New York State 2016 Economic and Revenue Consensus Forecasting Conference

1 NEW YORK STATE

2016 ECONOMIC AND REVENUE CONSENSUS 2 FORECASTING CONFERENCE 3 ------------------------------------------------------ 4

State Capitol - Room 124 5 Albany, New York 6 February 25, 2016

1:30 p.m. to 3:30 p.m. 7 8 PRESIDING: 9 Robert F. Mujica Jr.

Budget Director, NYS Division of the Budget 10 11 PRESENT: 12

Senator Diane J. Savino 13 Chair, Banking Committee,

and IDC Member of Senate Finance Committee 14

Senator Catharine Young 15 Chair, Senate Finance Committee 16 Senator Liz Krueger

Ranking Minority Member, Senate Finance Committee 17

Assemblyman Herman D. Farrell, Jr. 18 Chair, Assembly Ways and Means Committee 19 Assemblyman Robert C. Oaks

Ranking Minority Member, Assembly Ways and 20 Means Committee 21 Robert B. Ward, Deputy Comptroller

NYS Office of the Comptroller 22 23 24 25 1

SPEAKERS:PAGE 2

Michael Jacobs 17 3 New York City Independent Budget Office 4 James Diffley (presentation interrupted) 31

IHS Economics 5

Jason Bram (via telephone) 32 6 Federal Reserve Bank of New York 7 James Diffley (presentation resumed) 47

