New York State 2015 Economic and Revenue Consensus Forecasting Conference

PRESENTERS:PAGE QUESTIONS 2

Kenneth Matheny 16 -- 3 Senior Managing Director

Macroeconomic Advisers 4

James Diffley 33 55 5 Senior Director,

U.S. Regional Economics 6 IHS Global Insight 7 Hugh Johnson (by telephone) 59 75

Chairman and Chief Investment Officer 8 Hugh Johnson Advisors, LLC 9 Jason Bram (by telephone) 77 --

Research Officer 10 Federal Reserve Bank of New York 11 Ronnie Lowenstein 86 --

Director 12 NYC Independent Budget Office 13 14 ---oOo--- 15 16 17 18 19 20 21 22 23 24 25 1 MARY BETH LABATE: All the players are here 2 so why don't we get started. 3 I would like to welcome everyone to the 4 annual Economic and Revenue Consensus Forecasting 5 Conference. 6 My name is Mary Beth Labate. I'm the newly 7 appointed director of the budget. 8 Joining me today on this forecasting panel 9 are, from my right, Senator John DeFrancisco, Chair 10 of the Senate Finance Committee; 11 To my left, Assemblyman Herman Farrell, 12 Chairman of the Assembly Ways and Means Committee; 13 Senator Valesky, IDC Deputy Conference 14 Leader, and member of the Senate Finance Committee; 15 Senator Martin Dilan, Senate Finance 16 Committee; 17 Assemblyman Robert Oaks, Ranking Member of 18 the Assembly Ways and Means Committee; 19 And, Robert Ward, deputy comptroller. 20 I'm please to be presiding over the panel for 21 the first time. 22 Today's conference represents the first step 23 in what we all hope will be a collaborative and 24 collegial march towards a state budget that every 25 New Yorker can be proud of. 1 Each member of this panel will have an 2 talking about to provide brief operating 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's start with some good news. 8 As hard as it may be to believe, we're 9 heading towards the beginning of the seventh year of 10 this nation's recovery from the Great Recession, and 11 there are good reasons to feel optimistic. 12 Energy prices are at their lowest point since 13 early 2009, a windfall for all Americans on any 14 range in the income spectrum. 15 The U.S. economy saw two quarters of growth 16 above 4 percent in 2014. 17 Indeed, last year alone, the nation's private 18 sector created 2.6 million jobs, the most since the 19 height of the dot-com bubble of the late 1990s, and 20 I'm happy to be able to say that we did it without 21 the bubble. 22 All of us can be proud that, of the 23 9.4 million private-sector jobs created between 24 2010 and 2014, over half a million were created here 25 in New York. 1 The national unemployment rate fell to 2 5.7 percent in January, the lowest since 2008, while 3 the state unemployment rate is at its lowest level 4 since September of 2008. 5 New York's recent job gains have been 6 broad-based and no longer concentrated in the 7 low-wage sectors that characterized the earlier 8 stage of recovery. 9 The state is creating jobs in high-skill, 10 high-wage areas, making New York well-positioned to 11 compete with anyone anywhere in the global arena. 12 But all of these appealing statistics provide 13 no excuse to rest on our laurels. 14 Not every New Yorker has been able to share 15 in our relative prosperity. We also know that 16 economies in New York State are highly regionalized, 17 with many areas still working hard to recover the 18 jobs that were lost during the recession. 19 We've come a long way, and there is more to 20 be done. 21 So, while we've a lot to feel good about, we 22 must remind ourselves that significant risks remain 23 a fact that's even the weather won't let us forget. 24 It is looking like our frigid weather will be 25 shaving a significant amount of growth of the 1 economy's first-quarter performance. 2 I look to our panel of experts to offer some 3 guidance on that score. 4 Weather aside, and despite a national labor 5 market that is in its best position since the start 6 of the recovery, the most recent data suggests a 7 substantial deceleration from the middle of last 8 year. 9 Bob Megna promised me that wouldn't happen 10 when he convinced me to take this job, but it seems 11 to be happening. 12 The global economy is weak, and it is unclear 13 how encouraged we should be by a recent spate of 14 green shoots, another area we look to our panel of 15 experts to comment on. 16 I think we can all agree, we have been 17 disappointed before. It is tempting to say that 18 with the recent weakening of the euro, maybe this 19 time is different, but the flip side of a weaker 20 euro is a stronger dollar. 21 And, again, we look to the panel to provide 22 us an assessment. 23 For New York, one of the greatest risks lies 24 with the future action of the Federal Reserve. 25 I think all of our economic staffs agree that 1 the Central Bank is likely to start raising interest 2 rates before the year is out. 3 Again, we'll ask the panel for some guidance 4 there. 5 I don't think anyone in this room needs to be 6 reminded that, as the nation's financial capital, 7 financial market volatility poses a particularly 8 large degree of uncertainty for New York. 9 Recent events have demonstrated how sensitive 10 markets can be to shifting expectations surrounding 11 federal policy -- Federal Reserve policy, and the 12 resulting market gyrations are likely to have a 13 larger impact on the state economy than on the 14 nation as a whole. 15 Which bring us to the topic of Wall Street. 16 Last year was not a good year for the 17 financial sector. 18 Despite double-digit equity market growth and 19 IPO growth of 60 percent, it appears that we are 20 seeing the weakest bonus season in three years. 21 Although Wall Street has always been a source 22 of high volatility, we've to recognize that 23 Wall Street is playing under a new set of rules and 24 may never again be the growth engine of state 25 revenue it once was. 1 Wall Street firms have been altering their 2 executive-compensation practices in response to 3 regulations that are still being written under 4 Dodd-Frank. 5 We've observed dramatic reductions in the 6 cash portion of bonuses in favor of equity grants, 7 with large portions of compensation being deferred 8 and subject to clawback. 9 Moreover, deferral patterns have changed from 10 year to year. These changes, while necessary, have 11 challenged our forecasting models in ways that we 12 are still trying to sort out. 13 Thanks to the greater diversification of the 14 state economy, and I might add, prudent budgeting on 15 all of our parts, we are weathering the weakness in 16 bonus payments without too much difficulty. 17 That said, this is exactly the right forum 18 for acknowledging the added uncertainty to our 19 incoming revenue projections, and must -- and we 20 must resolve to plan accordingly. 21 Nevertheless, again, there is much positive 22 news. 23 The state labor market remains strong and 24 well-balanced. 25 New York remains a tourist mecca, drawing 1 visitors from all over the world to our state's 2 unique urban and natural attractions. 3 The state's business-service industry is 4 serving a growing global market, and our real estate 5 and construction sectors are leading the nation. 6 So, while we're on a great path, our optimism 7 must be tempered with caution. 8 All too soon, the current environment of low 9 interest rates and easy access to capital will come 10 to an end. 11 Historically, whenever the Federal Reserve 12 shifts from an expansionary to a contractionary 13 policy stance, the impact on financial markets, and, 14 consequently, New York's revenue base, is 15 unfavorable. 16 Consequently, it is critical that we look 17 ahead and prepare ourselves for that day. 18 So, it is against this backdrop of economic 19 uncertainty that we embark upon the 20 revenue-consensus process. 21 It is important to note, that while there are 22 differences in our forecasts, at a fundamental 23 level, there is broad agreement that New York faces 24 substantial risk given the nature of its revenue 25 base. 1 We will need to take the type of responsible, 2 necessary actions proposed in the executive budget, 3 on both the revenue and the spending side, to 4 strengthen New York's fiscal position, and at the 5 same time, provide the tax relief, particularly from 6 the state's high property taxes, that middle-class 7 New Yorkers so richly need and deserve. 8 For four years, we've worked together to 9 enact an on-time, fiscally responsible budget that 10 embraces the principles that state spending must 11 grow more slowly than the overall economy. 12 With the establishment of the 2 percent 13 spending benchmark, the unsustainable trends of 14 yesteryear have been reversed and we are seeing 15 measurable improvements in the state's financial 16 position. 17 By controlling and managing spending growth, 18 we've reduced the need to engage in 19 overly-aggressive revenue projections. 20 All parties deserve credit for responsible 21 budget-making, and I thank you all for your 22 cooperation. 23 Each of the forecasts before us today 24 represents a good-faith contribution to the 25 consensus process. 1 Looking ahead, I know we're all committed to 2 meeting the statutory March 1 deadline for a 3 consensus-revenue agreement. 4 Revenue consensus is an important component 5 of achieving our shared goal of a timely and 6 responsible enacted budget. 7 And at this point, I would like to offer the 8 other members of the panel an opportunity to make 9 their opening remarks. 10 SENATOR DEFRANCISCO: Thank you. 11 I think what's really noteworthy here is the 12 fact that we passed a Budget Reform Act a few years 13 ago, and we used to routinely not comply with a bill 14 that we actually passed. 15 Over the last four years, I think, in no 16 small part, due to adherence to that Budget Reform 17 Act, today, as part of that adherence, having a -- 18 this meeting in time to come up with a consensus is 19 extremely important. 20 And, I'm glad we're on time again. I'm glad 21 we got good experts to give us some guidance. 22 As a frequent watcher of CNBC, I usually have 23 no clue of what the speakers are talking about. 24 And what I do, I can acknowledge, that with 25 the economists, usually there's three with 1 three different opinions, all going in different 2 directions. 3 So I understand that. 4 That's why we've got so many experts today. 5 But, fortunately, in the three years that 6 I've been here before this year, there's been a 7 relatively close agreement on what all of you have 8 to say, which makes our job a lot easier. 9 So, I welcome all of you, and I look forward 10 to a fourth on-time budget. 11 And, I just want to make an observation, that 12 I have been Chairman for -- a fifth on-time budget 13 in a row. 14 I have been Chairman of the Finance Committee 15 for four years. I don't think there's any 16 connection to that. 17 But I'll remain -- 18 UNKNOWN SPEAKER: [Inaudible.] 19 [Laughter.] 20 SENATOR DEFRANCISCO: Okay. 21 But, thank you very much, and I look forward 22 to hear what you have to say. 23 ASSEMBLYMAN FARRELL: Thank you. 24 I am pleased to be here today. 25 Anything to get out of that basement. 1 [Laughter.] 