason will be glad to hear. 24 JASON BRAM: Yeah, well, I won't directly 25 answer your question, for the reasons that you 1 suggested. 2 But I think -- 3 SENATOR DEFRANCISCO: Theoretical answer. 4 JASON BRAM: No, I'll tell you what the 5 general thrust of it. 6 I mean, I think the -- the thrust of having 7 these -- these low interest rates, I mean, when you 8 say "artificially low," the fed is always, 9 historically, for -- since its existence, and other 10 central banks, "artificially" affected -- you know, 11 they set interest rates. 12 So I don't -- you know, I don't think they're 13 artificially low. I think they're at an appropriate 14 level, to try to get the economy going. 15 And the risk, you know, if we think -- I 16 think if we felt there were a risk of inflation 17 getting, you know, out of hand, or not being able to 18 grip on it, we would feel very differently. 19 But, right now, the balance of risks is very, 20 very much toward, you know, you have this huge 21 outlook that the economy's weak. 22 And, in a sense, I mean, worrying -- you 23 know, worrying about some sort of -- the interest 24 rates are too low, is kind of like worrying in the 25 middle of a drought that you're watering your plant 1 too much. 2 It's just -- it doesn't -- that would be my 3 analogy. 4 ASSEMBLYMAN FARRELL: Just one question on 5 the unemployment. 6 How do you know whether you decide to come 7 back in [unintelligible]? 8 I mean, how do -- we know they fall off 9 before they stop going to the unemployment office, 10 and they don't say they've gotten a job. They just 11 disappear. 12 Do you assume they fell off? 13 JASON BRAM: Well, there are different 14 measures. 15 So, the measure of when people are on 16 unemployment insurance or file for unemployment 17 claims, is not what the unemployment rate is based 18 on. 19 The unemployment rate is based on a survey of 20 households. 21 So, you know, as people -- you can -- if 22 you're -- if the benefits expire and you're no 23 longer are on the rolls of the people, you're still 24 unemployed, you know, in the sense that, someone 25 like you is going to get surveyed and say, Yeah, you 1 know, I'm unemployed, I'm looking for work. 2 So the -- to get back to your question -- 3 CHRIS VARVARES: Unlike most economic 4 variables, in this case, we ask them. 5 RONNIE LOWENSTEIN: Yeah, that's exactly it. 6 Are you -- 7 ASSEMBLYMAN FARRELL: Are you looking -- 8 RONNIE LOWENSTEIN: "Are you looking for a 9 job?" That's it. 10 ASSEMBLYMAN FARRELL: [Unintelligible.] 11 JASON BRAM: I mean, you could almost -- 12 ASSEMBLYMAN FARRELL: But, no, I won't go 13 there. 14 JASON BRAM: You could even imagine, I mean, 15 there's even, you know, the possibility, you know, 16 it's quite possible that someone, when their 17 unemployment benefits are expired, I won't say would 18 be more likely to be looking, but will probably be 19 looking harder for a job, because there's a more 20 [unintelligible] of -- 21 ASSEMBLYMAN FARRELL: Well, because I have 22 another problem in my community, the problem is, 23 people are unemployed, but they never were legally 24 employed, so they're not in the system, but they're 25 on the streets. 1 And you begin to see it, because the stores 2 cut down in the amount of people they have working 3 in them. And you get a lot of this stuff. 4 And you really don't know. 5 I can tell, at six in the morning in my 6 neighborhood, how the economy is going, because at 7 six in the morning, I go to the subway, and sit 8 there -- or stand there, never sit. You sit, you're 9 going to sit -- you sit, you get run over. 10 And by the amount of people going in, and how 11 they're dressed, and everything, I can tell you if 12 it's going on. 13 If things are bad, there's nobody taking 14 literature, there's nobody standing there, they're 15 not coming in. At six in the morning is when you do 16 it. 17 The people that work, who get on the subway 18 at 8:00 and 8:30 and 9:00, they don't lose their 19 jobs, they're okay. 20 But the lower echelon always makes the 21 earlier subway. 22 One other question. 23 On the 2 percent -- 24 I'm sorry the Senator left. 25 -- aren't we basically -- we've always had 1 2 percent interest; it's just a question of what the 2 base is underneath it. 3 In other words, when inflation is too high, 4 it's 7 percent, but it's still, always, 2 percent. 5 CHRIS VARVARES: Well, it varies a bit, but 6 you're quite right, you should look at real interest 7 rates. 8 ASSEMBLYMAN FARRELL: And the real interest 9 rate is always 2 percent -- 10 CHRIS VARVARES: Two very good points. 11 ASSEMBLYMAN FARRELL: [Inaudible.] 12 CHRIS VARVARES: But the variation is less 13 than the interest rate. 14 ASSEMBLYMAN FARRELL: Okay, because this "2" 15 is just, we're not acknowledging inflation because, 16 as you said, we need it. 17 CHRIS VARVARES: That's a good point. Very 18 good. 19 ROBERT L. MEGNA: That was great. 20 Any other questions? 21 We've had great questions from the panelists. 22 Any more? 23 If not, then I think we're done. 24 And I'd like to thank everyone for coming, 25 and taking time out of, I know, your busy schedules. 1 So, thanks again. 2 CHRIS VARVARES: Thank you. 3 4 (Whereupon, at approximately 3:14 p.m., 5 the New York State 2013 Economic and Revenue 6 Consensus Forecasting Conference concluded.) 7 8 ---oOo--- 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25