IHS Economics 8

Hugh Johnson 64 9 Hugh Johnson Advisors, LLC 10 Chris Vavares 83

Macroeconomic Advisers 11

Commence questions to the panelists 100 12 13 14 15 16 17 18 19 20 21 22 23 24 25 1 Good afternoon. 2 I'd like to welcome everyone to the annual 3 Economic and Revenue Consensus Forecasting 4 Conference. 5 My name is Robert Mujica, Director of the 6 Budget. 7 Joining me today at the joint economic 8 revenue consensus forecasting panel are: 9 To my right, Senator Catharine Young, 10 Chairman of the Senate Finance Committee; 11 Assemblyman Herman D. Farrell, Chairman of 12 the Assembly Ways and Means Committee; 13 Senator Diane Savino, Chair of the Senate 14 Banking Committee, and member of the Senate Finance 15 Committee; 16 Senator Liz Krueger, Ranking Member of the 17 Senate Finance Committee; 18 Assemblyman Robert C. Oaks, Ranking Member of 19 the Assembly Ways and Means Committee; 20 And, Robert B. Ward, Deputy Comptroller. 21 I'm pleased to be presiding over this panel 22 for the first time. 23 Today's conference represents the first step 24 in what we all hope will be a smooth process towards 25 another on-time balanced budget. 1 Each member of this panel will have the 2 opportunity to provide brief opening remarks. 3 Afterwards, we'll hear testimony from a 4 cross-section of experts who will offer their 5 perspectives on the current economic and revenue 6 situation. 7 Let me begin with some positive news. 8 New York State's main-street economy is doing 9 quite well. 10 We have been seeing some of the strongest 11 rates of private-sector job growth since the heady 12 days of the high-tech Y2K bubble, but this time, 13 without the bubble. 14 The state economy has become more diversified 15 and less dependent on the financial sector. 16 Our construction sector, professional and 17 business services, and tourism-related industries 18 are doing well, and many of the jobs being created 19 pay solid, middle-class wages. 20 Of course, we also know that not every 21 New Yorker has been able to share in the relative 22 prosperity, so we continue to work on this issue. 23 Also, the New York State economy is highly 24 regionalized, and some parts are still trying to 25 recover from the job losses that were lost during 1 the last recession. 2 We've come a long way, but there still 3 remains a lot to do. 4 Of course, we also know that, despite our 5 recent successes, the financial sector still 6 contributes disproportionately to the state's 7 revenue stream. 8 By our estimates, both this year's and last 9 year's bonus seasons were either flat or down. 10 And if the volatility we're seeing thus far 11 this year continues, we will fully expect that it 12 will, next year's bonus season could be even worse. 13 And those forms of non-bonus income that are 14 also important components of our revenue base, such 15 as capital-gains realizations, will also likely be 16 negatively affected next year. 17 Because of the lag between economic activity 18 and the revenues generated by that activity, we will 19 likely not see the full impact of these recent 20 developments until well into the 2017-18 fiscal 21 year. 22 National economic growth appears to be stuck 23 in a low-growth rut. 24 For sure, some areas of domestic economy are 25 doing well: autos, housing, and restaurants. 1 But we have, virtually, recession-like 2 conditions in the energy sector and the 3 manufacturing outside of the auto industry. 4 Just as the U.S. was poised to take its 5 current place in the world's leading liquid-energy 6 producer, the Chinese economy, whose energy needs at 7 one time seemed insatiable, began to slow. 8 As they say, timing is everything. 9 We seem to be living in a world where low oil 10 prices have become a net negative for the U.S. 11 economy instead of a positive. 12 Who would have thought that was even a remote 13 possibility five years ago. 14 Global economic conditions remain grim, 15 helping to strengthen the U.S. dollar, and as a 16 result, corporate earnings have been generally 17 dismal, particularly in the export and energy 18 sectors. 19 Unfortunately, those businesses that are most 20 affected by these adverse conditions are 21 disproportionately represented in the major stock 22 market indices. 23 Equity markets noted, my first few weeks as 24 budget director, with a 10 percent correction in the 25 middle of the Wall Street bonus season. 1 Not ideal conditions to begin budget 2 discussions. 3 We all know that the Federal Reserve has 4 finally embarked on a path towards interest-rate 5 normalization, and, historically, there has been a 6 shift in monetary policy. 7 New York State, the home of the world's 8 financial capital, will be disproportionately 9 affected. 10 Again, we look to the panel for guidance on 11 the timing of the future Central Bank actions. 12 Recent events have demonstrated how sensitive 13 markets can be to the shifting expectations 14 surrounding Federal Reserve policy, and the 15 resulting market gyrations are likely to have a 16 larger impact on the state economy than the nation 17 as a whole. 18 So while some numbers are quite strong -- our 19 economy now has more private-sector job growth than 20 ever before -- for example, we must remind ourselves 21 that significant risks remain. 22 Thanks to the greater diversification of the 23 state economy and prudent state budgeting practices, 24 we are weathering the weakness in bonus payouts 25 without too much difficulty this year. 1 Thanks -- that said, this is exactly the 2 right forum for acknowledging that adding 3 uncertainty to our income and revenue projections, 4 and we must resolve to plan accordingly in the 5 future years. 6 So it is against this backdrop of economic 7 uncertainty that we embark upon this 8 revenue-consensus process. 9 It is important to note, that while there are 10 differences in our forecasts at a fundamental level, 11 there is broad agreement that New York State faces 12 substantial risk, given the nature of its revenue 13 base. 14 We will need to take the types of 15 responsible, necessary actions proposed in the 16 executive budget, on both the revenue and spending 17 sides, to strengthen New York's fiscal condition. 18 For five years we have worked together to 19 enact on-time, fiscally-responsible budgets that 20 embrace the principle that state spending must grow 21 slowly -- or, slower than the national economy. 22 With the establishment of the 2 percent 23 spending benchmark, the unsustainable trends of 24 yesteryear have been reversed, and we are seeing 25 measurable improvements in the state's financial 1 position. 2 By controlling and managing spending growth, 3 we have reduced the need to engage in 4 overly-aggressive revenue projections, and all 5 parties deserve credit for this responsible 6 budget-making. 7 I am particularly interested in hearing from 8 our expert panel as to when global conditions can be 9 expected to significantly improve, and when we can 10 expect the benefits of low gasoline and heating oil 11 prices to more than offset the negative impacts to 12 our economy. 13 We also would like to hear your estimates as 14 to when equity markets might be expected to bottom 15 out. 16 Each of the forecasts before us today 17 represents a good-faith contribution to the 18 consensus process. 19 Looking ahead, I know that we are all 20 committed to meeting the statutory March 1st 21 deadline for a consensus revenue agreement. 22 Revenue consensus is an important component 23 of achieving our shared goal of a timely and 24 responsible enacted budget. 25 And at this point, I'd like to offer to the 1 other members of this panel an opportunity to make 2 their opening remarks. 3 Senator. 4 SENATOR YOUNG: Thank you. 5 Thank you, Budget Director Mujica. 6 And, I also welcome the State Legislators and 7 our distinguished panel of experts here today, and 8 everyone who is in attendance, as we go over our 9 annual conference on economic and revenue 10 forecasting. 11 As you all know, we're here to listen to the 12 testimony of our invited guests panel of experts, in 13 order to have that testimony help our fiscal 14 committees reach a consensus forecast on the economy 15 and tax revenues. 16 We are eager to hear your views on the status 17 of the economy, Wall Street, and the state, in 18 general. 19 The Senate and the Assembly fiscal committees 20 have now released our economic and revenue 21 projections for the remainder of the current fiscal 22 year, and for state fiscal year 2017. 23 And you have been provided with those 24 forecasts. 25 This conference is the important first step 1 to helping the two houses of the Legislature and the 2 Division of Budget come to an agreement on a 3 budget -- I guess the Governor is part of that too, 4 right? -- by helping to come to an agreement on 5 revenue. 6 After we reach a consensus on revenues and 7 other available sources of funding for fiscal-year 8 2017 budget, the legislative budget process can 9 commence working through the details of various 10 appropriation bills and Article 7 bills as we 11 approach the start of a new fiscal year. 12 I have to agree with Budget Director Mujica 13 about the path of fiscal responsibility that we have 14 been on for the several last years, by controlling 15 spending, but at the same time, we are looking in 16 the Senate, as the majority, to invest in important 17 programs. 18 Whether it's tax relief for New Yorkers, 19 creating jobs and opportunities, investing in 20 education and transportation, all of these are 21 important to New Yorkers in improving their quality 22 of life. 23 And so we look forward to working together to 24 make things happen. 25 Again, I would like to thank the members of 1 the panel for taking the time out of their schedules 2 to be here with us today. 3 I look forward to the analysis and insights 4 that we will receive from you. 5 And I would suggest that, today, we in the 6 Legislature and representatives of the Governor, 7 begin, in earnest, the discussions which ultimately 8 will lead to another on-time state budget. 9 So thank you very much. 10 ROBERT F. MUJICA, JR.: Thank you, Senator. 11 ASSEMBLYMAN FARRELL: I look forward to 12 hearing the panelists, your thoughts on economic 13 outlook for both the state and nation, with a 14 particular focus on your views about the outlook of 15 New York State's economy and the increasing risks we 16 face, going forward. 17 I am particularly interested in hearing your 18 assessment as to how the unbalance of risk for the 19 national and state economies will affect New York's 20 fiscal outlook. 21 This analysis is important to us as we look 22 to gauge the economy, and to act as effective as 23 possible. 24 Your independent viewpoints, along with 25 today's discussion, help to provide a solid 1 foundation as we discuss and debate various aspects 2 of the budget. 3 And I look forward to being here and hearing 4 your comments. 5 Thank you. 6 ROBERT F. MUJICA, JR.: Thank you, Chairman. 7 Senator Savino. 8 SENATOR SAVINO: Thank you, Budget Director 9 Mujica. 10 I'm very pleased to be here today with my 11 colleagues and our new budget director. 12 And on behalf of Senator Klein and the 13 members of the Independent Democratic Conference, 14 I want to thank all of the panelists for joining us. 15 We look forward to hearing your thoughts on 16 the outlook for New York State, and the economy, 17 more generally. 18 As the national and state economies continue 19 to expand in the aftermath of the great recession, 20 there is still uncertainly as to how widespread and 21 sustainable the recovery in New York State will 22 ultimately be. 23 We continue to be concerned about weak 24 economic growth in the housing markets. 25 And in New York State, we continue to see 1 that wage growth still lags behind the national 2 pace, and the unemployment rate is expected to 3 remain at 5.5 percent. 4 This slow economic recovery, coupled with the 5 exorbitant costs of everyday life in New York, 6 continue to present a challenge to working 7 New Yorkers. 8 The Independent Democratic Conference 9 believes that this is a persistent problem that 10 requires the State's attention. 11 It's also important to remember the broader 12 context in which we're working, because there are 13 still many risks threatening the state's recovery. 14 New York's role in the national economy means 15 that disruptions at the national and global levels 16 can have an immediate impact on the state. 17 Declining oil prices and slow global economic 18 growth have caused volatility that could threaten 19 New York's recovery. 20 Therefore, today's discussion will be crucial 21 in assessing the realities of our economic situation 22 so that we can develop an understanding of how to 23 best move forward to face our challenges. 24 The consensus that we're confident we will 25 reach will lay the foundation for passing an on-time 1 budget that will allow the state economy to continue 2 growing, and will enable New York's working families 3 to prosper. 4 We are eager to begin laying the groundwork 5 for that process, and to hear the input of all of 6 our panelists in that regard. 7 Thank you for your participation. 8 ROBERT F. MUJICA, JR.: Thank you. 9 Senator Krueger. 10 SENATOR KRUEGER: Thank you all for being 11 here today. 12 I think that, pretty much, all the 13 introducers have raised exactly the same issues, so 14 I don't think I need to give a speech. 15 Thank you. 16 ROBERT F. MUJICA, JR.: Thank you, Senator. 17 Assemblyman Oaks. 18 ASSEMBLYMAN OAKS: Yes, I would just like to 19 say, thank you, for all of our panel to be here 20 today. 21 For me, this is -- we depend on a lot of 22 internal information, and us processing things, to 23 try to get to the end product. 24 I think today is the opportunity to hear some 25 expert advice, and to hear if we're on the right 1 track, or we're off. 2 As far as the Assembly Minority, we -- we're 3 very close in a lot of the numbers to what the 4 Governor has put out. Sometimes we come off a bit 5 more than that. 6 But I know that, for us, we see, you know, 7 just policy-wise, that, tax cuts, we have some 8 middle-class tax cuts that ought to become 9 permanent. 10 We have some on higher earners that might -- 11 are set to expire. 12 The question of whether that should be done, 13 we would agree that they should, to help stimulate. 14 And, also, giving our small businesses 15 predictability of our -- what our tax structure is. 16 And we always tweak it some. 17 But, always looking forward to hearing your 18 input, so that we, as I said, get -- can get to that 19 final -- our target date of the end of March for a 20 state budget. 21 ROBERT F. MUJICA, JR.: Thank you, 22 Assemblyman. 23 Bob Ward, do you have anything, 24 Deputy Comptroller? 25 ROBERT B. WARD: Comptroller DiNapoli has 1 observed that, although the state's fiscal position 2 currently is strong, there is rising uncertainty 3 about economic conditions that we are watching 4 closely. 5 The report on the executive budget that the 6 comptroller released yesterday, included cautionary 7 comments about the prospect of slowing revenue 8 growth, and the possibility of increasing budgetary 9 challenges for the state, in coming years. 10 We look forward to learning more from the 11 informed analysis of the economic experts gathered 12 for today's meeting. 13 ROBERT F. MUJICA, JR.: Thank you, Bob. 14 So we'll start with the presenters. 15 Michael Jacobs, from the New York City 16 Independent Budget Office. 17 MICHAEL JACOBS: It's on? 18 Okay. 19 I'm a little concerned. I had a handout 20 I was going to be talking from, and I don't have a 21 copy in my blue folder. 22 Is it, somewhere? 23 They were being printed up earlier, so they 24 exist. 25 My presentation will be easier to follow with 1 some of the numbers. 2 Okay. 3 Just keep in mind, I'm going to be presenting 4 an outlook and a forecast that we produced in late 5 November. 6 And a lot of the more specific forecasts of 7 growth and employment, income and output, are a lot 8 more optimistic than either what, you know, is 9 currently warranted, given problems in the -- the 10 output problems in the last quarter of 2015 and the 11 financial-market uncertainty. 12 So, you know, this is what we were thinking a 13 couple of months ago. 14 We're actually in the middle of revising the 15 forecast. I can assure you it's not going to be 16 quite as optimistic. 17 So, with that caution in mind, let me present 18 some things from our forecast that we had done. 19 The first is, New York -- and I'll be 20 concentrating on New York City. 21 New York City's economy has outperformed the 22 nation's economies since the end of recession, in, 23 both, that the severity of the recession was not as 24 great in New York City, and economic -- and economic 25 growth and employment was quicker to recover in 1 New York City. 2 And the second page of the handout has some 3 projections of real GDP growth. 4 Again, I think we're way optimistic in terms 5 of national growth. 6 I don't want to say that, you know, I -- we 7 are going to -- how much we're going to reduce it, 8 but it, clearly, will be reduced. 9 Employment growth is -- has been pretty 10 phenomenal in New York, whether you measure 11 employment growth by taking the average of one year 12 over the average of the preceding year, or, to 13 forward to Q4, as I prefer to do it. 14 We've had two years in a row where we've 15 added 100,000 jobs. And, the growth -- employment 16 growth rate is, clearly, stronger than the U.S. at 17 large. 