2 ASSEMBLYMAN FARRELL: The Ways and Means 3 Committee staff forecasts an acceleration in the 4 U.S. economic growth, and a steady improvement in 5 the state's employment and income for this year and 6 next year. 7 As this forecast is not without risk, 8 however, I look forward to hearing not only the 9 panel's thoughts on the economic outlook for the 10 state and the nation, but also your views on the 11 risks that we face here at home, and abroad. 12 The independent analysis you share with us 13 today will provide a solid foundation for us as we 14 discuss and debate various aspects of this budget. 15 And I thank you for being here today, and 16 I look forward to hearing about your comments. 17 Thank you. 18 SENATOR VALESKY: Thank you, Director Labate. 19 I want to join my legislative colleagues, 20 Senator DeFrancisco, Assemblyman Farrell, who, 21 jointly, will conclude tomorrow the public-hearing 22 review process of the state budget proposal, so we 23 continue to meet the markers to, potentially, lead 24 to that fifth on-time budget. 25 Let me just suggest, from my perspective as 1 Deputy Leader of the Independent Democratic 2 Conference, that I and the members of the Conference 3 look forward to once again having a partnership role 4 with the Senate Republican Conference in meeting 5 these benchmarks in enacting a fifth on-time budget 6 that maintains the fiscal responsibility that we've 7 seen under the Governor's leadership these past four 8 years. 9 And I'm confident, that in that spirit of 10 cooperation, that we will indeed be successful in 11 our efforts. 12 Thank you. 13 ASSEMBLYMAN OAKS: Yes, thank you. 14 It's my pleasure to be here as well. 15 As my colleagues have mentioned, we are in 16 the midst of a process that, in adhering to it, it 17 does feel a bit compressed, though, as we've run 18 from budget hearing, and have that continuing on 19 while we're here for this. 20 But, this is always enlightening for us. 21 You know, we've some of our people who crunch 22 the numbers and do our best. And from that, we're a 23 bit less optimistic than the Assembly Majority in 24 how some of the revenues might come in. 25 Actually, the Governor, in his 30-day 1 amendments, brought some of his expectations on 2 personal income-tax growth closer to where we are; 3 but, in essence, we're all in the same ballpark. 4 There aren't varying or widely divergent views. 5 And so I think that's helpful as -- from our 6 perspective on this side of the table. 7 And, hopefully, in listening to you today, 8 and whatever, we will have either our perspectives 9 confirmed, or else push us perhaps in a little bit 10 different niche or direction. 11 But, always appreciate the opportunity to 12 hear your professional perspectives. 13 SENATOR DILAN: Good afternoon. 14 I'm State Senator Martin Malave Dilan, 15 18th Senate District in Brooklyn, and I'm here 16 representing the Democratic Conference. 17 And Ranking Member, Senator Liz Krueger, and 18 I, look forward to listening to the distinguished 19 panel, and we, too, look forward to an on-time 20 budget. 21 Happy to be part of the process. 22 Thank you. 23 MARY BETH LABATE: Thank you. 24 Mr. Ward? 25 ROBERT B. WARD: And on behalf of 1 Comptroller DiNapoli, I think the remarks that have 2 been made about the progress the state has made, 3 economically and budgetarily, the need to continue 4 moving ahead and to look realistically at the risks 5 that are out there, were all very well said. 6 And, looking forward to the insights from our 7 experts here, and we thank you for your time being 8 with us. 9 MARY BETH LABATE: With that, let's hear from 10 the people that we're here to listen to. 11 We'll start out -- and I know we're supposed 12 to have two of the panelists on the phone. I don't 13 know if we've gotten confused. 14 So why don't we start out with Mr. -- with 15 Ken, and we'll just go down the row. 16 KENNETH MATHENY: Okay, great. 17 So is that turned on? 18 It is? 19 Okay. 20 Okay, wonderful. 21 I'm Kenneth Matheny, with Macroeconomic 22 Advisers. 23 Thanks for letting us participate in this. 24 I'm going to focus my comments on the 25 U.S. macroeconomy, so I won't have much to say about 1 New York State, for example, although I'm sure some 2 of what I say will maybe have some ramifications for 3 the state. 4 But, I do want to underscore before I dive in 5 and go through some of the slides briefly here that 6 we've prepared, that some of the comments I've heard 7 in last few minutes, I would just underscore, a lot 8 of sensible comments. 9 You know, the outlook for the U.S. is 10 cautiously optimistic, I would say, in our terms, 11 but there are risks, and there are uncertainties. 12 One in particular that was mentioned, that 13 I want to underscore, and that is, how markets might 14 respond when the fed does begin to raise interest 15 rates. 16 I don't think there's much uncertainty that 17 the fed will be tightening fairly soon. Later this 18 year, maybe in September, is the most likely date at 19 the moment. 20 But, there is certainly a question about, how 21 will markets respond as that tightening program gets 22 underway? 23 So, that's just one of a number of risks. 24 If there's time at the end, I may highlight a 25 few more. 1 All right, so let me dive in. 2 [Start of slide show.] 3 KENNETH MATHENY: Turn right to Slide 2, 4 entitled "The MA (Macro Agenda)." 5 When you think about the U.S., it's hard not 6 to think about us in a global context. There are a 7 number of global pressures and themes that bear on 8 the forecast. 9 Two that I will just highlight at the outset 10 is: 11 What's happening overseas in terms of real 12 growth, concerns about growth, particularly in 13 Europe, and maybe in Japan to some extent, and some 14 of the international economic and geopolitical 15 tensions that are reflected in financial markets 16 here. 17 One of those is the rapid increase in the 18 value of the dollar on foreign-exchange markets. 19 And the second, and not wholly unrelated, is 20 the sharp decline in energy prices that we've seen 21 since last year. And those are having major impacts 22 on the U.S. economy, and, indeed, the global economy 23 today, and will continue to have impacts on the 24 forecast. 25 We'll draw some of that out in a minute. 1 But, generally, our forecast is one of 2 moderately above-trend growth; and by that we mean, 3 GDP growth for the U.S., this is in real terms after 4 adjusting for inflation, on the order of about 5 3 percent, or a little bit less, over the next few 6 years, and that's enough to continue to put downward 7 pressure on the unemployment rate. 8 We've fallen something like 4 percentage 9 points coming out of the recession -- or, the 10 Great Recession. 11 We think the unemployment rate at the 12 national level is likely to fall down into almost 13 5 percent. 14 And I would have to say, if anything, the 15 balance of risks on that are to the downside. 16 I think it's more likely we'll see 17 unemployment below 5. Then, a year and a half, 18 2 years from now, we'll see it's at 6 or 6 1/2, 19 something higher than where we are today. 20 So, strong -- moderately strong growth. 21 Continued decline in unemployment. 22 We -- key assumptions -- or, factors in the 23 forecast are, we assume that oil prices and energy 24 prices, generally, will rebound, but slowly. 25 We won't get anywhere back over the next 1 couple of years to the sorts of oil and gasoline 2 prices that we saw, say, 9 to 12 months ago. 3 We also assumed that the dollar will decline, 4 going forward. We think it's overshot a little bit 5 on the upside. And as the dollar depreciates, 6 that's going to have some impact on inflation and 7 growth, particularly in the trade sector. 8 Generally speaking, financial conditions are 9 fairly strong and are supportive of growth. 10 There are a few caveats in there, but that's 11 generally the case. 12 Banks are becoming a little bit more lenient 13 in their lending. 14 Risk spreads have narrowed. 15 Interest rates are low. 16 You know, generally, the financial conditions 17 are supportive of strong growth, and that's 18 reflected in very strong growth in what we 19 component -- a large component of GDP we call 20 "private final sales to domestic purchasers." 21 So this is a key measure of the underlying 22 strength of demand in the private sector, and that's 23 growing rapidly, 3 to 4 percent growth right about 24 this period of time. 25 So that's helping to really pull the economy 1 forward. 2 But, there are some factors that are holding 3 us back. 4 In the near term, over the next few quarters, 5 we're probably looking at some declines in inventory 6 investment which will temporarily restrain 7 GDP growth. 8 And, of course, because of the strength of 9 the dollar, some concern about foreign demand, we're 10 likely to see further declines in that exports, and 11 that's going to be exerting a little bit of 12 restraint on aggregate growth. 13 But, that's not enough to derail the economy, 14 either of those features. 15 And in terms of financial markets, we look 16 for continued gains in equities on a broad basis, 17 but much less than we've seen in last few years. 18 But, generally, as I noted, improving 19 financial conditions. 20 So, that's kind of a big overview. 21 I've got a handful of slides after this. 22 I'll kind of dive through some of them, we'll be 23 very brief. 24 The next slide, Number 3, rising dollar and 25 falling oil prices, this just put as little flesh 1 onto the comment I made a minute ago; which is, the 2 economy, both the U.S. and global, has been 3 influenced by, first, the sharp run-up in the value 4 of the dollar over the last several -- since last 5 year, and, also, the very sharp decline in energy 6 prices. 7 And we've partial -- we're assuming partial 8 reverses of both of those features over the next 9 couple of years. 10 If we sort of put all of this together, what 11 does it mean for the outlook? 12 And that's in the next slide. 13 The bars in that chart are forecasts of 14 quarterly GDP growth. This is at an annual rate. 15 And then the red line there, this all-red 16 line, is the path of the unemployment rate in the 17 forecast. 18 So this is kind of, if you had to show the 19 forecast in one picture, what would it be? It would 20 be this picture. 21 So, we've got GDP growth, as was noted. You 22 know, there's some signs that the economy may have 23 slowed down a little bit in the last quarter or two. 24 We're tracking Q4 GDP growth at under 25 2 percent, between 1 1/2 and 2 percent now, just 1 based upon the incoming monthly data that we get. 2 And, Q1, we're looking at something in the 3 low to mid 2's. 4 I think 2.3 percent is where we are today, 5 after the very latest report. 6 So growth at the moment doesn't look that 7 strong, but we expect growth to pick up. 8 And it goes back to the point I made a couple 9 of minutes ago, that in the private sector, private 10 final demand is actually growing, particularly 11 which -- if you also pull out the net exports, is 12 actually growing at quite a robust rate. 13 We expect private final sales to domestic 14 purchasers, this key component I mentioned, to be 15 growing about 4 percent this year, and then growth 16 well over 3 percent over the next couple of years 17 after that. So, that's really powering the economy 18 forward. 