18 That is probably not going to continue in the 19 near future, as the forecast values we have 20 indicate. 21 Also, the unemployment rate was slower. 22 And this is one area where New York wasn't do 23 so -- New York City was not doing so well. The 24 unemployment rate did not fall as quickly or as -- 25 as steadily as the U.S. unemployment rate did for 1 the first few years of the recession. But, after 2 2013, there's been this -- there has been a fall in 3 the unemployment rate. 4 Page 3, you'll -- just to repeat some of this 5 stuff: 6 The annual increases in employment have 7 averaged close to 100,000 jobs a year. 8 In recent years, the last two years, or -- 9 there have been -- there's been a decline of the 10 unemployment rate, from -- you know, by nearly 11 3 percentage points. 12 And what's -- what's indicate -- what the 13 strength of the labor market has indicated, by the 14 fact that the labor-force participation rate also 15 rose at this time, you'd think with more people 16 entering the labor force, it would be hard for the 17 economy to generate the jobs to absorb them. 18 But, clearly, New York City, in at least the 19 last two years, has been absorb -- finding a way to 20 absorb those in the labor force, or at least a large 21 portion. 22 The unemployment rate is still higher than 23 the United States as a whole. 24 And, the labor-force participation rate has 25 been rising in New York, while it's been falling on 1 the U.S. -- in the United States as a whole. 2 Our job forecasts are certainly not for a 3 continuation of $100,000 -- 100,000 jobs created 4 each year. 5 We see slower growth in the -- both the 6 national and the local economy, particularly the 7 local economy, and, a decline in the number of jobs 8 we will add. 9 Someone asked about the unemployment rate 10 being stuck at 5 percent. 11 Probably will go under that. 12 We don't see a whole -- enough of a growth 13 that it will go much below that. 14 And, I think the -- that we're pretty much at 15 the end of -- or, at least end of an increase in the 16 labor-force participation rate. 17 Slide -- the fourth slide has some 18 comparisons of employment growth in various 19 industries, in the years after the recession, and 20 during the forecast period. 21 One of the bright spots, and someone, 22 I think, referred to this, is that there's been a 23 diversification of the -- the city's economy, still 24 very dependent on the financial industry, but a 25 little less so. 1 And one of the bright spots is that 2 professional and business services has been -- has 3 been adding jobs at quite a strong pace, and those 4 jobs seem not to be tied to the fate of the 5 financial industry. 6 And that's a good sign for New York City's 7 economy. 8 Education and health: We believe education 9 and health, which has been fairly -- growing fairly 10 steadily, will slow down a bit, mostly because of 11 constraints in health-care growth. 12 Leisure and hospitality has been strong, much 13 to the surprise of a lot of us who thought that 14 tourism was going to fall off, given the economic 15 troubles, both, here, and after the recession, and 16 elsewhere in the -- for foreign visitors. 17 The securities-industry employment has not 18 been great in the last few years. 19 In 2015 it added, roughly, 2,000 jobs to the 20 city's economy, but that's after years of either no 21 growth or actual declines. 22 But, compared to the pre-recession expansion, 23 from about 2013 through 2000 -- to the middle of 24 2018 (sic), they added almost 10 percent of all new 25 jobs in the city. 1 That's not going to continue. 2 Growth we -- had started to resume again in 3 2015. 4 We expect there will be some growth in the 5 future, but not -- not -- nothing like accounting 6 for 10 percent of the job growth in the -- total job 7 growth in the city. 8 If you go to the next page, we're -- we look 9 at industry shares of wage growth. 10 While I should mention that, you know, in -- 11 there doesn't appear to be much difference from 12 the -- in the wage growth of the securities industry 13 from -- in the last few years, to -- and what we're 14 forecasting. 15 However, this contrasts with the securities 16 industry accounting for over half, about 52 percent, 17 of wage growth in the years leading up to the 18 recession. 19 It's still -- you know, the share of wage 20 growth has declined because of less employment 21 growth, and a decline in real wages, though average 22 salaries are still running around $400,000 a year. 23 So even with little -- little employment 24 growth expected in the securities industry, its 25 share of wage growth will -- is expected to rise. 1 Many of us look at the data that comes out of 2 the New York Stock Exchange for its member firms as 3 a general proxy for the health of Wall Street. 4 And I've -- here, I've compared the 5 pre-recess -- some pre -- 5-year period before the 6 recession, to 6 years since economic growth has 7 resumed, and then 4 years of our forecast period. 8 The employment-growth numbers are actually 9 not from the New York Stock Exchange. Those are 10 standard numbers from the Bureau of Labor 11 Statistics. 12 These are annual figures, so, we see that 13 there's has been a, you know, great decline by about 14 a quarter in the job growth in the securities 15 industry. 16 Revenue has also shrunk. And, the 17 net-profits numbers are a little misleading because 18 of wild swings in the profitability of Wall Street. 19 When the recession started, there were 20 two years of in -- of decreases -- well, not 21 decreases -- with -- of losses by securities firms, 22 almost 54 billion worth. And then there were 23 two years where firms' profits totaled 89 million. 24 So, that 2 percent decline you see for the 25 five years leading up to the recession is a bit 1 misleading, as is the 18.2 percent of the following. 2 And the reason for this, for the, you know, 3 relatively decent profits in the last few years, and 4 we expect this to continue in the forecast period, 5 is that interest-rate costs, net-interest expenses 6 of firms, have been quite low, in comparison to what 7 they had been leading up to the recession. 8 I talked about real wages decreasing. And, 9 they have not -- they've -- they have increased a 10 little bit since the recession, but nothing like 11 before the recession. 12 We don't expect -- while we expect there to 13 be some employment growth and some wage growth, 14 it's, obviously, much less than before the 15 recession. 16 You can call this a "new normal," if you'd 17 like. 18 And we are also thinking that net-interest 19 expenses will stay low because, yeah, the fed is 20 starting to nudge up interest rates, but, it's, 21 obviously, going to be doing so very gradually. And 22 the interest rate -- the interest costs to firms 23 will not be anywhere what -- like what they were 24 before the recession. 25 I'm going to -- in the interest of time, I'm 1 going to just, very quickly, go through some 2 comments on real estate. 3 These -- the forecast data is not produced by 4 our model. It's a little more of, I don't want to 5 say subjective, but, informed opinion by the people 6 in our office who look at the data carefully. 7 They believe that the sales growth of 8 commercial real estate is unlikely to continue, that 9 it's unsustainable for the next few years. 10 New records were set in 2015 of the value of 11 commercial real-estate sales. 12 And the value of commercial real-estate 13 sales, year to year, depends very heavily on whether 14 there are these, you know, very high-end sales of 15 $100 million or more. 16 The biggest sale last year was a 2.2 billion 17 sale of the New York Telephone building in midtown. 18 So, we expect sales to decline in the near 19 term this year, maybe into 2007 (sic), but then 20 grew -- and then stabilize or increase a little bit. 21 Obviously, the role of foreign buyers who 22 notoriously have been buying up a lot of property as 23 a safe-haven for wealth is something that we're 24 watching. 25 Residential real estate: The low interest 1 rates have continued to fuel activity in the 2 residential real-estate market, which didn't decline 3 as much as the commercial market in the wake of the 4 financial crisis; and, yet, the volume of sales is 5 still, in this year's, it's just about equal to its 6 peak in 2007. And that's in nominal terms, not 7 adjusted for inflation. 8 As I said before, commercial sales are a 9 function of -- unlike commercial sales, the volume 10 of sales in residential real estate is more a 11 function of rising prices than increases in the 12 number of transactions. 13 We expect the value of sales to taper off in 14 2016, into 2017 and '18, although we also expected 15 greater interest-rate rises than we're now 16 predicting. 17 So, I'm not sure that will be borne out in 18 the new forecast. 19 Next two slides have some details about 20 residential real estate in Manhattan and outside of 21 Manhattan. 22 And, at the back of the packet are some 23 graphs, for people who like to look at graphs, of 24 the median sales prices and sales volumes, both 25 inside Manhattan and in the other boroughs. 1 I'm going to skip over those in the interest 2 of time. 3 And I want to get to something that we did 4 back in late November. 5 We're certainly not predicting a downturn or 6 a recession in the national economy or in New York's 7 economy, but, you know, there is concern over a 8 possible recession. 9 The Mayor mentioned this in his introduction 10 of the preliminary budget. 11 What we've done is a hypothetical exercise, 12 is to take one of the recession scenarios, a very 13 moderate recession scenario, that Moody's Analytics, 14 formerly economy.com, has shared with us, and we fed 15 it into our local model. 16 And, you know, reasons for concern obviously 17 are, that we've had a long expansion. There's 18 been -- the stock market instability. 19 Neither a long expansion or spare markets 20 don't necessarily lead to downturns. 21 There are possibility of various shocks, 22 which I'm sure the macro presenters will talk about. 23 But, if you go to Slide 12, you'll see 24 what -- where the declines -- how the declines in 25 New York City's employment pay -- play out over 1 scenario. 2 The recession starts in the beginning -- as 3 we modeled it, starts in the beginning of 2016, and 4 it lasts until the third quarter of 2017. 5 And, the graph is a cumulative job loss 6 from -- from whenever that recession starts. 7 And we've -- we've made -- we -- the graph 8 compares the severity of the projected downturn, in 9 this hypothetical exercise, to previous downturns. 10 It's a little more severe in terms of the 11 number of job losses than the last recession, but, 12 it's nothing like the much greater job losses that 13 occurred in the recessions that began in 2001, and 14 1990. 15 So, by the middle of 2017, we expect the 16 city's economy to have lost about 168,000 jobs, and 17 that's almost two -- 250,000 less than the base -- 18 our baseline forecast, than -- the difference 19 between the job loss under the alternative scenario 20 and the job gains we have in our baseline forecast. 21 Finally, I just -- I know this is a meeting 22 about economic forecast, but I thought it might be 23 useful to look at how this hypothetical recession 24 plays out in terms of city taxes. 25 The least sensitive tax is -- at least in the 1 next few years, is the property tax of because -- 2 largely, because of the byzantine structure of 3 New York City's tax system, where you have four 4 classes of taxes, you have constraints and phase-ins 5 of assessment growth, you have limits to changes in 6 the share of total liability or -- that each class 7 bears, and a few other change -- a few other 8 constraints. 9 Of the more sensitive taxes, obviously, would 10 be income taxes, both personal and business income. 11 And, as measured as a percent of the baseline 12 forecast, we would say that property tax -- 13 property-transfer taxes -- the mortgage-recording 14 tax and the real-property transfer tax -- that's the 15 most sensitive, in terms of as a percentage of 16 baseline forecast. 17 The declines in all of -- of the -- the 18 declines in revenue increase over a two-year period, 19 as was said. You know, economic downturn doesn't 20 immediately affect the revenues hit -- the revenue 21 hit plays out over time. 22 Our model suggests that the greatest hit 23 is -- or, the peak of the revenue loss is in 24 two years from the start of a recession. 25 And that's -- that's about it. 1 I would be happy to answer any questions, now 2 or later. 3 ROBERT F. MUJICA, JR.: Any questions now? 4 No? 5 Okay. We'll go on to James Diffley, from 6 IHS Economics. 7 JASON BRAM (speakerphone): Hello? 8 JAMES DIFFLEY: I've got -- glad to be here 9 again. Thanks for inviting me once again. 10 I've got a presentation packet for you there. 11 So I'll go over -- 12 JASON BRAM (speakerphone): Am I on? 13 JAMES DIFFLEY: -- U.S. macroeconomic 14 forecast, and move on to the regional -- 15 ROBERT F. MUJICA, JR.: Hello? 16 JASON BRAM (speakerphone): Hello? 17 JAMES DIFFLEY: Is he on -- oh, there you go. 18 ROBERT F. MUJICA, JR.: Jason? 19 JASON BRAM (speakerphone): Oh, am I next, or 20 am I not next? 21 ROBERT F. MUJICA, JR.: Are you ready now, 22 Jason? 23 JASON BRAM (speakerphone): Oh, I'm ready, 24 yeah, if you guys are. 25 ROBERT F. MUJICA, JR.: Okay. Go ahead. 1 JASON BRAM (speakerphone): I'm sorry. 2 I didn't mean to interrupt, Jim. 3 JAMES DIFFLEY: That's okay. 4 ROBERT F. MUJICA, JR.: Go ahead. 5 JASON BRAM (speakerphone): Okay. Can 6 everyone hear me? 7 (Multiple people say "Yes.") 8 JASON BRAM (speakerphone): Okay. Great. 9 So if you want to -- I assume you have the 10 printout. If you want just to follow along on 11 there, I'll try to be quick, to leave a decent 12 amount of time for the macro folks. 13 First, let me say that the views that 14 I express are mine, and not those of the Federal 15 Reserve Bank of New York or the Federal Reserve 16 system. 17 I'm going to go through this presentation, 18 but some of what -- some of what's on these charts 19 has pretty well been covered by Michael Jacobs 20 there, so I'll kind of speed through some parts of 21 it and -- where appropriate. 22 So the first chart refers to our 23 Federal Reserve Bank of New York business surveys, 24 which we've been doing monthly for a number of 25 years. 1 The Empire State Manufacturing Survey, as you 2 would gauge from the name, covers manufacturers in 3 New York State. 4 The Business Leader Survey covers service 5 firms, largely, in New York State, but also in 6 northern New Jersey and southwestern Connecticut 7 which are parts of our district. 8 And, these are fairly good indicators. 9 You can see that, going into the 2008-2009 10 recession, they both went down pretty fast and 11 pretty hard. 12 There have been some other, I don't want -- 13 I guess we would call them "false signals," that the 14 late 2012, you'll see a big drop in the 15 service-sector index. That was right after "Sandy," 16 understandably, but things sort of snapped back. 17 And, now, in the last six or seven months 18 we've had a very deep and protracted slump in our 19 manufacturing index, which has been at its lowest 20 level, and for the longest time, since the 2008-2009 21 recession. 22 And we found that a little bit disconcerting, 23 except that our service-sector index seemed to be 24 holding up. But that also fell in February, to a -- 25 to a -- sort of a -- not a disastrously low level, 1 but to a level below zero, which is kind of the 2 break-even point. 3 To give you some intuition, for those of you 4 aren't familiar with these surveys: The concept of 5 these diffusion indexes are very, very simple, in 6 the sense that it's, basically, the percent of 7 people that say things are getting better, minus the 8 percent that say things are getting worse. 9 So when you have an index reading of below 10 zero, that suggests that more people say things are 11 getting worse than better. 12 That's all it says. It doesn't say anything 13 about the magnitude. 14 So, this is -- this is a sort of a warning 15 sign. 16 We're not that concerned yet, because it's 17 only really been one month that the service-sector 18 index has been weak, but it's something that we're 19 definitely watching. 20 The next chart is on a regional-activity 21 index, which is a composite measure based on 22 employment, unemployment, a measure of hours, and a 23 measure of wage and salary earnings. And these are 24 then blended together and smoothed, and re-trended, 25 to create a measure that's supposed to sort of mimic 1 economic -- the level of economic activity. 2 And as you can see here, New York State has 3 bounced back pretty strongly, and New York City has 4 been exceptionally strong. 5 These indexes, by the way, are all based on 6 the beginning of the national recession, which was 7 in late 2007, at 100. 8 So what it really means, is that 9 New York City's economy, if you take it literally, 10 has -- is -- is -- is up -- is up more than 11 25 percent from where it was before the recession, 12 and New York State's is up a little more than 13 10 percent more, if you take it literally. 14 And, yeah, you probably noticed there's been 15 a little slowing in New York State. 16 That's probably reflective of hours, and some 17 weakness in the manufacturing sector. 18 We're not too concerned about that, but, 19 again, it's something that we're watching. 20 Now, the next chart looks at private-sector 21 employment trends. 22 Again, these measures, so that we can put 23 them all on the same scale, are indexed to the 24 beginning of the recession. 25 And you can see that the -- much to, I think, 1 to a lot of the -- our regional economists' 2 surprise, the recession wasn't nearly as steep in 3 New York State or New York City as it was 4 nationally. 5 And you can see that New York City has come 6 roaring back quite strongly, and New York State 7 as well, and, again, it's, largely, due to 8 New York City. 9 New York City's had its strongest boom in 10 decades, at least in terms of employment. 11 And then New York State, of course, has also 12 been outperforming the nation in terms of the 13 comeback. 14 Now, before I go to the next few charts, you 15 know, one of the -- New York City has been 16 exceptionally strong, compared to the nation, 17 compared to the rest of the district, and so forth. 18 One of the things that we're looking at, as a 19 sort of long-term trend that might be supporting 20 this, is -- is this sort of urbanization trend; that 21 is, you know, through a good part of the 22 twentieth century, you had this gradual migration of 23 people, and then businesses, from central cities to 24 the suburbs. And, more recently, there seems to be 25 have been somewhat of a reversal of that. 1 Now, it's not clear how much of this reflects 2 changing preferences, how much of it reflects 3 elevated energy prices, because, you know, you spend 4 a lot less on energy in a New York City, for 5 example, apartment than you would in a house out in 6 the suburbs. 7 I don't -- I don't -- and now, obviously, 8 that's important, because now energy prices are much 9 lower, and the question is: Does that then tilt 10 that balance in favor of the suburbs versus the 11 city? 12 I don't think that that's as big a factor as 13 the other parts of it, but, again, that remains open 14 to be seen. 15 But, New York City doesn't seem to really 16 have slowed much at all, going into the end of 2015. 17 And I should add that, you know, with 18 benchmark revisions coming up soon, we look at 19 the -- we closely track the data that the numbers 20 get revised to, and it doesn't look like -- 21 (speakerphone failure) -- you know, weaken at all. 22 In fact, they may even make it look slightly 23 stronger, the trends in New York City, and, to some 24 extent, New York State. 25 So these are -- these are very, very, you 1 know, positive developments. 2 The next few charts are a look at sort of 3 different parts of the -- within the region -- 4 within the state. 5 I'm not going to get into much detail, but 6 you can kind of look them over yourself, and I'll be 7 more than happy to take questions at the end. 8 But, basically, I think the big take-away is 9 that downstate is -- has done better than upstate in 10 terms of job growth. But, upstate has not done too 11 badly relative to other business-cycle recoveries. 12 So, for example, if you go -- I don't know 13 what number chart it is -- it looks like it's about 14 Chart 6, maybe: 15 You can see that Buffalo has actually 16 outperformed the U.S. in terms of where it is 17 relative to before the recession. 18 Rochester has done reasonably well. 19 And these are areas that have typically 20 underperformed, consistently, the nation. And 21 they've underperformed it, in part, because you 22 don't have population growth at the same rate as in 23 other parts of the country, and so forth. 24 And then we see that Syracuse is lagging a 25 bit. 1 The next chart, you see that Albany, largely, 2 reflecting the tech boom there, has done pretty 3 well. 4 But, again, most parts of Upstate New York, 5 it's really a mixed bag. You have some laggards, 6 and some areas that are doing really well. 7 Binghamton and Elmira, which are old 8 manufacturing hubs, have been very weak. 9 And then one -- one which was, for some 10 reason, missing from the downstate chart, 11 Long Island has been doing pretty well. It's been 12 pretty much tracking along with where the nation is. 13 So, Long Island is performing about average. 14 Now, in case any of you have lost track of 15 which chart we're on, moving into this -- what we 16 call a "bubble chart," it's not -- "bubble" has 17 nothing to do with, you know, housing or financial 18 bubbles. It's that the actual data points look like 19 bubbles. 20 Just to make that clear. 21 And the way this chart is set up, it's a 22 somewhat complex chart, but, really, it's -- the way 23 to look at it is that, each bubble, each dot, is an 24 industry. The size of the dot reflects how big it 25 is. 1 And we're focusing here on Manhattan. 2 We could do this for New York State, we could 3 do it -- you could it for any one of a number of 4 regions, but since Manhattan is such a core part of 5 the state, especially in terms of revenue, we're -- 6 I just thought I would focus on that here. 7 And you can see that the securities -- so 8 the -- the right-to-left axis, or, the -- the 9 industries on the right, are the ones that are very 10 highly concentrated in New York City. 11 So, for example, securities has about 12 10 times the share that it would nationally in 13 New York City. 14 And then -- then the firm -- the businesses 15 on the left are -- tend to be underrepresented in 16 New York City -- in Manhattan. 17 And then the vertical axis simply indicates 18 how they've done over the last -- from 2009 to 2014. 19 So, basically, what you want for your region 20 or your county, or whatever, is you want industries 21 in the upper right and lower left, because the upper 22 right means it's very important there, and the fact 23 that it's high up reflects that it's growing 24 rapidly. 25 And then the industries that are on the left 1 tend to be underrepresented here, and they're 2 shrinking or underperforming the average. 3 So this -- this kind of points out that the 4 securities industry, and some of the others which 5 are very important, have not really been drivers of 6 growth. But things like Internet publishing and 7 motion pictures, and then some aspects -- some parts 8 of the professional and technical services, have 9 been -- are fairly important for New York City and 10 have been driving a lot of the growth. 11 So let me -- let me focus in a little on the 12 securities industry, which I think Michael Jacob 13 summed up pretty well, but I'm just going to show 14 you a chart here -- a couple of charts. 15 The first one shows, over the last few 16 decades, that each boom and bust in New York City's 17 economy has been preceded, or, you could argue, 18 driven, by booms and busts in the securities 19 industry, or, Wall Street. 20 And the gray-shaded areas are downturns in 21 the securities industry. 22 And you can see that each -- each upturn and 23 each downturn, pretty much, has been led by the 24 securities industry; that is, the securities 25 industry turns, and then the rest of the economy 1 turns. 2 There are -- obviously, these two are on 3 opposite scales. 4 The interesting thing about this last 5 recovery expansion is that, it's been one of the 6 strongest, probably the strongest, certainly, 7 I don't want to say in history, but, certainly, in 8 the past half century. 9 As you can see from this chart, the "gold" 10 line is outside the securities industry, is sort of 11 the rest of the economy. 12 And, it's really quite surprising how well 13 the city's economy has done with, really -- without 14 any help from its key industry, which is securities. 15 And if you go to the next chart, it just sort 16 of zooms in on the past few years, and you can see 17 that, you know, it's been driven by, pretty much, 18 everything but securities. Not everything, but a 19 lot of different industries. 20 And so the next question that might come 21 across your minds is: So if Wall Street's not 22 driving it, what is? 23 And you have a lot of different, mostly 24 service-based industries, and, specifically, health 25 and education, leisure and hospitality, retail. 1 And one thing that those industries tend to 2 have in common, is that they tend -- not all of 3 them, for example, not so much education, but, 4 certainly, retail and restaurants, and so forth, 5 tend to be low-paying industries. 6 And so what you see is that, the mix of job 7 growth has not been favorable in terms of total wage 8 and salary earnings; and, thus, in terms of total 9 revenues. 10 But, because the overall employment growth 11 has been so strong, it's sort of -- it's sort of 12 helped offset the fact that you have this shift in 13 the mix of employment. 14 And, then, we also did -- we did a report on 15 this last year, we looked very closely at 16 New York City's tech sector. And that's been a 17 pretty -- as you remember, the Internet publishing, 18 and other industries that we considered to be sort 19 of tech industries, have been growing very rapidly 20 in New York City. 21 They're not nearly as important here, for 22 example, as they are in places like Silicon Valley, 23 Route 128 in Boston, Seattle; but, nevertheless, 24 they've been growing very rapidly, and they've been 25 not an insignificant contributor to overall job 1 growth and earnings growth. 2 And then, to sort of try to wrap up quickly, 3 the last few charts refer to the housing market. 4 The first one kind of points out that 5 Upstate New York didn't really have, if we went 6 back, you know, before 2006 -- again, these are 7 indexed to the peak of the housing market in 2006 -- 8 Upstate New York didn't really have a huge housing 9 boom, or a bubble, or whatever you want to call it. 10 And so when the housing bust came, it didn't really 11 have a big bust. 12 Not so much true, obviously, not for the U.S. 13 And New York State, and downstate and 14 New York City, obviously, did get hit, but not as 15 hard as the nation. 16 Obviously, the nation includes, you know, 17 a lot of places like Florida, like California, 18 the -- what they call the "sand states," which were 19 particularly hard-hit. 20 And so New York State -- and so 21 Upstate New York has done pretty well. 22 Downstate New York has come back. 23 New York City has done a lot better than the 24 suburbs around New York City, and, as a whole, the 25 metro area is kind of, you know, inched its way back 1 up to where it was before the recession. 2 And then the next couple of charts, again, 3 I don't want to get into too much detail, but it's 4 really remarkable that Buffalo has been the leader 5 in terms of the housing market. 6 Now, obviously, in terms of the level of home 7 prices, it's still a long shot from, you know, 8 New York City or, pretty much, anywhere in Downstate 9 New York. But, nevertheless, there's been more 10 home-price appreciation in Buffalo than in the rest 11 of the region, and also more than Buffalo has 12 probably experienced over this long a time, in -- in 13 a long, long time. 14 Let me just -- let me just mention that 15 these -- the home-price indexes we're using are 16 core -- it's an organization, CoreLogic. They look 17 at repeat sales, and, they have a model that kind 18 of -- it -- so what you are looking at, in theory, 19 and, hopefully, in practice, is how much the same 20 home would have sold for. 21 It's not affected, like some of the median 22 home-prices indexes are, by shifts in the mix within 23 Buffalo. 24 So, for example, if, suddenly, the high end 25 of the housing market went dead, and a lot of 1 low-prices homes were selling, it would look like 2 median prices are going down. 3 That -- this isn't distorted by that. This 4 is based on same-home sales -- similar home -- 5 same-home sales. 6 And then the last one shows that there are 7 parts of New York State, the Lower Hudson Valley, 8 that have lagged, where home prices really have not 9 recovered at all. 10 And the last chart is based on the -- we have 11 a big database of mortgages, you know, the status of 12 mortgages, across different parts of the country. 13 So if you look at New York State, we divide 14 into downstate and upstate. I think the dividing 15 line is somewhere around, like, Kingston. 16 So, I know everyone has a different 17 definition of what "upstate" and "downstate" is, but 18 I think the picture remains the same; and that is, 19 that there's still a huge backlog of foreclosures in 20 New York State. 21 And the reason for that is, not that it's a 22 bigger problem here, necessarily, but more that 23 properties remain in foreclosure for a much longer 24 period than in the rest of the nation. It has to do 25 with the judicial; the laws that govern how 1 foreclosures go. 2 And so it's been coming down, but, it's 3 still a pretty high stock, especially in 4 Downstate New York. You see that over 5 percent of 5 mortgages, at the moment in time, the latest point, 6 which is late November, late last year, are in 7 foreclosure. 8 And I think I'm going wrap up. 9 I'm -- I'm, you know, perfectly happy to take 10 questions, whenever. 11 ROBERT F. MUJICA, JR.: Thank you, Jason. 12 Any questions for Jason? 13 No. 14 JASON BRAM (speakerphone): Okay. Thank you. 15 ROBERT F. MUJICA, JR.: James. 16 JAMES DIFFLEY: Again, I'm glad to be here. 17 So I've got a slide show of the U.S. economic 18 forecast here. 19 I guess I'm the first this morning to talk 20 about -- this afternoon to talk about the U.S. macro 21 economy, so, we'll go there. 22 And I'm sure you and Chris will have a lot to 23 say in response to that. 24 The summary is simply that, we think the U.S. 25 economy is sound, but, it's being buffeted by global 1 financial- and commodity-market turmoil. And we'll 2 see how we expect that to play out in a second. 3 2016 is shaping up globally now as another 4 substandard year. 5 Since 2012, the world economy has been -- 6 which, previously, had been growing at 3 to 7 4 percent per year regularly, has been stuck between 8 2.5 and 2.6, 2.7, percent growth every year. And 9 that's unlikely to change in 2016. 10 So, we've reduced our -- recently, our world 11 GDP forecast to 2.6 percent this year. 12 We do see it coming up, though, in 2017, 13 2018, 3.1 percent, and 3.2 percent. 14 So that's important to note, going forward. 15 What's happening here that affects us? 16 The sluggish global economy. 17 The strong dollar. 18 All right? The strong dollar is a very 19 important factor here this year, related somewhat to 20 the price of oil, but, by itself, makes imports -- 21 makes our -- makes for import substitution by 22 American consumers more interested in buying 23 imports, makes our exports less competitive. 24 And that's a huge factor, going forward. 25 Even in -- and, of course, in Buffalo, for 1 instance, New York is affected by the sharp decline 2 in the loonie, which I think is down to about 3 70 cents to the dollar, so that, no doubt, is 4 affecting consumers coming across and visiting 5 Western New York. 6 The service sectors in the economy are -- 7 talking about the U.S. now, are expanding. We 8 expect that to continue. 9 Manufacturing production, I'll come back to 10 this in a couple of slides, is on decline a bit, and 11 will continue, at least for the first half of this 12 year. And you'll see why -- why in a moment. 13 But consumer spending's import -- supported, 14 generally, by rising incomes, low inflation, and 15 also low unemployment now in the U.S. The 16 fundamentals are strong there. 17 Housing construction: The rebound in 18 housing, from the great recession and the 19 housing-bubble burst, continues to lag behind 20 expectations, but it is continuing to recover. 21 Prices are moving up. Starts are moving up, albeit 22 slowly. 23 We expect pent-up demand from young adults, 24 and improving credit availability, finally going 25 forward, to boost that, but, gradually, over the 1 next few years. 2 Growth in domestic demand for products and 3 stabilization in commodity prices will finally lead 4 to moderate gains in business fixed investment. 5 We think we're at the bottom now, okay, of 6 what's been a commodities super-cycle. And we 7 include oil prices in that, that oil prices have 8 gone lower than we expected. 9 We do think we'll gradually come out of that, 10 going forward, which will serve as a boost to 11 growth. 12 As Director Mujica pointed out, oil prices 13 seem high -- low oil prices seem, surprisingly, to 14 be a negative to the U.S. economy. 15 We don't think they're, on net, a negative, 16 but there's certainly a large sense now, that unlike 17 decades of the past, that the U.S. has become an 18 oil-producing nation. Right? 19 So low oil prices are not ambiguously good. 20 And there's certainly been a large negative 21 response in terms of manufacturing -- the 22 manufacturing sector, owing to the supply chain of 23 oil and gas investments, and capital expenditure, 24 which had been driving a lot of the U.S. economic 25 growth earlier this decade. 1 So that's all pulling back. All right? 2 And we see that -- you'll see that in some 3 regional slides, going forward -- as we go forward. 4 Okay. The next slide, we graphically show 5 our real GDP growth has behaved, and how the growth 6 in employment has behaved, and will behave, going 7 forward. 8 The one thing you'll note here, GDP growth 9 finally coming up to reach 3 percent, that 10 "3 percent" line there, in the second half of 2016, 11 but staying below it, going out in the near term 12 forecast, through 2018, which, again, is a little 13 surprising, as productivity growth has been lower we 14 would have expected, and the economy is stuck in a 15 bit of a lower-growth mode than we would have hoped 16 a few years ago, as we finally came completely out 17 of the recession. 