19 So GDP growth in the second half of this 20 year, we think, we will rise to well above 21 3 percent, and then ease back a little bit into the 22 high 2's after the second half of 2015. 23 Not spectacular by any stretch, but that's 24 still solid growth, enough to put downward pressure 25 on the unemployment rate. 1 I'm going to skip over the next slide, which 2 just adds a little color to my comment, that 3 financial conditions, generally, are improving. 4 And, jump over to Slide 5 -- excuse me, 5 Slide 6, entitled "Receding Fiscal Drag." 6 The point of this slide is to say, okay, I've 7 talked about the private sector, and the relatively 8 strong performance we're seeing right now in 9 private -- sort of the underlying strength of the 10 private sector. What's going on in the government 11 sector? 12 And as we all know, after the 13 Great Recession, we had, you know, massive stimulus 14 policies in an attempt to kind of pull the economy 15 out of the recession. 16 As we got on the backside of those, that 17 stimulus was falling off, and that led to a lot of 18 drag on growth over the last few years, particularly 19 up through 2013. 20 2014 was a bit of a transition year. 21 And as we go into the forecast, we actually 22 expect a modest boost to growth coming about through 23 fiscal policies, both state and local levels on an 24 aggregate basis, and at the federal level. 25 Now, that's not worth a lot. We're talking a 1 couple of tenths of a percentage point in terms of 2 annualized GDP growth. 3 What's important is, we don't have that big 4 drag that we had in years past; and, so, that's one 5 of the reasons that's sort of reinforcing our 6 expectation for fairly solid growth, going forward. 7 I mentioned, with strong growth, solid 8 growth, that's somewhat above trend. 9 We expect the unemployment rate to continue 10 to decline, and, generally, to lay -- for labor 11 markets to continue to heal. 12 We look for payroll gains, on a monthly 13 basis, for the entire U.S., to average about 14 240,000 persons per month over 2015, slowing to 15 about 180,000 per month, on average, in 2016, and 16 somewhat less than that in 2017. 17 As growth slows, we think employment gains 18 will also slow down. 19 We also expect a little bit of a -- some 20 firming in productivity growth, so that means less 21 of that growth and output that's in the forecast 22 translates into employment growth. 23 But, still, it characterizes as pretty strong 24 performance in terms of labor markets certainly 25 getting better. 1 We think the participation rate, which has 2 been declining for years, is likely to level out. 3 In fact, there's signs that it has done so over the 4 past year. 5 So as the unemployment rate's declining, as 6 workers are being drawn back into the labor force 7 because they're experienced, so what they see: 8 There's more employment out there. Employment's 9 growing and unemployment's falling, the duration of 10 unemployment is falling. 11 And we expect it to continue to do so, we're 12 going to see an increase in the 13 employment-to-population ratio, a key sort of 14 measure of, you know, what's happening to, you know, 15 the employment experience of adults, in the 16 aggregate, through the economy. 17 I'm going to skip the next slide in the 18 interest of time, and jump forward to Slide 9, 19 "Oil Price Drop and Dollar Rise to Press Near-Term 20 Inflation." 21 And, here, I kind of want to use this as a 22 vehicle to talk a little bit about the inflation 23 outlook, and there are a couple of cross-currents 24 going on. 25 One is, as we all know, inflation has been 1 quite low of late, for two reasons: 2 One, we've got declines in energy prices, as 3 we've talked about, and that's holding down, you 4 know, the decline -- much lower prices for crude oil 5 are translating into lower prices for things that 6 consumer care about; gasoline, perhaps, the most 7 visible. And that's helping to push down headline 8 inflation. 9 In fact, some of the monthly numbers on 10 inflation have been negative of late. We had 11 another big decline in energy prices in January, for 12 example. 13 So, that's holding down headline inflation. 14 We expect it will continue to do so for a little 15 while longer, but, if energy prices kind of flatten 16 out and then begin to drift back up, that 17 development's going to reverse. 18 So underneath this, we also look at what's 19 happening in inflation outside of the energy 20 components, and we talk about core inflation, 21 excluding the direct effects of food and energy. 22 Core inflation is also low. Not negative, 23 but low. Somewhere in the low 1 percent range; 1 to 24 1 1/2, depending on which measure we look at. 25 Now, the fed has established a target for 1 inflation over the longer term, of 2 percent. 2 We believe that, as the effects depressing 3 inflation from lower energy prices and a stronger 4 dollar gradually dissipate, and as the economy 5 continues to strengthen, inflation will pull -- be 6 pulled back up towards long-run inflation 7 expectations which are also very well anchored at 8 2 percent. 9 So, we expect a gradual rise in core 10 inflation, and then layered, on top of this are the 11 effects of the swings in energy prices. 12 So if you look a headline inflation also 13 including energy, not just the core, that, too, we 14 think will settle in around 2 percent as we move out 15 about a year and a half to 2 years from now. 16 Let's talk a little bit about fed. 17 Obviously, labor markets and inflation are 18 the two key factors that tend to influence fed 19 behavior. 20 As I mentioned, we expect, anticipate, that 21 the fed will begin its tightening regime later this 22 year. We're assuming the first tightening will 23 occur in September, and I think there's risks to 24 either side of that. But September I think is a 25 good date to anticipate the first tightening. 1 Initially, after that, the tightenings may 2 not happen that rapidly. Maybe every other meeting. 3 But as we move further into 2016, we think 4 the most likely path is to have quarter-point hikes 5 in the fed funds rate at just about every meeting, 6 so that, by late 2017, the funds rate, we think, 7 will be back up to 3 1/2 percent, which is what we 8 peg for sort of the long-run equilibrium value for 9 the fed funds rate. 10 Now, key question is, how are financial 11 markets going to respond to that? 12 Certainly, other interest rates are going to 13 be pushed up. 14 Long-term treasury yields, private-bond 15 yields, and so forth, are going to be pushed up, 16 mortgage rates are going to be pushed up, as the 17 fed's tightening, and even in advance of that 18 tightening. 19 But, will that response by financial markets 20 be continuous and smooth and well anticipated, or, 21 will it be just the opposite; will it be somewhat 22 discontinuous? 23 And, you know, as was noted earlier, not 24 every tightening cycle has been accompanied by a 25 nice, smooth progression and response of financial 1 markets. 2 So there's some risk the financial markets 3 could respond in a discontinuous fashion, that there 4 could be some up-settle along this path to, you 5 know, renormalization. 6 That's certainly a factor to keep in mind -- 7 or, a risk factor to keep in mind. 8 But, still, even with those increases in 9 interest rates, even by 2017, rates are still low in 10 historical context. 11 So, in and of itself, higher rates are not an 12 impediment to growth and strong performance, even 13 though there are some risks about it. 14 I think the last slide, with, you know, sort 15 of numbers on it, that I'll mention, is, Number 12, 16 "Leading to Improved Household Balance Sheets." 17 With equities continuing to expect to rise, 18 we expect modest gains in broad equity indexes over 19 next few years. Not as large as what we've had 20 recently, but, moderate gains, as profits and 21 dividends continue to rise. 22 That's going to support further increases in 23 household wealth, along with rising home prices. 24 We've had big gains in household wealth over 25 the last few years, a very strong recovery. And we 1 expect continued gains, albeit a smaller pace, over 2 next few years. 3 That's important, because it really 4 reinforces the strength in the consumer sector. 5 So, I mentioned that consumer spending, early 6 on, is growing pretty rapidly now. 7 We're tracking growth, you know, 3, 3 1/2, 8 almost 4 percent in some cases, in terms of real 9 consumer spending. 10 So, the outlook there's strong, and, in part, 11 it's because of these wealth effects. 12 The other thing that -- is declining energy 13 prices are putting a little bit more real purchasing 14 power in households' pockets. That's also 15 supporting strong growth in consumer spending. 16 But it's important to bring the financial 17 aspect back in and circle back, and, you know, sort 18 of complete the circle; say that's one reason why we 19 expect fairly solid growth. 20 So, I'd say that's a fairly, you know, 21 sanguine outlook. We're cautiously optimistic. 22 But, I can't end without noting that there 23 are a number of risks. 24 And the last two slides in my handout list a 25 very, very brief list, and we could make much longer 1 ones if we had time, about a number of the risks to 2 the outlook for the U.S. economy. 3 The point I would stress -- 4 And I'm not going to read these back to you. 5 You can look them over. There's a number, and many 6 more. 7 -- but the one point I would make, is that 8 the risks are not one-sided. There are not just 9 downside risks or just upside risks to the outlook. 10 And I'll give you a couple of examples. 11 It's easy to focus on downside risks. 12 I think financial markets, to some extent, if 13 you look at, for example, a very low level of 14 long-term interest rates, treasury will suggest 15 there's a lot of focus on downside risk. 16 But here's an upside risk: Wage growth has 17 been fairly anemic coming out of -- you know, during 18 this recovery. There has been just very, very 19 little pickup in the growth of wages. 20 But as labor markets tighten, as businesses 21 see more growth and demand and output, as the 22 unemployment rate falls, as businesses have to work 23 harder to recruit the kinds of employees they need, 24 I think we're going to see wage growth pick up. 25 We've got some of that in our forecast, but, 1 I think that the balance of risks there are probably 2 tilted to the upside. 3 If that happens, that makes the outlook for 4 consumer spending, and GDP growth, in general, look 5 a little better, maybe even than what's in this 6 packet here. 7 So, with that, I'll end my prepared remarks. 8 I don't know if you want to do a little Q&A 9 for a few minutes? 10 MARY BETH LABATE: I know that Ken may have 11 to leave a little earlier than [inaudible], so, if 12 anyone has questions now for Ken? 13 Anyone? 14 Thank you. 15 Moving on to -- I think we still might be 16 waiting, so why don't we move on to the 17 James Diffley. 