18 The one thing I'll note, though, is that 19 we're under 5 percent employment, not only in 20 New York, as has been mentioned, but for the U.S., 21 and the U.S. is even a little lower. 22 We're at, essentially, "full employment," in 23 economist terms. 24 So we're going to see, and this is an 25 important point in our forecast here, if you see the 1 line graph here, employment growth is going to be 2 slowing, all right, because we're not employing 3 previously-unemployed workers. Okay? 4 So normal demographic growth and labor-force 5 participation is going to slow the rate of growth. 6 We see that in the U.S., our U.S. forecasts. 7 We're going to see it significantly in our 8 New York forecast, which, if you looked at the 9 comparison graphs, is the key difference -- or, 10 table, is the key difference between our forecast 11 and the rest of the panelists, I think, generally. 12 Although, the IBO did have a fairly low 13 employment rate for New York City, going forward. 14 On the next slide, we show the Institute of 15 Supply Management Index. 16 And there we see the distinction, as has been 17 mentioned before, the service sector recently -- if 18 you look to the right of the graph, the service 19 sector behaving in increase -- with increase in 20 demand, but manufacturing sector having turned 21 negative. 22 Again, the high dollar effect on exports, 23 import substitutions, negatively affecting 24 manufacturers in the near term. 25 The table on the next slide shows real GDP, 1 and the components of real GDP, out for the next 2 three years. 3 Real GDP growth: 2.4 percent in 2016. 4 2.8 percent in 2017. 2.6 percent in 2018. 5 I'll note, the consumption line, the second 6 line, is near 3 percent for the period, and higher 7 than GDP growth, so it's contributing a greater 8 amount. 9 Also, notice at the bottom two -- two rows, 10 you see exports and imports fast -- faster growth, 11 finally, in exports in 2017, but, very sluggish 12 growth in 2015 and 2016, while the imports are 13 relatively strong, because that's the effect of the 14 strong dollar, and the effect of the trade imbalance 15 on U.S. domestic demand. 16 Other key indicators on the next table 17 include industrial production. 18 Notice, 2016, negative 0.4 percent in the 19 measure of output of our manufacturing firms. 20 I'll point out a couple of other. 21 Light-vehicle sales, which has been a strong 22 spot in the manufacturing economy, with some 23 benefit, particularly that -- to Western New York, 24 to be sure. 25 Jason mentioned Buffalo's relative 1 performance, for instance. 2 But we think that's peaking. 3 New-car sales of about 18 million are about 4 as high as we're going to get, so we increased 5 rapidly to 2015, 2016, but that's going to level 6 off. Not decline, but level off. It's not going to 7 be contributing to further growth. 8 "Housing start" line, you can see how slowly 9 it's come up, and will come up to what we think is a 10 normal level by 2018, of 1.5 million new units in 11 the U.S. All right? 12 Again, slow -- approaching that level much 13 slower than we would have guessed back a few years 14 ago. 15 The CPI, very restrained. 0.1 last year. 16 0.6 this year. But then reappearing, at some level 17 of inflation, in 2017 and 2018, a moderate level, of 18 course. 19 If you're interested in our oil price, we see 20 it, notice, for Brent level, $39, averaging, in 21 2016; 49 in 2017; 59 in 2018. 22 That's a very volatile forecast, I'll admit, 23 but we certainly put a lot of effort into trying to 24 get that right, but recognize the -- the uncertainty 25 of that. 1 The fed fund's rate, the Director asked 2 about -- I guess about that. I should answer that. 3 I mention that the fed will be cautious in 4 raising rates this year -- the first bullet -- the 5 first slide's bullet mentioned that -- more cautious 6 than we previously had thought. 7 A few months ago, we would have guessed that 8 the fed would raise rates four times during 2016. 9 We've now reduced that to two, all right, in 10 light of the current sluggishness. 11 So the -- but our end result is that, in 12 2014, the fed fund's rate average was 1.4 percent, 13 low by historical terms. 14 So, the fed's going to take a very cautious, 15 gradual process. 16 If you turn to the next slide, "Risks to the 17 U.S. Forecast," the colored slide, I think is 18 important. 19 We normally talk about scenarios of either 20 greater optimism or greater pessimism. 21 At this point, we think about the possibility 22 of a mild recession. Give it a probability -- 23 relatively low probability of 20 percent. 24 If there's even weaker global growth and a 25 stock market plunge, or further stock market plunge, 1 could push us into a mild-recession scenario. 2 On the positive side, productivity growth has 3 been slower. And it's very much a matter of debate 4 as to how we're measuring productivity growth, and 5 why it's slower. But suppose that accelerates, that 6 would be a positive outcome, as well as home 7 building picking up faster than is the case in our 8 baseline forecast. 9 If you turn to the next graph, the next 10 slide, you'll see the implications of those two 11 scenarios playing out. 12 And what I want to focus on is the gap 13 between the red line and the green line, how much a 14 difference it would make in real GDP growth in late 15 2016 under those different scenarios. 16 So there's a wide range of possibilities 17 there. 18 But the bottom line is that, while growth 19 will continue to disappoint in 2016, we think it 20 would take a lot more pain and stress to push the 21 global economy, include -- and, especially, the 22 United States, into recession. Okay? 23 We turn to the regional outlook. 24 I show, in the first map, the employment 25 picture as it appears. And there will be a 1 re-benchmark, as somebody mentioned earlier, coming 2 up in a couple of weeks from the BLS. 3 The south and west are returning to the lead 4 in employment growth in 2015, very much a pattern, 5 where the southern states and the western states are 6 growing -- are growing faster, which is -- was the 7 typical case before the great recession. And they 8 were states that were more dramatically negatively 9 affected by the housing boom and bust, in many 10 respects. 11 That's, apparently -- returned to normalcy, 12 in that sense, is apparent. 13 That's one of the reasons we have relatively 14 low New York forecast, going forward, as 15 I mentioned. 16 Migration flows to the sunbelt have 17 reappeared. 18 They stalled in the housing boom and bust, 19 particularly the housing bust, and also in the 20 recession. 21 We see in the 2015 data from census that 22 that's now returned. Florida is attracting a lot of 23 New Yorkers again, as is Arizona. And the same is 24 true, generally, for the rustbelt versus the 25 sunbelt. 1 You notice the middle of the map is not so 2 bouyant in 2015. 3 Again, that's the part of the country that 4 really is an oil producer. 5 Texas's growth has been cut in half, 6 essentially, nowhere near a recession, because Texas 7 has such a, you know, high fundamentals. But, a 8 significant negative impact on Texas. 9 And North Dakota is certainly in a recession, 10 and that that's, obviously, a special case. 11 What do we see, going forward? 12 On the next map, in 2016, again, that sunbelt 13 prominence continues. 14 New York is somewhat in the lower part of 15 that. 16 Let's turn to the -- if you turn to the next 17 slide, I'll describe where we are -- well, I won't 18 describe it here. 19 Let me talk about New York versus the rest of 20 the economy, though, in a minute. 21 In New York State we have achieved, as others 22 have mentioned, particularly in New York City, high 23 growth. 24 The job growth at the end of the year is 25 about 2.1 percent per year, which is stronger by 1 1.7 percent for the year. 2 In the fourth quarter, it was 22nd among 3 states, so in the top half, but in the middle for 4 2015. 5 Downstate, however, did exceed the U.S., as 6 Jason and -- Jason and others have pointed out. 7 And, indeed, Buffalo, as has been mentioned, 8 and in the very near term, Syracuse and Utica, 9 actually performing very fast, as we go to the end 10 of the year. 11 Unemployment, notably, is below 5 percent 12 across the state. Across New York State, 13 4.8 percent, on average, across there. And 26th, 14 right in the middle, across -- among states. 15 Okay. If we go to the -- the one thing I'll 16 mention here -- well, I'll wait for the bottom line 17 to mention the construction surge in New York City, 18 which I think was focused on somewhat indirectly 19 earlier. 20 But let's go to the -- the following slides 21 here. 22 The -- the graph shows our -- for -- history 23 and forecast for New York and jobs versus the 24 U.S. and New York unemployment rate. 25 And here you see the strong performance of 1 the state now, versus the U.S,; the blue versus the 2 red line. And, the unemployment rate coming down 3 consistently since 2011, to under 5 percent now. 4 As we go into the forecast period, we do 5 have, and we would have noticed in the tables for 6 the U.S., a slowing -- as I mentioned, a slowing in 7 the U.S. rate of employment growth. 8 We also have the slowing -- even deeper 9 slowing in the New York rate of employment growth. 10 That's because we've reached, in our view, 11 we've got a mature stage of the recovery and growth. 12 We've reached full employment, essentially. 13 And labor-force growth here is much less than it is 14 in the rest of the U.S. 15 And that's why -- what's generating less than 16 half a percent employment growth in the out years 17 for the forecast. 18 So that's a very significant difference -- 19 difference with the others, as I mentioned. 20 Jason had a good rationale for why 21 New York City growth has been high in a way that, if 22 the "new normal" is for increasing demand for 23 urbanization, you might consider the New York City 24 rate of growth could continue to be higher. 25 That's a big question mark, and a very 1 important question mark in anybody's forecast, going 2 forward. 3 I'll point out, though, that low -- that low 4 employment rate of growth goes along with a healthy 5 economy. The unemployment rate remains low. It's 6 not laggard. It's just moving at the normal rate 7 of -- that you would expect for a healthy 8 New York State economy, all right, which is, full 9 employment, essentially, but at a relatively low 10 rate of growth, owing to demographic trends, 11 compared to the nation, say. 12 The next graph shows income, in that 13 scenario, following the U.S., but lagging behind the 14 U.S. a bit. And this is total income, and it 15 includes non-wages, as well as wage income, which 16 causes some deviation in the line there. 17 Wages -- one of the other benefits of the low 18 unemployment rate is that wage growth finally 19 grows -- per worker, grows a little faster than it 20 has been, which has been generally sluggish across 21 the country, as most of you know. 22 The bottom line for New York: 23 Labor markets tighten -- are tightening, have 24 tightened -- and job gains are going to slow, with 25 wages rising with low unemployment. That's the good 1 side. 2 New York City is leading, although, as was 3 mentioned before, not by finance. 4 The construction boom, importantly, it has 5 been mentioned, but I'm sure the previous panelists 6 know, that includes the outer boroughs. Brooklyn's 7 been fantastic. And Queens and The Bronx are seeing 8 construction too. 9 A large spate of multi-family starts in the 10 city, owing to the expiration of a tax credit, that 11 I'm sure you're aware of, and is of some question, 12 that influences the numbers you'll see on the next 13 table in a second. 14 But we've seen Manhattan and Brooklyn values 15 soar. 16 I think the Director mentioned Wall Street 17 bonuses being flat for a couple of years. 18 And I'm taking this quote from somebody in 19 the financial sector earlier in the year about 20 "flat" being the "new up." 21 And so it's a good thing this year -- we 22 thought it was a good thing this year when we found 23 out that bonuses were, essentially, flat, and were 24 not going to decrease by 10 to 20 percent, as had 25 been rumored earlier in the year. 1 I don't know how, exactly that's played out, 2 and we'll see when we analyze the tax data. 3 I'll add, the construction of the 4 Tappan Zee Bridge being the single largest 5 infrastructure project in the company (sic), and 6 applaud that. 7 And I mention here, Jason was surprised about 8 Buffalo, but the "Buffalo Billions" are well -- well 9 touted in Western New York, and Buffalo is at least 10 seeing some strong optimism after many decades of 11 relative decline. 12 The -- the last chart shows the table of 13 New York economic growth, by fiscal year, going 14 forward, through 2018. 15 I guess I'll point out, you'll see the 16 employment line, showing the decline by fiscal 2018. 17 And, housing starts, the last line, you'll 18 notice there's a spike to 63.1 in fiscal 2016. 19 That's owing to the surge of permits and starts when 20 the tax was set to -- when the tax exemption was set 21 to expire. 22 But I'll also point out, 63.1, we express 23 these things in annual rates. So that's 63 for the 24 quarter, as though the whole quarter had been -- was 25 converted to an annual rate. 1 So if you want to get the actual number of 2 starts, you divide that by four, on average. 3 So with that, I'll wrap it up. 4 Glad to answer questions later. 5 ROBERT F. MUJICA, JR.: Thank you. 6 Hugh. 7 HUGH JOHNSON: Yeah, thank you. 8 Usually I'm the most optimistic of this 9 group. It's, in part, congenital defect, and it's, 10 in part, based on analysis. 11 But I think compared to what Jim just gave 12 you, maybe it's going to sound like I'm pessimistic. 13 I'm not pessimistic. I still am trying to 14 preserve somewhat of a lean towards optimism, but 15 maybe it's not quite as optimistic as Jim. 16 I commend -- the one thing I would -- and 17 I say, and people think I say this sort of 18 gratuitously, is the work that's being done by all 19 of the staff -- I'm, of course, very familiar with 20 the staff of the Assembly, the Ways and Means 21 Committee -- is just remarkable. They're really, 22 really working hard. And, you can see it by their 23 documents. The detail, the level of detail, in the 24 analysis is really -- is really incredible. 25 And not only is it incredible, but it's 1 extraordinarily important to coming to up to -- with 2 a good forecast for New York. 3 And as a result of that level of detail and 4 that level of analysis, they can come up with 5 reasonably good forecasts for revenues. 6 The -- as -- I've worked with this group 7 before, and enjoyed it, and very much appreciate 8 being invited back to share some thoughts with you. 9 As you know, or may know, what I try to do 10 is, I -- I look at the performance of the financial 11 markets, I look at the performance of important 12 monetary and economic variables, to try to determine 13 where we are in the current -- current cycle. 14 There have been 10 cycles in the post-war 15 period. 16 We're on the 11th cycle, a cycle which 17 consists of three parts: a stock market cycle, 18 accompanied by an economic cycle, accompanied by an 19 interest-rate cycle. 20 And I have found that my work, our work, that 21 the financial markets perform in specific ways, is 22 beginning, middle, and the end of that cycle, as to 23 the important monetary and economic variables. 24 And, so, if you can determine where you are 25 on that cycle, it's very important for making good 1 investment decisions, but most -- very importantly, 2 good decisions as -- as policymakers. 3 But most important question you really face, 4 I mean, it's really almost the only question you 5 face right now is: Has -- have we reached the -- 6 the end of the bull-market economic recovery, and 7 are we about to see a recession? 8 In other words, is the 7 1/2 percent or so 9 decline that we saw in stock prices since the 10 beginning of the year, the start of a bear market 11 that's going to be accompanied by a recession? Or 12 is it simply a correction in an ongoing bull market, 13 and that we're going to see further gains, both, in 14 the markets, as well as the economy? 15 That is the single most important question. 16 Another subtle way of asking the same 17 question, and this is very subtle, but very 18 important, is: Will the recession that we currently 19 see among the oil-producing, not only states, but 20 companies, is that going to spread? 21 Is it going to spread -- and I should say 22 agriculture as well, but is it going to spread to 23 other parts of the economy; and, therefore, 24 contaminate the entire economy? 25 Are we going to have an ongoing bear market, 1 insidious bear market, that's accompanied by a 2 recession? 3 To answer that question, I look at the 4 financial-market variables, and then, also, the 5 monetary and economic variables. 6 You look at not only the performance or trend 7 in the stock market, but the trend in various sort 8 of details within the stock market-sector 9 performance, capitalization performance, performance 10 of the bond market. 11 I can give you all this detail. I'd be happy 12 to talk to you about this detail. 13 Believe me, it can put me to sleep. It would 14 probably put you to sleep. 15 But, you look at all the variables within the 16 financial markets to see what the message of the 17 financial markets, and I say the bond market as 18 well, which would be the yield curve-quality 19 spreads, a lot of technical stuff. 20 The message of the financial markets, 21 collectively, is overwhelmingly clear; and that is, 22 that we have reached the end of a bull market. 23 We've reached the start of a bear market, and 24 it's going to be accompanied by an economic 25 recession. 1 Pay particular attention to the performance 2 of the financial sector of the financial markets 3 which has been performing very poorly. 4 I have a chart in there that shows you what 5 the pattern of performance of the financial sector 6 is, going into a recession, and coming out of a 7 recession. 8 And you can see that the pattern is, as you 9 might suspect, going down -- relative performance 10 going down prior to a recession, and improving prior 11 to -- prior to a recovery. 12 This is consistent with what Jason said, 13 which he talked about the financial sector. I think 14 he was looking at employment performing well before 15 the recovery, or as a leading indicator of the 16 recovery. 17 The point being is, that the message of the 18 financial markets is clear. 19 And the question is: Is that rational? 20 Is it consistent with a rational forecast for 21 the economy: earnings, inflation, and interest 22 rates? 23 And I hesitatingly say this, but I would say 24 it is not consistent with the performance of 25 important monetary and economic variables. 1 Clearly, you see that the Federal Reserve has 2 been very accommodative, even though that they've 3 raised interest rates once, and are likely, who 4 knows, to raise interest rates two, three times, who 5 knows, in 2016. 6 It's data-dependent. Nobody up here knows 7 the answer to that question. It would be simply a 8 guess. 9 I would guess three times. 10 You've heard two. 11 You've heard one. 12 You don't know. 13 But Federal Reserve policy is, and is likely 14 to continue to remain, accommodative, even if they 15 raise interest rates three times in 2016. 16 As a result of that lending is very strong. 17 Total bank lending, lending to businesses, is 18 very solid. 19 Lending to finance real-estate transactions 20 in New York State or throughout the country, very 21 solid, very, very strong. 22 The lending to finance consumer transactions, 23 consumer lending, very strong. 24 As a result of that, as a result of the 25 strong lending by the Federal Reserve, money 1 conditions are really good. 2 Yes, the growth rate of the money supply has 3 slowed some, but there's enough liquidity, shall we 4 say, to drive both the -- both the economy and the 5 financial markets. 6 As a result of some of those performances, 7 some of those monetary and economic variables, a lot 8 of the detail of this, what I'm talking about, is in 9 my handout. 10 I don't want to you get bogged down. I mean, 11 there's nothing worse. 12 But, I'm just covering, sort of, generally 13 speaking, what it says. 14 And because of the good bank lending, because 15 of pretty good monetary growth rates, leading 16 indicators, on balance, have been performing well. 17 Now I should add, very importantly, that 18 they've actually -- leading indicators which, of 19 course, are indicators from the conference board and 20 others, that tell us where the economy is going, not 21 where it's been, they've actually declined in three 22 of the last six months. 23 And, that's a little bit troubling. 24 There's a lot of ways of looking at them, 25 diffusion index. There's a lot of ways of analyzing 1 leading indicators. 2 I think when they run into trouble, we start 3 analyzing in all these different ways, to try to 4 make a good story out of what might be a bad story 5 or a troubling story. And, I'm guilty of that. 6 And I think, on balance, after I do that kind 7 of analysis, I come away with the conclusion that, 8 yes, it's troubling to see indicators that lead the 9 economy or tell us where the economy is, going run 10 into a little bit of trouble. 11 But I think, on balance, still the message of 12 those indicators is that the economy will continue 13 to expand through 2016, and probably into 2017. 14 So the answer to the most important question 15 of -- which is, "Is this the start of a bear market, 16 a long and insidious bear market, that will be 17 accompanied by at recession?" is, no. 18 This is going to be a correction in an 19 ongoing bull market -- a correction, I hope, in an 20 ongoing bull market -- that will be accompanied by a 21 continuation of the recovery through 2016, 2017. 22 It is not at all unusual, in financial-market 23 history, and this is important, that they had very 24 sharp, even sharper than we've seen, corrections or 25 declines in stock prices that were not accompanied 1 by recessions. 2 1987. 3 1994. 4 1997-98, everybody kind of remembers the 5 southeast Asia financial crisis, long-term capital 6 management. 7 I would be happy to talk to you about those. 8 They were really troubling, really severe, 9 to -- sharp decline in stock prices. 10 2011-2012, when we had the European 11 sovereign-debt problem or crisis. 12 So there have been declines in stock prices 13 without a recession. 14 And, in my judgment, this is going to be very 15 similar. 16 That's what the outcome this time is going to 17 be, very similar. But it is going to be, in my 18 judgment -- and this where a little pessimism comes 19 in -- it's going to be, in my judgment, a very close 20 call. 21 Got to watch the numbers, as was said so many 22 times, and watch them -- watch them very closely. 23 In this -- in this paper that I've given to 24 you, I've also detailed, or quantified, the 25 forecast. Not just simply, broadly speaking, given 1 you my idea of what's going to be the outcome, but 2 quantified the forecast. 3 Let me say just a couple of things about the 4 numbers. 5 First of all, again, the numbers are pretty 6 close from everybody. I mean, you know, this is 7 coin-flipping, but, the numbers are pretty close. 8 But there's a couple of things that you 9 should know about those numbers, which -- which, in 10 my -- my view, are very, very important. 11 First of all, as has been sort of said, 12 the -- the -- we have -- we've reached what 13 economists call "full employment." 14 And so, the gains, the growth rate, if you 15 may, but the gains that you're going to see in 16 non-farm payroll employment, in the gains in the 17 unemployment rate, are likely to become somewhat 18 more subdued. 19 I looked at the consensus forecast for the 20 economy as measured by, this one is Bloomberg 21 surveys: 231,000 jobs added to payrolls each month 22 in 2015; a hundred eighty-one, 2016; a hundred 23 sixty-three, 2017; and, in 2018, if anybody can 24 guess out that far, 149,000. 25 Unemployment rate coming down, continuing to 1 come down, but not in the leaps and bounds that 2 we've seen in the last few years, at 5.3 in 2015. 3 4.8, 4.6. 4 What this also implies, as the consensus 5 forecast and my forecast shows, is that, although -- 6 and this is where you and I differ a little bit, 7 Jim -- is that the consumer spending should continue 8 to expand, but at a slower and slower and slower 9 pace. 10 So, 3.1 percent in 2015, 4. -- 2.7, 2.5, and 11 then 2.4. 12 Now, this -- this is pretty important, 13 because it carries with it some important 14 implications for the New York State economy and for 15 New York State tax receipts. 16 I've got some numbers in there on tax 17 receipts, and what's troubling to me, but I think 18 this is important, is that receipts for the 2016 19 fiscal year -- personal income tax, sales tax -- 20 they look really good. 21 That's already in the bag, pretty much in the 22 bag. But they slow significantly for fiscal year 23 2017. 24 So I'd be pretty careful, because I think 25 this is very consistent with what I see going on in 1 the national economy, the numbers I just went 2 through. 3 In other words, the revenue forecast that 4 I had in here, suggesting a slowdown in the growth 5 rate, and, actually, a negative number for personal 6 income-tax receipts for the fiscal 2017, 7 minus .3 percent, I think that should be -- in other 8 words, I'm really strongly recommending a lot of 9 caution. 10 I see that also show up in my housing 11 numbers. 12 Yes, housing's a big, pretty solid part of 13 the economy. Probably the best part of the economy 14 that I can -- that I'm looking at. 15 But, there, the growth rates of residential 16 real estate and the GDP accounts come down, 17 8.7 percent in 2015, which is a good number, a 18 strong number, real. 7.1 percent. And then 19 4.9 percent in 2017. 20 So the whole pattern, when you look at -- the 21 numbers are all pretty close. 22 The pattern is, that things are going to 23 become a little bit slower as we move through 2016 24 and 2017, and that will show up -- I think, that 25 will show up in revenues. 1 Stock prices; you asked the question about 2 stock prices. You wanted to hear what the prospects 3 were for stock prices. 4 There are two things that drive stock prices. 5 One is earnings. And the other is 6 price-earnings ratios, or, what people will pay for 7 those earnings. 8 The growth rate of earnings is negative in 9 2015, a lot because of energy. 10 In 2016, it looks like it's going to be 11 breakeven. Maybe down .5 percent. 12 And at 2017, we're talking, like, at about a 13 plus 2 percent growth rate, in -- whether we're 14 looking at corporate earnings or S&P 500 earnings, 15 the numbers are about the same. 16 Those are not particularly inspiring. 17 The second thing is, the Federal Reserve is 18 going to be leaning towards restraint. Whether it's 19 one time, three times, I don't know. But when 20 they're raising interest rates, it puts a little bit 21 of downward pressure on price-earnings ratios. 22 It is very hard to make the case for really 23 good stock markets in 2016 and 2017. 24 If you were to -- if you were to start -- use 25 as your starting point, the average price in 2015, 1 fourth quarter, you get almost no change in stock 2 prices for 2016 and '17. 3 The good news is, if you want to call this 4 good news, is we've had a sharp decline in stock 5 prices, so we're not starting at the average of the 6 fourth quarter of 2015. 7 We're starting at an average, which is 8 considered our price, that is considerably lower 9 than that, so that we're now, as I do the 10 arithmetic, this is very grandiose, 7 1/2 percent 11 undervalued, with the upside potential in the stock 12 market from the current level, of being 9.9 percent 13 through the end of 2016, and then we flatten out 14 again. 15 The point is, is that -- you know, is that if 16 it was isn't for the volatility, which has created 17 an opportunity -- and I don't want everybody to rush 18 out and call their broker now -- but what I'm trying 19 to say is -- because this could easily be wrong, but 20 if it wasn't for the opportunity that's been created 21 by the current, quote, crisis, it -- it -- the 22 prospects for interest rates will be rising a little 23 bit, stock prices would be level. But, now, it's 24 created somewhat of an opportunity, which might make 25 you feel really great about the stock market. 1 But, in my judgment, the prospects are really 2 not all that great. 3 A couple of -- couple of points on this 4 forecast, and I'll be brief. 5 First of all, I've done this sort of as 6 whimsy, but turns out to be pretty good research -- 7 well, it's not good research. It's whimsy. 8 The consensus forecast for the national 9 economy tends to pull in one direction during the 10 two-year forecast period. 11 The -- it tends to either start too high, and 12 just goes down for the whole two years, until it 13 gets it right in the last month, of course, when 14 you've got all the numbers. Or, it starts too low, 15 and it goes up. 16 And the consensus forecast is now, about, 17 2.1 percent for 2016, and it's been trending lower. 18 And that means that, 2.1 percent -- I'm 19 hoping, I'm crossing my fingers, that's where I am, 20 I hope it's right -- but if that pattern continues, 21 it's probably going to come down a little bit. 22 Another reason for being a little bit 23 cautious about 2016. 24 So, that's one thing. 25 The second thing which I would sort of 1 mention in passing, you know, the average growth 2 rate of the economy, from 1980 through the -- before 3 2009, in positive expansionary orders, was 4 3.7 percent. 5 In this recovery, it's 2.2 percent. 6 The reason is, as I see it, the growth rate 7 of the population has come down considerably. 8 The participation rate, or the percentage of 9 the population that's actually in the labor force, 10 or working or actively looking for jobs, has come 11 down considerably. 12 And as has been mentioned, productivity has 13 been very dismal. The growth rate of productivity 14 is low. 15 I know I heard your numbers, but, getting a 16 growth rate of above 2 1/2 percent is really hard 17 when you take this all into consideration. 18 So that's a kind of structural problem that 19 the state of New York tends to mirror, or walk in 20 march step -- in lockstep with the U.S. national 21 economy. 22 It's going to be hard to get the kind of 23 growth rates we all would like to see. 24 So -- so -- so that's important. 25 That's the structural problem. 1 And the cyclical problem is that, we've 2 reached full employment, and it's going to be -- 3 So, the point is, I'm saying, you know, go 4 easy. 5 Let me see. 6 A couple other things -- well, let me say the 7 other -- other thing. 8 It's going to be hard -- the -- the -- will 9 this recovery just end of old age? 10 That's another question that keeps coming up. 11 You know, (unintelligible) simply, well, you 12 don't have a good reason for the recovery ending -- 13 recession starting. Maybe energy's fine, and all 14 that. 15 Will it just end of old age? 16 That question has been asked, and it's been 17 studied very, very extensively. 18 And the answer is: No, it is not going to 19 end of old age. There has to be a cause for the 20 recovery ending and a recession beginning. 21 As has been mentioned already, probably the 22 principal cause of the problem, the thing that we 23 face, which is the big risk, is China. 24 It's very indirect, but it's -- the slowdown 25 that we've seen in China can get transmitted around 1 the world, as well as to the U.S., through four 2 primary transmission mechanisms: 3 Psychology. Declines in China -- declines in 4 the stock market in China to scare everybody around 5 the world, they go down. 6 The most important being commodity prices and 7 trade flows. 8 And, there are six countries in the world 9 that -- that over 33 percent of their exports are 10 commodities. 11 Think about this: Canada, Mexico, Brazil, 12 Indonesia, Russia, and Australia. 13 If you add China to that package, that's 14 45 percent of U.S. exports. 15 If you're asking the question, "Can the 16 slowdown in China get transmitted around the world, 17 and can it affect the U.S.?" it certainly can affect 18 the U.S. It does gets transmitted. It doesn't 19 happen in isolation. 20 That's another reason to be a little bit -- a 21 little bit troubled, or a little bit concerned. 22 But as I say, I still don't think that's 23 going to be enough to turn an economic recovery that 24 we're currently experiencing into something that 25 will be called a "recession," or something that 1 would qualify as a recession. 2 I'm going to finish up by just mentioning a 3 couple things. 4 I -- the oil price, I think, I'm -- I -- I -- 5 I have no idea is going to happen to oil prices. 6 I wish I knew. 7 I forecast $65 today. 8 Believe me, I work pretty hard at forecasting 9 oil prices, and I really think I got some great 10 models going, and they -- they're been just 11 continuously wrong. 12 But, it feels very much like we're as much at 13 an emotional extreme in oil as we were in 2008 when 14 the price got to $140 per barrel, and everybody was 15 forecasting $200 per barrel. 16 Well, that didn't happen. 17 And we've gotten down to 30, and it seems 18 like an emotional extreme once again. 19 So, I'm crossing my fingers and hoping that 20 oil -- that you're right on your forecast for oil 21 prices, I would take that. 22 That's -- I'm going to finish right there. 23 The most important question -- 24 I think I've covered all that I wanted to 25 cover. 1 -- was really that question is: 2 Is this a bear market, or is this simply a 3 correction? 4 Are we going to see a recession, or not? 5 And I think the answer to that question is: 6 No, but there -- but it's going to be a close call. 7 And I think that when you take a look at the 8 details of your forecast, your economic forecast, 9 and everybody is pretty close, make sure that you're 10 coming down on those growth rates, not only for 11 employment, but on the unemployment rate, as well as 12 consumption, and also -- and also housing. 13 And that has -- carries with it significant 14 implications for tax revenues for the fiscal 2017 15 year. 16 I think that's about it. 17 ROBERT F. MUJICA, JR.: Any questions for 18 Hugh? 19 SENATOR KRUEGER: We're all waiting till the 20 end. 21 ROBERT F. MUJICA, JR.: Hugh, thank you very 22 much. 23 Chris Vavares, Macroeconomics Advisers. 24 CHRIS VAVARES: Hi. Very good to be here. 25 Thanks for having me back. 1 I don't believe this -- is the microphone on? 2 Great. 3 So, I loved the prior remarks, especially 4 Hugh's. I think he started with exactly the right 5 issue. 6 We come down on the same side. 7 We think it's less of a close call, but I -- 8 but we think we'll -- we're in a correction and 9 we'll avoid a recession. 