18 JAMES DIFFLEY: Thank you. 19 Good afternoon, everyone. Glad to be here 20 again. 21 I anticipated you speaking ahead of me, as he 22 usually does. 23 So let me report on IHS's projections for the 24 nation, and the state, in the context of this budget 25 process. 1 First -- so we've got a slide set here, I'm 2 sure that you all have. 3 [Begin new slide show.] 4 JAMES DIFFLEY: U.S. economic expansion will 5 continue. 6 We've, as the Director said, a windfall to 7 American consumers, across the board, in terms of 8 oil prices -- I shouldn't say across the board, 9 because there are negatives that we'll come to in 10 terms of the effect of higher oil prices. But, 11 clear accelerations in consumer spending that 12 outweigh all of the off -- some of the offsetting 13 factors. 14 And home building, we hope, will boost real 15 GDP growth, from 2.4 percent last year, to 16 3.0 percent in 2015, which will be the best year 17 since 2005, the strongest growth in GDP for a year. 18 Consumers step up spending in response to the 19 lower energy prices, and robust gains in employment 20 that have now shown a very momentous labor market in 21 the last half of last year, coinciding with real 22 income gains and net-worth gains at last. 23 The recovery in home building, which is on 24 shakier ground than the other things we're talking 25 about, but we think will gain momentum as labor 1 markets improve and credit standards ease as they 2 have been, at least gradually. 3 A strong dollar, all right, largely because 4 of the effects of the now favorable turn in terms of 5 the balance of payments with -- given low oil 6 prices, will be a negative on the net-export sector, 7 reducing the demand for U.S. exports, increasing the 8 demand for imports, by virtue of the exchange rate. 9 There will be cutbacks, and have been 10 cutbacks, in energy-related, oil and gas development 11 investments, not so much affecting New York State 12 directly, but it does affect indirectly in the 13 supply chain, but in various pockets across the 14 country. 15 We still think, by the way, just to give a 16 little regional flavor, that Texas will be one of 17 the leading states in growth over the next few 18 years, but at a more muted rate than it has been in 19 the past. 20 Okay, the -- and a slowdown in inventory 21 accumulation will also be restraints on measured GDP 22 growth. 23 Interest rates are set to rise, and we've 24 been watching it for a while. And fed 25 Chairman Yellen gave a very detailed speech earlier 1 in week. 2 So we're looking at, over the next 3 three years, interest rates coming up, similar to as 4 Ken pointed out, as a monetary accommodation to 5 boost the economy gradually [unintelligible]. 6 But we think fed is well capable of handling 7 the transition. 8 The price of now Dated Brent crude oil, the 9 standard is expected, for us, to average $47 per 10 barrel this year, and $63 in 2016. So, we don't see 11 it coming up very much in 2018, but it will come up 12 a bit in 2016, but nowhere near the $100 levels that 13 we, until very recently, had been expected. 14 All right, so a major boost for American 15 consumers. 16 The second page of the handout shows the 17 graph of real GDP and employment rate, both 18 historically and in our forecast. 19 You'll notice the blue line coming up, and 20 down. That's a -- measures a -- six long years of a 21 cycle, with unemployment rate rising dramatically to 22 almost 10 percent for the nation, and coming down 23 continually till now. 24 The rate of decline in the unemployment rate 25 will naturally fall off because we're getting closer 1 to full employment, but fall off, in part, though, 2 because, as Ken mentioned, labor-force participation 3 is being encouraged, and that will add available 4 labor force, which tends, by itself, to boost the 5 unemployment rate, at least in a measured sense. 6 But they'll be able to get jobs. Job growth will be 7 strong. 8 GDP growth, you see the huge vertical green 9 lines just before 2015, that's the last two quarters 10 of 2014. 11 The -- we'll have an average of 3 percent for 12 the upcoming year, 2015 -- or, this year, 2015, and 13 continuous strong growth, as opposed to the GDP 14 numbers we have seen between, say, 2011 and 2014, 15 where it was a few strong quarters followed by weak 16 quarters [unintelligible]. 17 And that's why we come up with, finally, 18 3 percent, which is a healthy long-term rate of 19 growth for the U.S. economy in terms of real GDP. 20 If you turn to next slide, we have a table of 21 GDP -- real GDP and its components. 22 Real GDP, you see the 3.0 in 2015. As 23 I said, the best since 2005. 24 Consumption, remember this is real terms. 25 Okay? 1 The State collects nominal dollars in sales 2 tax, et cetera. 3 But consumption is going, in real terms, 4 above 3 percent. And these are calendar-year 5 measures, by the way, at 3.6 percent in 2015, 6 3.3 percent in 2016, almost 3 percent in 2017. 7 Residential investment, mainly housing, and 8 housing starts, it's been up and down for the 9 real-estate recovery. 10 As you may know, only 1.6 percent gains in 11 2014. We do see double-digit gains, though, in the 12 next two years. That's the most fragile part of the 13 forecast. 14 Home sales at the start of 2015 have been 15 weak, you know, somewhat weaker than expected, so 16 we'll have to watch those. 17 Business fixed investment, less than a 18 6 percent in 2014, but still a healthy -- 19 And, remember, these are in real terms. 20 Right? 21 -- inflation-adjustment terms, almost 22 5 percent this year, and almost 6 percent next year. 23 Federal government, a modest drag on gross 24 state and local government now positive. 25 The net-export sector -- exports minus 1 imports -- the exports growing at a rate that boosts 2 the economy 3.3 percent, that's fine, but imports 3 are growing even faster at double [unintelligible]. 4 And that's largely the consumer side. 5 Okay. The next slide, let's talk about 6 labor-force participation, and you see our view of 7 it. 8 Labor-force participation has been a bit 9 puzzling. 10 The question is, why is it so low? 11 Part of that is demographics, an older work 12 force, and part of it is, of course, the lingering 13 effects of the recession and the vast increase in 14 the long-term unemployed. 15 Because of the population aging, though, we 16 don't think the labor-force participation rate, 17 which will be coming up -- if you look at the blue 18 line to the right of the vertical line, which is the 19 edge of the forecast, we do see it coming up a bit, 20 but not reaching previous levels which you see in 21 the 1990s, above 65 percent, the measured labor 22 force as a percent of the working-age population. 23 So the unemployment rate, while coming down, 24 at least initially, will be coming down a little 25 slower than it has been; but, nevertheless -- so the 1 upshot of this is, labor-force growth is going to be 2 smaller than we have expected in the past. 3 So, job gains, once we get back to full 4 employment, are going to be at a slower rate than 5 you might have expected, a couple of tenths. 6 And the same is true in New York. 7 On the other side, we also agree wage gains 8 have been muted. 9 The next slide. 10 Labor compensation, we do expect to 11 accelerate, finally. Many of us expected 2014 to be 12 a breakout year in that regard. We're now hoping 13 2015 will. 14 You see the blue line there, the benefits; 15 but, also, wages and salaries and total 16 compensation, at faster rates. This is the growth 17 rate chart, so faster rates than we've seen since 18 2008, basically. 19 Okay? 20 That's benefits, going forward. 21 The next slide, our view on oil prices, which 22 I mentioned, just briefly, you know, to put this in 23 context: The unconventional supplies of oil in the 24 U.S., particularly in the Bakken Shale in 25 North Dakota, which, as you all know, a lot of it 1 flows through New York State, from Buffalo to 2 Albany, and down the Hudson, the -- and other 3 unconventional sources across the U.S., including 4 Pennsylvania, have greatly increased the supply of 5 oil. 6 That was somewhat masked for a couple of 7 years by the disruptions in Iraq and Libya. Right? 8 So it didn't depress prices as much as it would have 9 earlier, a few years ago. 10 Now with those countries now producing a lot 11 of oil, now, suddenly, Saudi Arabia saw that the 12 price -- the equilibrium price in the market would 13 come down dramatically, and they -- unless they cut 14 back. And they decide not to cut back, so they let 15 it come down. 16 And that's the basic story. 17 We see oil production slowing in the U.S. in 18 the second half of 2015, and around the world, of 19 course, in response to lower prices. 20 So it's a bit of a lag in the negative 21 response of the high oil price -- the low oil 22 prices, sorry, in terms of reducing oil and gas 23 investment in the U.S., and the multiplier effects 24 of that. 25 So, we get a bit more of a drag on growth 1 from that factor in the second half of the year. 2 It doesn't overweigh -- outweigh the stimulus 3 from increased consumer spending at low oil prices, 4 so we should be for low oil prices, by all means. 5 But, there is a negative impact that we'll 6 see loaded to the second half of the year, as 7 opposed to the first half, and that explains sort of 8 the quarterly pattern that we see in real GDP 9 growth, or at least part of it. 10 Okay? 11 On the next graph, the graph shows how much 12 that means to U.S. consumers. 13 Here, we've plotted the retail gasoline 14 price. 15 And our forecast of it, by the way, under 16 that scenario, we do see, ultimately, oil prices 17 recovering in the world market. 18 But the big drop here, and the -- related to 19 that is on the right-hand scale: Spending on motor 20 fuels per household. 21 So this is the direct windfall to U.S. 22 consumers: how much they spend on gasoline at the 23 pump, and how much that means to them. 24 At the bottom, if you look at the graphs, 25 it's, about, $1,000 per year is the benefit from the 1 recent reduction in oil prices. So, that's a direct 2 stimulus. 3 It happens for everybody in New York State -- 4 every driver, for instance, in New York State, you 5 see the positive impacts it has. 6 Next slide, we do think the recovery in the 7 housing markets will strengthen. 8 I mentioned labor-force participation. 9 One of the things that happened after the 10 recession, is we started talking about what the 11 "new normal" might be in terms of household 12 behavior. 13 One of the factors that we were concerned 14 about, or we had to watch -- we recognized we had to 15 watch, was the change in labor-force participation 16 going down in the recession, and would it recover? 17 Okay? 18 Big question, going forward. 19 The second part is the change in household 20 formation, which dropped dramatically during the 21 recession, for obvious reasons. 22 You know, students came back home, young 23 adults came back in households; households were 24 generally bigger. 25 That was not a surprise during the recession. 