10 However, we did significantly mark down our 11 forecast in the recent forecast round, and the 12 primary reason was: If you go back a bit to the 13 summer, when concerns bubbled up again about the 14 growth of the Chinese economy, and how that was 15 spilling over into commodity prices, and how the 16 strong dollar was spilling over into emerging-market 17 economies, all of that's led to increased pessimism 18 about near-term growth prospects for the global 19 economy. And that's reflected in stock prices. 20 And, so, we've seen a major additional leg 21 down in equities in the U.S. market, as well as 22 other global stock markets. 23 We -- and, of course, that impacts aggregate 24 demand in the U.S. through wealth effects and 25 through the cost of capital. 1 In addition, we've seen a sharp rise in 2 credit spreads. Some of that's related to the low 3 oil prices and the impact on high-yield bonds in the 4 energy sector. It's also impacting banks; fear 5 about banks' balance sheets, and the kinds of loans 6 that they may have made to the energy sector, and 7 what it will do to their ultimate profitability. 8 In addition, the strong dollar impacts 9 corporate profits, as well as -- and, of course, 10 that can spill over into investment. And, in 11 addition, it disadvantages U.S. exports and 12 advantages imports, and contributes to the 13 additional drag we expect from that exports. 14 So all of these financial conditions that 15 have worsened are working against the continued 16 strong expansion that we've seen; "strong," if you 17 like something a little north of 2 percent. 18 And, previously, we had expected that all of 19 the -- this worsening of financial conditions, or at 20 least the last few months of it, would be corrected 21 at a fairly quick pace. 22 However, with some of the weakening in the 23 data that we've seen, and with just a greater 24 overall sense of pessimism, including the "R" word 25 creeping into the lexicon of the media, making 1 everyone, suddenly, a bit more cautious. And that 2 caution leads to more risk aversion, and that risk 3 aversion impacts asset prices. 4 And -- so all of that has led to us be more 5 cautious about the rebound and improvement in 6 financial conditions. 7 And as a result, then, we've marked down the 8 growth of aggregate demand in the U.S. fairly 9 substantially. 10 Now, there's a -- financial conditions are 11 the things that control the growth of aggregate 12 demand, and it includes bank lending, et cetera. 13 But the three or so things that I highlighted 14 are, I think, quite representative of the overall, 15 you know, dominate financial conditions as it 16 imposes -- as it impacts the aggregate demand. 17 But there's yin-and-yang of financial 18 conditions. 19 It's sort of what's imposed by market and 20 market expectations and perceptions. 21 And then there's the fed who can do something 22 to offset it, but, imperfectly. It doesn't control 23 financial conditions, but it influences financial 24 conditions. 25 So when financial conditions worsen, and 1 impacts what -- the outlook for the U.S. economy, 2 the fed responds to that, and it tells us it's 3 data-dependent. 4 In the last survey of economic projections, 5 the F1C was suggesting that the economy would grow, 6 you know, north of 2 percent, 2 1/2 percent, 7 something like that, and that that would be -- and 8 inflation would gradually move to 2 percent, and 9 that would be sufficient to have four fed 10 tightenings in each year over the next three years. 11 And, so, that's what the DOTS chart showed 12 us, and we had pretty much said, Well, believe the 13 DOTS. 14 And that had been our forecast for the fed 15 funds' rate. 16 However, as a result of the larger and more 17 persistent weakening in the financial conditions, we 18 don't believe that they'll be able to follow that 19 path, and the next couple of surveys will show less 20 of a rise in interest rates. 21 And so with that, we -- we're now expecting 22 only two tightenings this year, in June and 23 December. 24 They'll skip one, we believe in 2017, if our 25 forecast -- if the economy evolves similar to our 1 forecast. 2 And, finally, get to four tightenings in 3 2017 -- 2018. And that would be consistent with the 4 very end of the year, December, with the fed fund's 5 rate at two seventy-five. 6 So this is significantly below what's shown 7 in the DOTS charts today. And we believe that, and 8 market expectations will be coming down towards 9 that. 10 Now, in addition, when we look at long rates, 11 we know that the term premium has been squeezed to 12 be significantly negative, most of that due to 13 flight-to-safety issues as a result of all the 14 global financial turmoil. 15 And we think, as things sort of get -- gain 16 more traction, we get going again, we're likely to 17 see that term premium move up towards zero, and 18 eventually into positive territory. 19 So we can see long rates moving back up, 20 rising from where we are today, around one seventy. 21 On the 10-year treasury yield, probably 22 around, you know, possibly to two fifty by the end 23 of 2016. And all the way up to something, like, 24 closer to three fifty by the end of 2018. 25 So, long rates we expect to rise. 1 We do expect, eventually, a rise in all 2 rates, and a flattening of the yield curve. And 3 that's also predicated upon continued expansion. 4 Some of the factors that will lead to that 5 continued expansion are that we do get the 6 improvement in financial conditions from where we 7 are today. 8 So risk spreads will narrow. The equity-risk 9 premium will decline. 10 And that's really important, because the rise 11 in rates is usually a significant headwind for 12 equities, and especially during a period when, while 13 we have growth, called "moderate growth," of 14 corporate earnings, it's not great. 15 So we need that decline in the equity-risk 16 premium in order to get continued increases in the 17 stock market. 18 But for this year, we expect it to be a down 19 market, down about 1 percent, and the S&P ending 20 around twenty twenty. 21 For next year, we expect to be up about 22 3 1/2 percent, with the S&P ending about 23 twenty eighty. 24 And, 2018, we'll end up maybe around 25 twenty one seventy-five. 1 So not great years in terms of price returns 2 on the S&P 500. 3 And, so, as we -- as we've already seen with 4 the significant cutbacks in the financial-services 5 industry, while at least these numbers are positive, 6 they're not -- they're not that great, and so 7 financial services will probably be under 8 significant cost pressures. 9 Okay. 10 So, the other thing related to fed policy, 11 I should mention, is inflation. 12 And, of course, the higher dollar and lower 13 oil prices work in the same direction to lower 14 inflation. 15 And there's a lot of inertia in the inflation 16 process. 17 So once a shock pushes inflation lower, it 18 tends to stay there, and only gradually be drawn up 19 to towards the -- in this case, inflation 20 expectations, which, thus far, appear to be anchored 21 around 2 percent. 22 Unfortunately, when we look at the some of 23 the measures of inflation expectations, whether 24 they're survey measures or the market-based 25 measures, say, from the TIPS market, the 1 5-year/5-year forward break-even inflation rates 2 that we read from the TIPS markets, we've seen 3 significant declines in the market-based measures of 4 inflation. 5 And if that ends up spilling over into the 6 survey-based measures, and, in, fact is, a true 7 representation of what's happening with inflation 8 expectations, then -- then we're in a kind of whole 9 different world. 10 And Jim Bullard mentioned last night, that 11 there's some credibility issues with respect to 12 whether the fed, in fact, its 2 percent inflation 13 target is remaining credible. 14 And, so, if -- if we don't see a pickup in 15 the economy and see inflation begin to move back 16 towards 2 percent, the fed is going to have to be 17 more aggressive. 18 So we may see no additional tightenings out 19 there. 20 So I think there's significant risk if 21 inflation expectations become unmoored. 22 So I would put that as another, sort of, 23 category-one risk, of seeing inflation not raise 24 towards 2 percent, if those inflation expectations 25 become unmoored and drift lower. 1 We do expect the unemployment rate to 2 undershoot full employment. That's part of the 3 story of why we think inflation will, in fact, move 4 up towards 2 percent. 5 So we see the unemployment rate getting to 6 4.6 percent by the end of this year, and staying 7 there, with overall GDP growth that's just a little 8 over 2 percent. 9 So that's sort of the big picture. 10 The -- Slide 3 has some of the numbers. 11 I don't want to spend too much time on that. 12 I want to call your attention instead to 13 Slide 7 in my slide packet. 14 And, again, this goes to the notion of what 15 are the -- what are the foundational elements of a 16 scenario that has the economy avoiding recession? 17 And, here, it's the fact that fiscal -- the 18 fiscal policy, and this includes both the state and 19 local and the federal level, and not only taxes, but 20 also government spending, so we pull all this 21 together into an index of contributions to 22 GDP growth, has moved from being a significant drag, 23 as it was back in 2013, to a modest increase in 24 2014-2015. And we expect that there's still a 25 modest boost to growth over the next three years. 1 So that's something that should be helping to 2 sustain growth at 2 percent. 3 You go on to the next slide, I alluded to, 4 you know, financial conditions are bad now, not 5 universally. 6 I think Hugh pointed to some that were 7 actually pretty good. 8 Extension of credit to consumers is one area, 9 to be sure. 10 And that's reflected in this chart, in the 11 blue line at the above. 12 It's the diffusion index of -- from the 13 Senior Loan Officer Survey from the Federal Reserve, 14 of banks' willingness to make consumer installment 15 loans. 16 When it's positive, it means they're more 17 willing in this -- on average, in this period, than 18 the prior period, to extend those loans. 19 So credit growth is still looking pretty 20 solid, and we don't have to really look any further 21 than the credit-growth numbers themselves. They've 22 been pretty solid. 23 But the red line is the B, double-A, spread 24 over the 20-year treasury yield, and it has risen 25 lately. 1 So that's that worsening of financial 2 conditions that I described earlier. And, of 3 course, that raises the cost of capital, and also 4 impinges on credit flows into -- into both 5 high-grade and in -- and -- and junk-bond debt. 6 So, that's not good, in terms of credit flow 7 to the business sector. But we do expect that, as 8 the economy regains traction, that those spreads 9 will come down. 10 And then, finally, if you go to the next 11 chart, we put the trio up there: the mortgage 12 spread, the bond spread, and the equity-risk 13 premium. 14 And the story is, that as those things come 15 down, with -- at acceleration in both prices and 16 GDP, cash flows are improving, the unemployment rate 17 is a little lower, employment levels are better, 18 consumers' balance sheets are continuing to 19 improve...all of the factors that should lead to a 20 less risky environment, you know, continue to 21 unfold; and as a result, those risk premiums get 22 squeezed, and that's a positive for growth. 23 If you look at Slide 10, this is the house -- 24 this is the chart of the components of household net 25 worth. It includes: All the consumer durables that 1 folks own. All the liquid assets outside of the 2 stock market. The stock market itself. Their 3 equity holdings, both directly and indirectly. And 4 then their housing wealth. 5 And all of that, that mountain of wealth, has 6 been rising at a pretty good pace since the end of 7 the recession. And even with the last couple of 8 corrections we've had in the stock market, you see 9 them as small divots in that mountains of household 10 net worth. 11 So when you look at from it from this 12 perspective, yes, it's not a good thing that we've 13 had those declines, but it's not something that's 14 going to derail consumer spending. 15 It may -- it may take the -- sort of the 16 bloom off the rose a bit, but we're going to see it 17 continue to rise. 18 The other factor that I want to address, 19 that's come up a couple a times, is the impact of 20 the oil-price decline on the U.S. economy. 21 If you look at Slide 11, this calculation is 22 the contribution to real disposable income growth 23 from the relative decline in energy prices. 24 So, when energy prices decline, it reduces 25 inflation relative to what it otherwise would have 1 been. 2 That boosts the growth of real disposable 3 income, and that should flow through to consumer 4 spending of, roughly, 70 to 80 cents. Or, you can 5 think of a factor of 70 to 80 percent of these 6 contributions to growth will show up in consumer 7 spending. 8 Can we see it? Is it there it? 9 Well, it doesn't always come in with the same 10 timing, but we expect that we will see it 11 eventually. 12 It is consistent with an immediate rise in 13 saving rate when gasoline prices decline. But then, 14 laster, that saving rate declines as the spending -- 15 real spending picks up. 16 And this has been positive. It will continue 17 to be positive through most of 2016. 18 So that's another factor that we think will 19 help to sustain overall consumer spending in this 20 year. 21 I had mentioned the dollar is a significant 22 drag on the economy. 23 If you look at -- oh, and, I'm sorry, one 24 more thing on oil prices. 25 When we did the analysis to look at what the 1 net impact was in 2015, we arrived at the conclusion 2 that it was a slight negative. 3 And the reason was, that when oil price were 4 falling from 110 to 70, there was not that much 5 impact on domestic oil production, because oil 6 production in the U.S. was still sort of economical 7 above that price level. 8 But once you fell from 70 to 30, that 9 $40 price decline went through and took out all of 10 that tight oil and gas production, and it was no 11 longer sensible to go out and explore at those 12 prices. 13 The producers explore -- the wildcatters, if 14 you will, couldn't get funding to do it, and so we 15 saw rig counts drop off dramatically. And that then 16 was reflected in a huge dropoff in business fixed 17 investment in mine -- what's called "mining 18 structures," of over $100 billion. And that was a 19 big negative for overall GDP growth over most of 20 2015. 21 So while there was the positive impact from 22 the boost of consumer spending, we felt that the 23 impact on business fixed investment. 24 And as Jim alluded to, the downstream effects 25 of that in the manufacturing of pipes and valves and 1 pumps, all of that, was -- turned out to be a slight 2 negative. 3 So, it was probably the first year in our 4 history that a decline in oil prices was not 5 positive for the U.S. economy. 6 For 2016, we see it as a slight positive, 7 because we think, well, first of all, oil prices, we 8 have rising from current levels, slightly. 9 Even with that, there's so much of a prior 10 decline built in, that we're still going have the 11 beneficial effect on consumers, and we're not really 12 going see much change on the business 13 fixed-investment side. 14 So probably a slight positive for this year. 15 Okay. On to the foreign sector. 16 We do expect that growth in the rest of the 17 world has probably troughed, and is about to pick 18 up. This is predicated upon effective policy 19 measures in both China and in Europe, and elsewhere, 20 with growth picking up, by this measure, from about 21 2 to 3 percent over the next year. 22 This particular measure is a trade-weighted 23 measure using export weights of the United States. 24 So, it's focused on those countries that we 25 do the most trade with. 1 But, the big headwind here is the sharp rise 2 in the dollar, as I alluded to earlier. That that 3 has caused and set off a string of declines in net 4 exports, that we think will amount to about a 5 half-a-percentage-point drag on GDP growth every 6 year, as we go forward. 7 I want to then just go -- let's just go all 8 the way to -- let's just jump up to Slide 20, since 9 I talked about a lot of the other ones already. 10 So Slide 20 is our stock, S&P 500, forecast, 11 along the -- with our forecast of the equity-risk 12 premium. 13 And, I'll serve a good dose of humble pie 14 here, and as Hugh does a great job of saying, don't 15 believe these -- what do you say? -- don't believe 16 these numbers, or something like that? 17 [Laughter.] 18 CHRIS VAVARES: You know, I don't have a 19 great -- I don't have a great deal of confidence 20 here, but at least there's a story; and the story 21 is: That, you know, we -- the level of dividends, 22 and the expected growth of dividends, consistent 23 with the rise in rates that we have, and, with this 24 kind of a decline in the equity-risk premium, is 25 consistent with modest gains in the stock market, 1 going forward. 2 And -- and that would be -- also would say 3 that some of this is due to the fact that we view 4 the stock market, as Hugh mentioned, as being 5 somewhat undervalued today. Maybe not 9 percent. 6 Maybe 5 percent. 7 But, maybe 5 percent undervalued today, and 8 able to rise beyond that, given the growth of 9 dividends that we expect. 10 And so I think I'll just leave it here. 11 ROBERT F. MUJICA, JR.: Thank you, Chris. 12 Okay. Do we have any questions for the 13 panelists? 