1 But, at the same time, because of the housing 2 bust, big houses became somewhat out of fashion 3 relative to the past, and we were wondering about a 4 change in household conditions. 5 And it was an open question as to how strong 6 household formation's going to be, going forward, to 7 support real-estate construction markets as healthy 8 as they had in the past. 9 The recent data have been disappointing in 10 that regard, even in 2014. 11 Household formation, as measured by the 12 census -- which, by the way, is measured with the 13 great deal of error, so you shouldn't -- you know, a 14 great deal of volatility, so you shouldn't take it 15 too seriously -- but there is a concern of the "new 16 normal," including lower rates of household 17 formation, which means the real-estate markets, in 18 general, won't come back and be a driver for 19 economic growth, going forward. 20 So what's happening now, though? 21 The recent job growth does increase housing 22 demand. 23 The -- now, last year you saw moderation in 24 home-price inflation. 25 We saw not incipient bubbles as we saw in 1 last decade although some could argue that; and, for 2 instance, the Bay Area in California -- in 3 San Francisco. 4 But, certainly, not here, and, maybe -- 5 except in Manhattan apartments and high-end housing 6 there. 7 But, the moderation that we saw through 2014 8 increases affordability once again and helps to get 9 people into the market. 10 The lower-income and younger part of the 11 general homeowner-demand segment has been hampered 12 by much tougher credit conditions than in the past. 13 You know, the standard now, is it requires a 14 20 percent down payment, which was relaxed quite a 15 bit, too much, during the bubble, but, it could be a 16 little lower than it was [unintelligible]. 17 It's a little more flexible now. 18 And then there's the reduction in home equity 19 in a lot -- that a lot of people had in their 20 existing houses that they lost in the bubble. 21 So, we're still having trouble in the low end 22 of the market -- lower-income levels, lower 23 house-price levels -- getting demand. 24 And at the same time, because families are -- 25 because of low equity, are discouraged from moving, 1 that also decreases the supply of homes in that 2 segment too. 3 So, the high end of the market -- 4 million-dollar houses, high-income houses -- are 5 doing better now, and the rest of the economy will 6 follow with -- particularly with improving job 7 conditions. 8 The supply of buildable lots we thought was a 9 problem, partly due to credit conditions, because 10 the prospective builders had to get credit 11 availability there too. 12 Multi-family units jumped up in proportion, 13 and was -- is still going to account for about 14 one-third of the starts. 15 But, the single-family market is the one 16 that's really coming back. 17 Young adults, as I mentioned, are delaying 18 home ownership. 19 And, baby-boomers, the flip side of it, the 20 older generation, is starting to downsize away from 21 the McMansions, which puts downward price pressure, 22 of course, on those houses, which we'll have to 23 watch. 24 Okay? 25 The next slide, the multi-colored slide, is 1 risks to the forecast. 2 The Director mentioned preparing for, not so 3 much downturns, but weaker growth than we've had in 4 the past, and that's something we do all the time. 5 We always have three scenarios: a baseline, 6 and both the positive and negative, and we put 7 probabilities on them. 8 Right now we've got equal-weighted; 9 15 percent to the high side, 15 percent to the low 10 side. 11 The low side includes the low household 12 formation, you'll notice in the bullets there, and 13 I won't get into the rest of it. 14 But, what's the high side? 15 Oil prices falling further; 16 Housing markets rebounding to, you know, more 17 healthy levels quicker than we thought; 18 And then global economic growth lifting 19 U.S. exports. 20 The European economy is -- has been in tough 21 shape. 22 We're hoping to get out of the mess there. 23 We'll see what the resolution of the Greece -- the 24 Greek crisis is. But, it does bode ill for the 25 general European economy which is the strong driver 1 of growth. 2 China, for exports, China is decelerating. 3 All right? 4 Still going to have healthy growth, but 5 decelerating relative to what it has been. 6 India, on the other hand, is poised for 7 stronger growth. 8 So, those are the -- part of the scenarios 9 that we weaved together. 10 If you turn to the next slide, you see the 11 implications of those scenarios, in terms of at 12 least one factor of import here of interest here. 13 Real consumer spending, between the red and 14 the green lines, is a total of 5 percentage points 15 in difference. And that would translate to 16 5 percentage points, and whether you're thinking of 17 real or nominal spending. 18 That's -- plus 3 percent on the upside in our 19 optimistic scenario. Minus 2 percent on the low 20 side in our pessimistic scenario. 21 Again, with, roughly, 15 percent probability 22 on our side. 23 Turn turning to the regional outlook, we've 24 got a couple of maps here. 25 And the major thing we see, here, we're 1 looking at growth -- job growth in the next year and 2 the upcoming year, through 2015, state by state, 3 across the country. 4 And you'll notice New York in the lowest 5 segment of that. We've got about one -- between 6 1.2 and 1.4 percent for New York State, in the tan, 7 or gray, section there. 8 The south and west lead. 9 All right? 10 Now, part of it, first of all, it's already 11 in place. That's what 2014 looks like. 12 The -- but there's a little -- there's one 13 other factor you need to consider here. 14 The south and west still have a lot of what 15 you might think of excess capacity, both in the 16 business and labor markets. Their recession was 17 deeper than New York. 18 New York, very early in the recovery, 19 regained all the jobs lost in the recession. 20 So did Texas in the mid-section of the 21 country. 22 But California and Florida are way behind 23 that, and continue to be way behind, particularly 24 the southeast [unintelligible] Florida. 25 So some of the growth rates that we see, 1 going forward, right, are telling us is healthier 2 growth in the south and west now than in the 3 northeast, particularly New York. 4 But, part of it is just a catch-up. 5 All right? 6 So if we look over the course of the whole 7 cycle, New York has actually done pretty well. 8 But, that said, having done that, the 9 expected growth, going forward, in our view, is 10 going to moderate. 11 And I'll come back to the numbers in a 12 minute. 13 Let's show the -- the next map goes to the 14 near-term 2015 to 2019, the next 5 years. 15 And, again, you see, not surprisingly, a 16 similar picture of more moderate growth in New York 17 and the northeast and midwest that you see across 18 the country. 19 On the next slide, I look at the sectoral 20 detail of New York growth. 21 And I agree with the Director's comments 22 here, that there has been a shift, or a greater 23 help, in the high-wage segments, particularly in 24 what you see here, is the 3.5 percent professional 25 business services. 1 But, overall, employment growth has been 2 lagging the nation. 3 Most notable thing about this is the 4 financial sector being very low, which, of course, 5 we've discussed here. Very little growth. 6 And I know that Ronnie, and I think Jason on 7 the phone, are going to talk about New York City in 8 more detail, so I'll leave that to them. 9 But it's very interesting that New York's 10 growth up to this point has not been boosted by the 11 typical driver of growth, which is downstate -- 12 downstate financing. 13 Okay? 14 Looking across the metro areas, the next bar 15 chart, New York City, not surprisingly, leads. 16 All right? 17 I've given the broader New York metro there, 18 by the way, as well as the -- as well as 19 New York City itself. 20 Upstate New York, and particularly Syracuse, 21 Utica, the mid-section, is weak. 22 Buffalo is not exceptionally strong, but 23 there's great promise in Buffalo. 24 I've spent a lot of time in Buffalo recently, 25 in the "Buffalo Billion," I think it's called by the 1 Governor. But, there's a lot of developmental 2 activity downtown. And in the area, a lot of 3 optimism, going forward, for Buffalo. 4 The next map shows home-price growth. This 5 is actually through the third quarter of 2014, the 6 latest data. 7 Again, weaker real-estate recovery now in 8 New York. And that's, generally, actually true over 9 the course of the cycle. 10 Except for New York City, while the bubble 11 wasn't too high Upstate New York anyway, but the 12 rate of the expansion in the real-estate market is 13 slower than the rest of the country right now. 14 Put that in perspective. 15 We do have our forecast on the next slide, 16 the bar chart and graph, both of housing starts and 17 average home price. 18 You see home prices recovering by the end of 19 the decade to their peak across state, and by some 20 measures, they have already. 21 This is one particular measure based on the 22 federal Housing Finance Authority. 23 But I want to point out the bar charts there, 24 the other bubble that occurred in the mid-part of 25 the last decade, and that was in building itself. 1 And, there, we don't see that coming back in 2 New York at all. 3 Okay? 4 And the question is how close the country 5 gets to their previous peak. 6 But there were -- in other words, there were 7 two bubbles: the price increases, and then crashed, 8 but also the building increases. 9 And the building increases are really 10 affecting the real economy as well, driving demand 11 for construction jobs, and the like. 12 Summarized on the next slide is New York 13 growth by different economic indicators across the 14 fiscal years. This is fiscal-year tabulations here. 15 And you can see, gross state product, less 16 than 2 percent for fiscal 2014 and into fiscal 2015, 17 trailing the nation, as I said, but moving up, 2016 18 and 2017. 19 And, similarly, you're seeing employment and 20 personal income. 21 I'll make a note, because I was reviewing the 22 budget publication ahead of time: The division of 23 budget adjusts their employment numbers for expected 24 revisions, and they'll be out in a couple of weeks; 25 so, we'll see. 1 We're using the existing DLS numbers, so 2 that's why we're showing lower growth, even in 3 fiscal '14, I believe. 4 We are, though, a little less bullish, or 5 more bearish, about employment growth in the 6 upcoming years, so -- but the actual level of the 7 numbers was explained by that adjustment there that 8 the budget office makes. 9 So, what's the bottom line? 10 Trailing the nation now, part of that is due 11 to the relative shift, as the south finally recovers 12 and the west finally recovers from the recession. 13 We're trailing in jobs. 14 Wages are not as disadvantaged, but, the 15 overall rate of growth, we do see it as lower than 16 the nation, which is, of course, what you expect in 17 the long term, to some degree, which is based on the 18 different demographics. 