14 SENATOR KRUEGER: (Microphone turned off.) 15 How would you like it? Like, one at a time? 16 back and forth? 17 ROBERT F. MUJICA, JR.: Yeah, you can just go 18 ahead. 19 SENATOR KRUEGER: (Microphone turned off.) 20 Thank you. 21 Thank you, all. 22 Okay. So I do have a series of questions, 23 and I'm just going to throw them out there, and 24 anybody can answer, because I think that your 25 information doesn't necessarily conflict with each 1 other, although you approach things in different 2 ways. 3 So, everybody was talking, to some degree, 4 about, you know, the story of: Unemployment being 5 better than it was. Likelihood of continued slow 6 growth, as opposed to major retraction. 7 You had some charts -- I think it was James 8 had some charts, showing -- 9 (Microphone turned on.) 10 SENATOR KRUEGER: See, the light doesn't 11 work, so I didn't know if it was on or off. 12 Thank you. 13 So, somebody had some charts showing that 14 employment for New York was actually better than the 15 U.S. average. 16 But then James had some maps showing 17 New York State in a category where we actually fall 18 quite a bit behind. I think it was in a dark blue, 19 the best states, to, light blue, the worst. And we 20 were in the light blue? I think it was your maps. 21 So, how does all that jive? 22 That compared to the U.S. average, we're 23 better, but, it's all going to fall apart? 24 JAMES DIFFLEY: Well, no. 25 First of all, as a state, we're near the U.S. 1 average. 2 But I think the chart -- the earlier charts 3 were focused on New York City; New York City being 4 substantially better than the state average, to be 5 even better than the U.S. But the upstate regions 6 were generally lagging the U.S., and by a lot. 7 So our charts, I mentioned some -- our charts 8 show New York in about the middle for performance 9 in -- I show in 2015. But that would be the case 10 over the 2010 to 2015 period. 11 In fact, better than the U.S., if we look 12 back earlier in the decade, because the New York 13 recovery was stronger than much of the U.S. 14 But, going forward, New York falls lower than 15 the average by a bit, lower than the average U.S. 16 And that's largely driven by demographics, 17 and as I mentioned, the predominance of high growth 18 in the sunbelt, from Florida, to Arizona, frankly, 19 and even Texas when it gets over the oil-slump 20 issue. 21 So that's the relative connection. 22 SENATOR KRUEGER: So, also, people who follow 23 unemployment data always talk about, there's the 24 official unemployment rate, and then there's real 25 unemployment. Right? And the numbers on real 1 unemployment are much higher, when you look at 2 underemployment, people who have given up on 3 looking, new entries. 4 Is everybody's data working off of official 5 unemployment rates and employment rates, or the more 6 the category of what have they call "real 7 employment" stats? 8 MICHAEL JACOBS: The last time I looked at 9 the broader measures of unemployment, and those are 10 official measures, too, that the Bureau of Labor 11 Statistics has, counts one measure, including 12 part-time people who want to work full-time, people 13 that have given up on looking for work because 14 they're discouraged. 15 There are various measures. 16 Last time I looked at it, which was, 17 admittedly, back in November, there was a beginning 18 of a decline in the U.S. of that -- or, more of a 19 decline than we had seen. 20 So it's still high, you know, still not 21 great, but, I think it's been moving in the right 22 direction. 23 JAMES DIFFLEY: When we report the 24 4.8 percent that I mentioned a couple times, we're 25 reporting the official rate, which hides the higher 1 rates that you're mentioning, and it's called, from 2 U-1 to U-6, which is much higher. 3 We're not ignoring them. We're just not 4 reporting them. 5 They have improved over the last few years, 6 considerably. 7 I can't tell you the rate of change in 8 New York versus the rest of the country, offhand, on 9 those, but -- but I'm sure it's better. 10 We recognize them. 11 There's a thriving debate -- there's always 12 been thriving debate amongst economists as to what 13 is the full employment rate of unemployment, the 14 natural rate? 15 I'm arguing it's about -- that we're there, 16 that we just got there, and it's 4.8 percent. 17 You and Chris might have a different number 18 on that. 19 HUGH JOHNSON: I agree with everything Jim 20 said so far. 21 I think the most important thing, and if you 22 look at, depending on your definition of the 23 "unemployment rate," they all kind of go together, 24 so you can say, Well, gee, it's much higher. Isn't 25 that horrible? 1 Well, it's the pattern. 2 It's whether we're getting improvement or 3 not. 4 That's number one. 5 Number two, and it's the most important thing 6 to me, and I think Jim explained it, when he talked 7 about changing demographics, and the growth rate of 8 employment in the sunbelt, is that the growth rate 9 of employment in New York State, he has, and I also 10 have, in 2016-2017, to be lower than the growth rate 11 for the national -- the national numbers. 12 And I think that's the most significant, 13 because that's what's going to drive consumer 14 spending, income-tax receipts, in New York State. 15 That's why I come up with such numbers, but, 16 basically, we're saying the same thing. 17 SENATOR KRUEGER: And this all ties into a -- 18 my bigger follow-up question which I have, and 19 I have another -- I have all these economists in the 20 room and one on the phone. 21 So, one of the Governor's major priorities is 22 an increase in the minimum wage. 23 And if you looked at this table, there are 24 those of us who strongly support that proposal, and 25 I'm going to guess those of us who officially don't 1 support that proposal. 2 If we do what's proposed by the Governor, and 3 I'm one of those supporters, what do you believe the 4 impact is, or will be, on the -- not just the -- 5 obviously, the wages will go up of workers, but, the 6 impact on jobs' numbers and economic predictors for 7 the state? 8 HUGH JOHNSON: I -- I -- I'll just say one 9 thing, and rather than -- I don't even think anybody 10 up here is going to want to touch that one -- but 11 rather than touch it, I will say, I refer you, the 12 Federal Reserve Bank of San Francisco recently has 13 done -- they do really good work, their economists 14 do really good work, because it's short, like 15 four pages, and it's readable. 16 And they've recently done some really good 17 work on that issue. 18 They come in where I come in, and they think 19 it's, on balance, not a good idea, and, for a 20 variety of reasons. 21 But the real bottom line is, that it, on 22 balance, lead -- and it's a close call. 23 I know it's, politically, you know, it's 24 feel-good, or, it's fair, or, the kinds of things 25 you hear, said. 1 But I think it might lead to, on balance, 2 somewhat of a loss of jobs. 3 And that's what they've concluded. And they 4 really are doing that, totally, from an academic 5 point of view. 6 So I think I would -- everybody is going to 7 be different -- well, go ahead. 8 I'll throw it back. 9 SENATOR KRUEGER: Chris, I can tell you want 10 to say something. 11 CHRIS VAVARES: I have a somewhat different 12 view. 13 The Council of Economic Advisers did an 14 extensive review of papers on the effects of the 15 minimum-wage unemployment. 16 And they -- there was a great graph in there, 17 where they showed the cluster -- a cluster chart, if 18 you will, of the employment effects: positive, 19 negative, zero. 20 The vast majority of them found, essentially, 21 zero effect on employment. 22 There were a few negatives, a few outliers of 23 negative, that often get cited by folks who are 24 against minimum-wage increases. 25 A few positives who get cited by folks in 1 favor. 2 But the vast majority were close to zero. 3 So, I think the preponderance of the academic 4 evidence is -- is -- is close to no impact on 5 employment. 6 But have you to consider where the state is. 7 And, like, are most of the minimum jobs -- 8 minimum-wage jobs in the service industry, where 9 those -- where those -- they can't really move them? 10 You can't move the deli from the corner of 11 53rd and Lex, and take it over to New Jersey. 12 Okay? It's -- that job is not going to go somewhere 13 else. 14 But are there below minimum-wage jobs, that 15 if you raise the minimum wage, and states 16 surrounding you have not, that those service-sector 17 jobs, you know, could go somewhere else? 18 So I think that's the main question. 19 Do call centers -- well, they've all already 20 left New York. 21 So, I mean, that's kind of the question 22 I would ask, that could be something peculiar to the 23 state and the surrounding states. 24 SENATOR KRUEGER: Anybody else want to jump 25 in? 1 They're all, "No, no." 2 [Laughter.] 3 SENATOR KRUEGER: Would you all agree that if 4 low-income people's income goes up, they tend to 5 spend that in the economy immediately, as opposed to 6 invest it in the stock market and then lose it in 7 Apple stocks? 8 (Off-camera, several presenters say, 9 "Yes.") 10 SENATOR KRUEGER: "Yes." 11 Okay. Thank you. 12 I think it was in Chris's chart, I think it 13 was page 10, where you're showing household net 14 worth, and you're breaking it down as continuing to 15 rise, even though there was this glitch during, you 16 know, the last recession. 17 When we look at lots of the data on the 18 number of people who are living in poverty in 19 New York State, and those numbers are not going 20 down; the number of senior citizens, which is a 21 growing population, living, literally, on their 22 social security income, and nothing else, that chart 23 seems skewed to me. 24 Is that because, when you take the 25 uber-wealthy and you throw them in, they just skew 1 everything up? 2 CHRIS VAVARES: Certainly that's part of the 3 issue, but, we focus a lot on income inequality, but 4 there's also a lot of wealth inequality, because of 5 the concentration of wealth. And so the gains in 6 the stock market that we've seen have driven a lot 7 of, you know, increased concentration of wealth. 8 So they're consistent, but it's just a 9 function of the concentration of wealth. 10 SENATOR KRUEGER: Anybody disagree with that? 11 JAMES DIFFLEY: And I'll add, not only stock 12 ownership, but ownership itself, it shows up in that 13 wealth -- that chart, but it doesn't affect poverty 14 statistics. 15 HUGH JOHNSON: It's a substantial -- it's a 16 substantial issue, and it's hard to answer that -- 17 any of that. The income-inequality and 18 wealth-inequality issue, it's really hard to answer. 19 It's -- I don't think many of us are very 20 close to the answer. 21 But I think that -- I think a big part of it 22 are -- are -- is -- is the exponential progress of 23 technology and the loss of middle-class jobs. 24 They just simply don't exist. 25 And you see that, if you look at the 1 employment levels for all of the major companies, 2 what they were in 1990, and what they are today, and 3 they're half of what they were in 1990. 4 And you look at the number of jobs that have 5 been outsourced to other parts of the world. 6 Now, those are coming back, because the 7 arbitrage -- the wage arbitrage that used to exist, 8 U.S. being flat, and wages going up in some places 9 like China, a lot of those -- a lot of those jobs 10 are being shipped to places like India where there's 11 still is an income arbitrage. But some of them are 12 coming back here. 13 So it -- believe me, the income inequality, 14 wealth inequality, in my view, my view, and I love 15 to hear others, will be solved over time if you're 16 patient. 17 But I will also say that some of the work 18 that I've seen done will not be solved by increasing 19 taxes on the wealthy and increasing transfer 20 payments to those -- believe me, I have a lot of 21 sympathy for them, I really do, but I don't -- but 22 I think we've proven that that doesn't -- that just 23 doesn't do it. 24 The GINI coefficient continues to increase. 25 You know, you're familiar with that, aren't 1 you? 2 All right -- all right. That's -- that's 3 all. 4 SENATOR KRUEGER: So, I don't have as big a 5 vocabulary as you do, but I actually don't agree 6 with you on that. But we can have that conversation 7 at another time. I would like to. 8 HUGH JOHNSON: I'd love to. 9 But tying into the other things you presented 10 on, actually, I think it was in the Budget 11 Director's presentation, you talked about the 12 concerns about bonus-money income going down as a 13 concern for the state. And several people 14 highlighted that. In fact, somebody said that 15 was -- you know, "flat" was the equivalent of "up" 16 for bonuses. 17 I don't remember which one of you put that in 18 your charts. 19 I was always taught we should be happy when 20 we're not so dependent on Wall Street. That 21 we're -- you know, that it's, like, okay, bonus 22 stories change, but our economy is diverse, not 23 overly dependent on one industry. 24 So, I look at that and go, okay, is that 25 really terrible? 1 But, is that really terrible that we're 2 seeing flat bonus money, which I guess means not as 3 much of our tax revenue comes in. 4 I understand that was your point. 5 UNIDENTIFIED SPEAKER: No, my concern was 6 that (unintelligible) revenue. 7 SENATOR KRUEGER: No, I understand that. And 8 this is a revenue discussion. 9 But, objectively, on the big picture, should 10 New York State be concerned if bonuses are flat and 11 we're less dependent on the financial sector? 12 JAMES DIFFLEY: Well, to turn it, to combine 13 this question with your question of inequality, if 14 we -- if I were to report that the bonuses were flat 15 this year because the income wage gains was 16 distributed more broadly in the New York City 17 economy, say, then, you would consider that a good 18 thing, and you would consider it on -- on -- in the 19 aggregate, offsetting, and not a problem. 20 However, I'm reporting that bonuses are down, 21 but that money doesn't appear anywhere else in the 22 New York tax-revenue streams. So, in that sense, 23 it's a bad thing. 24 SENATOR KRUEGER: And, Michael -- 25 MICHAEL JACOBS: A lot of the inequality 1 measures that have been pointed to, and I've done 2 analysis of New York City tax returns, where, you 3 know, capital gains is the predominant form of 4 income for, you know, people, say, filers with over 5 a million dollars, and it's a small portion of 6 everyone else's. 7 The -- if can I say -- the -- oh, the 8 income-inequality measures vary greatly, just with 9 the fate of how the very wealthy are doing, very 10 affluent are doing. 11 And the question is, whether or not, you 12 know, everyone else is getting more money, or it's 13 just the capital gains going to a certain small 14 portion is declining. 15 So I think the way you put it was correct. 16 SENATOR KRUEGER: That was my question. 17 Thank you, Rob. 18 ROBERT F. MUJICA, JR.: Thank you, Senator. 19 Chairman Oaks. 20 ASSEMBLYMAN OAKS: Yes, I just had one 21 question. 22 You mentioned labor-force participation, 23 showed charts saying that -- I think they were 24 New York City numbers, saying they had hit the top 25 since we started keeping those figures. 1 Is that -- do we have figures on 2 New York State, or nationally, on workforce 3 participation, to suggest we are in that phase, or 4 is that unique to New York City? 5 JAMES DIFFLEY: Generally, I don't -- I can't 6 quote the figures, offhand, but we do have them. 7 There's also an ongoing debate about the fate 8 in the, quote, new normal of labor-force 9 participation rates. 10 Generally, across the country, labor-force 11 participation has declined substantially since the 12 pre -- say, pre-recession days. 13 Now, you can trace -- I think I can safely 14 say, we can trace at least half of that to the aging 15 of the population. Right? It's natural that 16 60-year-olds have a different labor-force 17 participation than 30-year-olds. Right? And 18 there's more 60-years-old than there were 10 years 19 ago. 20 There's a debate as to whether the remaining 21 changes are permanent or not. 22 We have taken -- and I've had this discussion 23 with others on this panel -- the view that the 24 decline in labor-force participation rates are 25 somewhat behavioral, and are not going to turn 1 around at least very quickly. 2 That's -- that actually is a part of our more 3 pessimistic job-growth picture for the state, I will 4 admit, that you can -- that that's an open -- 5 somewhat of an open question. 6 HUGH JOHNSON: I have some numbers in my 7 handout. 8 New York State, you can get from the census 9 bureau, and then sort of a quasi participation rate 10 for labor force, divided by the population. 11 And so you have to put them together. 12 But they're right in there, in my -- in my 13 numbers. 14 ROBERT F. MUJICA, JR.: Any other questions? 15 No other questions? 16 Nope. 17 Thank you. 18 This concludes this year's Economic and 19 Revenue Forecasting Conference. 20 I want to thank all the panelists for sharing 21 your views. They'll be very helpful. 22 And, shortly, the economic and revenue staffs 23 of both committees, and the executive, will be 24 getting together to figure out, and hammer out, the 25 revenue forecasts by March 1st. 1 So thank you, everybody, for coming. 2 JASON BRAM (speakerphone): Thank you. 3 (Whereupon, at approximately 3:40 p.m., 4 the 2016 Economic and Revenue Consensus 5 Forecasting Conference concluded.) 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25