19 New York City clearly leads the state, most 20 notably, though, not the financial sector in 21 New York City. 22 There is optimism in Buffalo, as I mentioned. 23 And the conclusion is, that we're going to 24 have growth. It's going to be moderate over the 25 near term, over the budget cycle, going forward. 1 Thank you. 2 HUGH JOHNSON: Can I interrupt? 3 I don't mean to interrupt, but I have been 4 getting some notes that nobody can hear me. 5 Can you hear me? 6 SENATOR DILAN: We can hear you, yes. 7 JAMES DIFFLEY: We can now, Hugh. 8 HUGH JOHNSON: Okay. 9 I'm sorry to interrupt, but that's -- the 10 notes I've been getting, and I thought I was plugged 11 in, but, I didn't know. 12 Okay, I am on, so, if anybody -- whenever you 13 want me to speak, I'll be happy to speak. 14 MARY BETH LABATE: Okay, very good. 15 Let me just see, are there any questions of 16 Mr. Diffley? 17 SENATOR DEFRANCISCO: Yes, page 3, when you 18 talk about the unemployment rate, are you talking 19 about all people unemployed, or all people that are 20 seeking employment that are not in the job market? 21 JAMES DIFFLEY: Right, this is the narrowest 22 measure, which is those people who are in the labor 23 force and actively look for a job, what percentage 24 of those people are not -- 25 SENATOR DEFRANCISCO: Do you have any 1 estimate as to the number, what the percentage would 2 be, in terms of people that aren't in the labor 3 force? 4 JAMES DIFFLEY: The BLS (the Bureau of Labor 5 Statistics) has six different measures. The largest 6 one is, roughly, double this. 7 I don't know the number off hand, but, you're 8 right, it would be above 10 percent now. 9 SENATOR DEFRANCISCO: And what's the -- what 10 are the factors in trying to get more people in the 11 market? 12 JAMES DIFFLEY: Well, it's discouraged 13 workers, for one. 14 And that's the interesting thing, when I talk 15 about the labor-force participation rate increasing, 16 and hence muting the further fall in the 17 unemployment rate, that's getting those people back 18 into the labor force. 19 They come back in looking for a job, and 20 think-about the time lag here. 21 When they don't find the job, they count it 22 as unemployed. 23 So that by -- being unemployed now, as 24 opposed to being outside the labor force, that tends 25 to boost the unemployment rate. 1 There's nothing negative that's happened in 2 the economy, other than these people looking for a 3 job. 4 But with job opportunities expanding when 5 they find jobs, that then reduces the unemployment 6 [unintelligible]. 7 Okay? 8 SENATOR DEFRANCISCO: Well, I guess my 9 concern would be, if you're really hurting and you 10 need food for the table, you'll get a job. 11 It may not be what you're looking for, but 12 it's a job, and it puts less pressure on government 13 forces having to take from others to pay for the 14 person who chooses not to take the job. 15 I think I've asked you the same question 16 before: 17 I don't even know when the unemployment 18 insurance has expired. I know it was up to 99 weeks 19 at one time. I haven't followed it. 20 But, how long can someone have 21 unemployment -- get unemployment insurance -- or, 22 unemployment payments? 23 JAMES DIFFLEY: Well, the extension from -- 24 it's normally 12 months. 25 The extension to two years has ended. 1 SENATOR DEFRANCISCO: It's ended, as of when? 2 JAMES DIFFLEY: I don't have -- I forget the 3 exact date. 4 SENATOR DEFRANCISCO: But is there -- 5 JAMES DIFFLEY: Some economists have studied 6 it and prescribed a couple of tenths of a percentage 7 point increase in employment following the 8 expiration, because -- 9 SENATOR DEFRANCISCO: That's what I was 10 getting at; has there been any indication that that 11 has happened? 12 That -- 13 JAMES DIFFLEY: There is an indication -- 14 SENATOR DEFRANCISCO: -- there are more 15 people looking for a job? 16 JAMES DIFFLEY: There is an indication, and 17 it's a debate over the size of the effects. 18 SENATOR DEFRANCISCO: Where can I find the 19 parameters of the debate? 20 JAMES DIFFLEY: Well, I'll give them to you 21 afterwards. 22 SENATOR DEFRANCISCO: Okay, thank you. 23 JAMES DIFFLEY: By all means. 24 But one other factor, though: When 25 I mentioned six different measures in the 1 unemployment, one of them includes the group of 2 people who are, for instance, taking part-time jobs 3 even though they'd rather have full-time jobs. 4 And you also want to consider people who are 5 taking, as you say, more menial jobs when they would 6 rather have -- they have higher qualifications. 7 All of these things -- an expanding economy 8 will benefit all of those things, reduce all of 9 those adverse situations. 10 SENATOR DEFRANCISCO: Thank you. 11 MARY BETH LABATE: Anyone else? 12 Hey, Mr. Johnson, we're going to give you a 13 try. Hopefully -- 14 HUGH JOHNSON: Thank you. 15 Thank you very much, Madam Budget Director. 16 And, I commend both Ken and Jim for their 17 very comprehensive and useful discussion on what's 18 going on in the economy. 19 It's very hard for me to be able to say 20 something that they haven't already touched on and 21 given you all the information that you really 22 probably need. 23 But, at any rate, thank you very much. 24 And, hopefully, hopefully, you can hear me 25 clearly. That's important. 1 And, once again, thank you very much for 2 inviting me back to participate in a pretty 3 important part of the budget process. 4 Let me -- let me -- I'm not -- you have a 5 handout, and I'm not going to labor through the 6 handout. 7 I'm just going to try to hit what I think are 8 the important points that are contained in the 9 handout, and you can sort of fill in by reading the 10 handout, or add to what I'm going to say. 11 The approach that I've had in the past in 12 talking to you, and the one I want to pursue today, 13 is -- which is, first of all, to start with, what 14 I take to be the most important question that faces 15 not only investors, but also faces policy-makers 16 such as yourself, and particularly a part of the 17 budget process, and the real key question, the most 18 important, crucial question, is: Do we have further 19 to go in the current stock market economic-expansion 20 interest-rate cycle? 21 And if we do, that's good news. 22 And, obviously, if we don't, that's not such 23 good news. 24 What I like to do is to take a look at the 25 financial markets as giving me an idea, a fairly 1 good idea, probably better than forecasters, as to 2 whether, indeed, we have further to go in the 3 current cycle. 4 And if you look at the performance of the 5 financial markets, and I talk about both the equity 6 markets, as well as the fixed-income markets, as 7 well as all international markets, if you asked the 8 question, "Based on the performance of the financial 9 markets, do we have further to go in the current 10 cycle?" an answer which has already been, both, 11 implied, as well as stated by Ken and Jim, is the 12 answer -- and the answer is yes. 13 Now, I would add, importantly, that there was 14 a time, between January of 2014 and the so-called 15 "correction lull" of October of 2014, when you begin 16 to question that, or ask the question, or, 17 basically, have the impression, that maybe we don't 18 have further to go. 19 Given the performance of the financial 20 markets since October 15th, the equity markets and 21 the fixed-income markets, you have to conclude that 22 the message of the financial markets is, indeed, 23 that we do have further to go in the current cycle. 24 There are some -- there are some variables, 25 I'll call them "internal fixed-income variables," 1 that seemed to be suggesting otherwise. 2 For example, the spread between corporate 3 bonds -- BAA corporate bonds and 10-year treasuries 4 has begun to widen, suggesting that the fixed-income 5 investors are concerned about something and 6 unwilling to take greater risk. 7 But, generally speaking, if you look at the 8 performance of the broad-based stock market sectors 9 within the stock market, capitalization within the 10 stock market, even the yield curve, you're left with 11 the impression we do have further to go in the 12 current cycle, which is, as I mentioned, is fairly 13 good news. 14 Not only is that the message of the financial 15 markets collectively, but that message is, in my 16 view, confirmed by what I take to be pretty 17 important monetary and economic variables. 18 Obviously, Federal Reserve policy has been 19 accommodative. Understatement of the year. 20 In addition, as was mentioned by the two 21 previous speakers, we're seeing a pickup, or even an 22 acceleration, maybe that's too strong of a word, 23 and -- in bank lending. 24 Money growth is certainly a strong, or 25 certainly solid. 1 Liquidity conditions are positive. There's 2 enough liquidity to drive both the economy and the 3 financial markets. 4 And all of this shows up in leading 5 indicators for the economy, which have continued to 6 expand, having expanded in 10 of the last 12 months, 7 being unchanged in one month, and declining in 8 one month. 9 So, from 30,000 feet, looking at the 10 performance of the financial markets, and the 11 performance of what I take to be important monetary 12 and economic variables, the outlook is positive. 13 Or, the current bull-market economic expansion, and 14 eventually we'll get to it, rising interest-rate 15 environment, will continue through 2015, and with a 16 little luck, 2016 as well. 17 In addition -- after having sort of looked at 18 it from that point of view, I've included -- in the 19 handout, I've included what -- a couple of tables: 20 One which shows the consensus forecast for a 21 lot of the numbers that you're going to need to use 22 in forecasting-revenues numbers, that I take from 23 the consensus, as measured by Blue Chip economic 24 indicators. That's about as good as anything. 25 I also have a table in there that shows my 1 forecast. 2 Essentially, the first question -- everybody, 3 and I include Macroeconomic Advisers and IHS, are 4 generally around the same number on overall economic 5 growth for 2015 and 2016. 6 I take a look at not just their numbers, but 7 also the numbers that I just got which show the view 8 of the Department of Budget, Senate Majority, Senate 9 Minority, the Assembly Majority, Assembly Minority, 10 on gross domestic product, or the top line of 11 economic growth, and everybody's pretty much around 12 the same number for 2015 and 2016. Essentially, 13 around 3 percent. 14 I don't think there's any reason to strongly 15 argue with that. 16 As I said in the past, there's a little bit 17 of whimsy to the level of confidence I have in the 18 forecast for, let's say, 2015, through the forecast 19 period -- the 2-year forecast period, you tend to 20 see the consensus pull in one direction. 21 It starts either too high, and continues to 22 decline through the 2-year forecast period, or it 23 starts too low, it tends to rise. 24 This time, sort of uniquely, the consensus 25 forecast for 2015, and, again, that's around 1 3 percent, has been pretty flat, suggesting -- and, 2 again, this is whimsy, as opposed to economic 3 research, suggesting the current consensus of around 4 3 percent is probably -- probably the right number. 5 What has been mentioned, which is a little 6 bit odd, is the -- well, I don't know if I would 7 call it odd, but what has been mentioned by -- 8 certainly by Ken, is the numbers that you're going 9 to look at for inflation, both headline inflation 10 and core inflation; but particularly headline 11 inflation. 12 And, when you get to that number, you're 13 going to see -- most likely, you're going to see a 14 year-over-year number for 2015 which is below 15 1 percent, and a year-over-year number for 2016 16 which is either just below 2 percent, the Federal 17 Reserve so-called "target," or just above that 18 2 percent target. 19 I see that the so-called, sort of, "five-way 20 average," Assembly Majority, et cetera, is 21 .2 percent for 2015, and 2.2 percent for 2016. 22 I think '15 is going to be higher than 23 the .2. I have it at about.9. 24 Forecasting inflation, believe me, folks, is 25 extraordinarily difficult, and I have it a little 1 bit below that 2.2 percent for 2016. 2 So I, quite frankly, would probably come up a 3 little bit on the 2015 five-way average of 4 .2 percent. And I think the 2016 number of 5 2.2 percent is probably about right. 6 I don't have any reason to really differ 7 strongly. 8 A lot of the other numbers, whether we look 9 at corporate profits, non-farm payroll employment, 10 and personal income and wages, I would probably stay 11 fairly close to what is -- what I'm looking at, 12 which is the five-way average. 13 Yes, I have personal income at less than the 14 4 percent of 2015, or 4.4 percent. 15 Yes, I have wages at less than 4.5 percent 16 for 2015. 17 But there's a very strong consensus among the 18 various forecasting units of the, roughly, 19 4.4 percent, and 4.5 percent, for income and wages. 20 I would most likely, even though I'm a little 21 bit lower, probably stick with those numbers. 22 These are important numbers because they're 23 going to drive -- ultimately drive your forecast for 24 revenues. 25 Three-month treasury bill rate, you're 1 probably fine on 2015, but too high on 2016. 2 The number you have for 2016, which is 3 1.5 percent, on average, for 2016 over 2015, 4 implies, statistically, that the Federal Reserve is 5 going to be far more aggressive in raising 6 short-term interest rates, that I believe is the 7 case. So, I think that number has got to come down. 8 I might add, that I agree with Ken, that 9 we're talking about -- I was talking about June. 10 But after listening to Janet Yellen and 11 thinking about it, particularly looking at some of 12 the more recent numbers on inflation, I think 13 September is probably a better bet as to when the 14 Federal Reserve has what we're now I guess calling 15 "lift off"; or starts to raise short-term interest 16 rates. 17 If they start in September, the number of 18 1.5 percent that you have for short-term interest 19 rates is simply too aggressive, it's too high. 20 And I might add, importantly, that the yield 21 on a 10-year treasury, I don't think it's going to 22 get to -- I'm including 2016, to get to over 23 3 percent until late 2016 at the earliest. 24 In other words, the consensus forecast for 25 longer-term interest rates, in my judgment, is also 1 simply too high. 2 Those are numbers which you might want to 3 adjust as we take a look at things. 4 I also have in there numbers about 5 New York State; numbers that have been referred to 6 already: New York State, and how New York State is 7 going to fare compared to the national economy. 8 Like -- as Jim has suggested, whether I look 9 at the Index of Coincident Economic Indicators for 10 the U.S. or New York, or I look at the growth rate 11 of non-farm payrolls for the U.S. and New York, the 12 unemployment rate, growth of the labor force, it's 13 going to continue to be the case, that -- the lack 14 of a better way of saying it, that New York State 15 economy is likely to hover below the national 16 numbers. 17 So, for example, with the growth rate of the 18 national economy, growth rate of non-farm payrolls, 19 being about 2.0, maybe a little bit above that, 20 I would agree with Jim that we're probably going to 21 be closer, for New York State, about 1.4 percent for 22 both 2015 and 2016, which is below the results we're 23 going to see for the nation as a whole. 24 I might add, that there are a number of 25 metropolitan statistical areas in New York State, 1 and these are across New York State, Upstate 2 New York, which are likely to experience, with one 3 exception, Elmira, but experience positive growth in 4 payrolls in 2015 and 2016, for the two years. 5 But, you're going to see the -- an ongoing 6 disparity, I guess is the way to say it, or 7 divergence, between the growth of payrolls for 8 downstate and upstate, with areas such as Buffalo. 9 Now, I tend to -- I understand about the 10 upbeat assessment of Buffalo. I hear it myself. 11 But when I crunch the numbers, and this could 12 be misleading, I could be off base, but the numbers 13 I get, Buffalo, Rochester, Syracuse, Elmira, and 14 Binghamton, are -- they're positive, but they're 15 certainly not -- certainly not equal to what we see 16 for New York State overall, or, for various areas of 17 Downstate New York. 18 There are some areas in Upstate New York 19 where I would forecast, interestingly, and 20 surprisingly, somewhat strong numbers. Kingston, 21 Glens Falls, Utica, Albany, interesting things going 22 on there, I think; particularly in the Albany area. 23 Federal Reserve policy, I've already 24 mentioned. 25 As I mentioned, Ken and James have done a 1 really good job on taking a look at Federal Reserve 2 policy. 3 It's pretty close to guesswork, but based on 4 recent inflation numbers, and what's going on in the 5 inflation side of things, and listening very 6 carefully to Janet Yellen, who has made it fairly 7 clear that the fed is not going to raise interest 8 rates at the next two meetings, that there's room, 9 I guess in her mind, for significant improvement in 10 employment conditions, broadly defined. And that, 11 although it's going to take time, over time, that 12 the rate of inflation will approach that "2 percent" 13 number, and that gets to that 2 percent in 2016 that 14 I mentioned before. 15 But listening to what she has to say, I think 16 probably the most sensible conclusion is to conclude 17 that the Federal Reserve is likely to move in 18 September. 19 I also have numbers in there on what I think 20 that implies for interest rates. 21 And as you can see from the numbers that 22 I have, that it implies, statistically, that 23 interest rates are not going to be anywhere near as 24 high, both short-term and long-term interest rates, 25 as is currently forecast by the consensus. 1 I have some numbers there on housing which 2 are fairly good, so it looks to me as though housing 3 is going to be pretty close to consensus, if not a 4 little bit above consensus, as we move through 2016. 5 Stock prices: 6 I think this is pretty much implied, or 7 actually mentioned by both Ken and James; and that's 8 that my expectation is, we've really good years in, 9 obviously, 2013 and 2014. 10 The growth rate of profits I think is going 11 to come down and be mid-single digits, as it was in 12 the fourth quarter. 13 With the growth rate of profits, whether 14 we're looking at corporate profits or whether we're 15 looking at S&P 500 operating earnings, mid-single 16 digits. 17 That's not particularly good news for a 18 stronger growth and stronger rise in stock prices. 19 And, in addition, if the Federal Reserve is 20 leaning towards restraint or starting to raise 21 interest rates in September, that's not very good 22 news for price earnings; the expansion of 23 price-earnings ratios. 24 Price earnings-ratios are likely to come down 25 just a little bit. 1 And if you put the two of those together, the 2 two primary drivers of stock prices -- again, 3 profits, on the one side; interest 4 rates/price-earnings ratios, on the other side -- 5 about the best you can do is make the case for, in 6 my judgment, mid-single-digit growth rates, or rise, 7 in stock prices; mid-single-digit average annualized 8 rates of return. 9 That's good news in some ways, because it 10 will be higher than the bond market which will be 11 pretty close to zero to 1 percent. 12 But, nevertheless, it's not going of be as 13 good as 2013 and 2014, and that's going to have an 14 impact, and not a particularly good one, on 15 Wall Street, which gets you, of course, to -- gives 16 you a variable on thinking about revenues. 17 We've talked about the risk to the forecast, 18 emerging markets and developed markets or foreign 19 markets, Europe. 20 My expectation, like everyone else, is that 21 the price of oil is going to go up to between 60 -- 22 West Texas Intermediate between 60 and 70 dollars 23 per barrel. 24 But having said that, the damage that's being 25 done to the economy of Russia, I expect it to 1 contract 3 1/2 percent in 2015. That will have 2 some, but not a significant, impact on Europe. 3 It will have some impact on the U.S. It's 4 not going to derail the recovery or the cycle in the 5 U.S., but it will have some impact. 6 But we're now seeing, we're currently seeing, 7 to some extent, unexpectedly, very good performance 8 from the equity markets of Europe, relative 9 performance, relative to the U.S. 10 And particular good relative performance of 11 the northern European countries: the U.K., France, 12 and Germany. We're also seeing the consensus 13 forecast for those three countries of -- start to 14 stabilize or improve. 15 And I'm also hearing, anecdotally, that 16 there's improvement in Europe, generally, but 17 particularly the northern European countries. 18 So I think that, we're not talking about a 19 recession, and we're not talking about deflation in 20 Europe, even though they're likely to be impacted by 21 the events that are transpiring in Russia. 22 But, nevertheless, the economy is starting to 23 look better, or it doesn't look to me as though -- 24 it doesn't look to me as though Europe is nearly as 25 significant a risk as I would have said three or 1 four months ago. 2 So that's -- that pretty much covers 3 everything. 4 I've looked at revenues, and, it's 5 interesting, that I've got -- just for an example, 6 my personal income tax numbers, or forecast, if you 7 may, is not particularly sophisticated. It's good 8 statistically, but it's not, in my judgment, 9 something I would hang my hat on. 10 But for personal income tax numbers, for 11 2015, fiscal year, .4 percent; 2016, 2.1 percent. 12 So my numbers, I don't know where everybody 13 else is on these numbers, but, you can see in the 14 handout that I've given you, I've got some fairly 15 specific forecasts for different revenue -- 16 different revenue categories. 17 Overall, what this all says is this: 18 The message of the financial markets is, we 19 have further to go in the current cycle. 20 That's very good news. 21 We can quantify it at about 3 percent, around 22 3 percent, for 2015 and 2016. 23 New York State being a little bit less than 24 that, that carries with it specific implications for 25 New York State revenues, which I've summarized in my 1 handout. 2 And, then, there's a lot of information in 3 addition, things we can think they, as far as, 4 particularly different areas of New York State, some 5 which will do well, some which will do, let's just 6 say, less well. 7 And that's pretty much it. 8 MARY BETH LABATE: Any questions for Hugh? 9 I have one. 10 Thank you very much, Hugh. 11 I just have one question. 12 HUGH JOHNSON: You're welcome. 13 MARY BETH LABATE: I just have one question. 14 The market was obviously very strong in 2014. 15 Why do you think the Wall Street revenues 16 were so weak, in light of the market? 17 HUGH JOHNSON: That's a -- that's a good 18 question. 19 I don't know the answer to that question, 20 other than I would say, when you talk about 21 Wall Street these days, and maybe this is not a good 22 answer to your question, but, when you talk about 23 Wall Street, we're not only talking about 24 proprietary trading or the financial side of their 25 business, but also talking about the 1 commercial-banking side of their business. 2 And, my impression was that we saw some 3 fairly significant deterioration in margins on the 4 commercial-banking side. 5 And there -- you know, even though the stock 6 market did well, and the bond market did okay, there 7 wasn't really much on the proprietary-trading side 8 of things. 9 So, I don't -- I really don't know the answer 10 to that question, and I'm just sort of flopping 11 around here, as you can tell. 12 I'll try to get you a better -- a better 13 answer and send it to you. 14 But that's -- that's -- it's a good question, 15 and a tough question to answer. 16 MARY BETH LABATE: Yeah, we've been puzzling 17 over it too, so -- 18 HUGH JOHNSON: Yeah, it's not -- it 19 doesn't -- it's not obvious, but -- it's not 20 obvious. 21 It's, just, none of their businesses really 22 did particularly -- particularly well. 23 MARY BETH LABATE: Well, thank you for that. 24 Anything else? 25 1 Okay, we'll move on. 2 I believe, Jason is on the phone, the Federal 3 Reserve, is, hopefully, on the phone. 4 And I know he has time constraints, so, 5 Jason, are you with us? 6 JASON BRAM: I am. Can you hear me okay? 7 MARY BETH LABATE: Yes. 8 JASON BRAM: Great. 9 Okay, I'm going to try to go pretty fast, to 10 leave time for Ronnie's presentation. 11 So, I'm Jason Bram, with the Federal Reserve 12 Bank of New York. 13 I should preface this by saying that the 14 views I express are mine, and do not necessarily 15 represent the views of the Federal Reserve Bank of 16 New York or the Federal Reserve system. 17 And, I assume everyone has the chart package, 18 so I'm just going to go through that kind of 19 quickly. 20 First, I'm going to look mostly at employment 21 trends, and take a quick look at housing. 22 And I know Ronnie will fill in more on 23 housing, and especially on wages, which I'm not 24 really going to talk specifically about. 25 So in the first chart, what we've done, is 1 we've just looked at trends in private-sector 2 employment. They're all indexed to the beginning of 3 the recession at the end of 2007. 4 And, so, when the index is at, you know, 104, 5 it means that things are -- employment is 4 percent 6 higher than it was at the start of the recession. 7 So, basically, New York, and the city, the 8 state, upstate...all of New York, some milder job 9 losses than the nation during the recession. 10 And, as Mary Beth noted earlier, the -- 11 there's lots of variation in strength across 12 New York State. 13 So you can see that, New York City is going 14 gang-busters, it recovered quickly, and it's 15 continued to grow rapidly; where, upstate, and 16 especially parts of Upstate New York, have lagged 17 the U.S. somewhat. 18 And then if you go to the next chart, you can 19 see a little more that Upstate New York itself is 20 mixed. 21 I was going to try to put all the metro areas 22 on here, but it just looked too crowded, so I put 23 Buffalo on here, which is nice, because Buffalo 24 seems to be -- a lot of people seem to be talking 25 about it. 1 But I'll just say that Buffalo is kind of 2 representative of what's going on in both Buffalo 3 and Rochester. They're kind of doing okay. They've 4 reversed all the job losses from the recession and 5 they're growing at a moderate pace. 6 Albany and Ithaca are going gang-busters, not 7 quite like New York City, but, are definitely ahead 8 of Buffalo, and ahead of upstate as a whole. 9 And then you have, Binghamton, Syracuse, 10 Elmira, and Utica-Rome have been lagging. They 11 haven't really reversed the job losses that we saw 12 during the recession. 13 And you can see here, Long Island, you know, 14 also fueled, in part, by New York City, is doing 15 moderately well, still ahead of the U.S. 16 The next chart looks at, we have two business 17 surveys. 18 We have a survey of New York State 19 manufacturers; and a survey of service firms 20 throughout the district, but mostly in New York 21 State. 22 The diffusion index is -- it's really quite a 23 simple index. It's the difference between the 24 number of firms saying business is growing, versus 25 business is shrinking. 1 So when it's above zero, then the growing 2 firms are outnumbering the shrinking firms. This is 3 over periods of a month, so it kind of jumps around 4 a little. 5 What you see is, that the -- these indexes 6 have mostly been above zero, in positive territory, 7 kind of at the same levels that we saw before the 8 recession and right after the recession. 9 So, things are in a growth mode. 10 We tend to keep an eye on this because, when 11 it goes below zero, we get a little bit nervous, and 12 it sort of acts as yellow flag. 13 And you can see that the service-sector 14 survey, which is the blue -- oh, it might not be in 15 color on yours, but, it's the line that is kind of 16 down at the zero axis in February, is the 17 service-sector survey. 18 We're not too concerned about it. One of the 19 things, you know, that could be affecting it is 20 weather. 21 And you see that, in early 2014, when we've 22 the a lot of snow, and especially in late 2012, you 23 can see the thing plunged well below zero. Late 24 2012, of course, was "Sandy." 25 So we're not too concerned about that, but 1 it's something that we like to watch. And we're 2 expecting, and hoping, it to rebound in March and 3 the months ahead. 4 So, anyway, these are just indicators that we 5 like to watch because they're very, very timely. 6 Now, to switch gears a little, let's look at 7 a few key industries. 8 We've been talking a little bit about 9 Wall Street and the securities industry. 10 And, this is a chart that I've been showing 11 for a while. 12 And, before this recession, I used to show it 13 to say, you see whatever the securities industry 14 does is what the rest of New York does. 15 So when the securities industry turns up, 16 when it's doing well, then New York City's typically 17 growing. 18 So that's the left scale, it's the blue line. 19 I don't know if it's in color, but it should be the 20 darker line in black-and-white. 21 And each up-and-down cycle, the securities 22 industry tends to precede or lead total employment 23 by a bit. 24 And you can see that during the recent 25 experience, basically, the securities-industry 1 employment has done nothing. It's been flat. It 2 fell quite a bit during the recession, and it's been 3 flat. And everything else has been going -- not 4 everything else, but, everything else, as a whole, 5 has been going gang-busters. 6 And, it's really kind of surprising because 7 it's never happened in New York City. We've never 8 had a period in New York City where the city has 9 done really quite well when the securities industry 10 has been a lagered. 11 And then the next graph just kind of zeroes 12 in a little bit more on the recent periods, so, you 13 just sort of get a closer look at what's been going 14 on lately. 15 So, if the securities industry isn't driving 16 it, what is? 17 So the next page is a big table of numbers. 18 Without going through all the numbers, I'm 19 just going to highlight a few things. 20 First, on the bottom line, you can see what 21 you saw in the first charts; is that, total 22 employment, New York City is doing better than 23 upstate, and, in part, on par, at least over the 24 last year, with the nation. 25 But, when you look at the individual 1 industries that are leading things, you can see 2 financial activities is kind of sluggish. 3 But you see that industries, like 4 professional business services, leisure and 5 hospitality, education, and health, and, to some 6 extent, retail trade, at least for New York City, 7 but even for New York State as a whole, tend to be 8 doing better than the others. 9 And what some of these industries have in 10 common, which is a concern, is that, obviously, the 11 finance sector is a very high-wage industry. And, 12 obviously, leisure and hospitality and retail tend 13 to be very low-wage industries. 14 But what I think goes unrecognized often, is 15 that within -- and, again, I didn't want to get into 16 too much detail in this little table, but, within 17 the professional-business-services sector, and even 18 within the information sector which, as a whole, is 19 falling, you have pockets of tremendous strength in, 20 what I would call, information technology, high-tech 21 industries, things like Internet publishing, 22 computer-systems design, these are areas where 23 growth is really doing very well in New York City 24 and in New York State. 25 And it is something that we're looking into 1 more. 2 Maybe -- I don't want to dwell on it too 3 much, but, it's also a source of very-high-paying 4 jobs. 5 We looked at series -- a group of what we 6 considered to be high-tech industries in 7 New York City, and even at the national level, they 8 pay over $100,000 per year, on average. 9 So, this is kind of a counterpoint to what 10 we're seeing a lot, which is also growth in 11 lower-wage industries. 12 So it is a mix. 13 And the technology sector I think is 14 something that is hard to watch, because it's 15 scattered through different industries, but is 16 important to watch. 17 And I'll just wrap up. 18 I know Ronnie has some more detailed charts 19 on New York City home prices. 20 But, this is a -- Core Logic, they do a 21 house-price index that's based on repeat sales, so, 22 it's not really affected by changes in the mix. You 23 know, if all the houses, one month, happen to sell 24 in a nice neighborhood, you don't want, you know, it 25 affects the median price. 1 So, you can see that U.S. home prices fell an 2 awful lot during the housing bust, and up as late as 3 2012. And they've certainly recovered, but they're 4 not back to where they were. 5 New York City metro, they're -- and probably 6 New York City is doing better as the metro, as a 7 whole, they have recovered. 8 And in upstate, which I think is really quite 9 interesting, upstate didn't have a big housing boom, 10 bubble, whatever you want to call it, from 2000 to 11 2007, but it also didn't have much of a bust at all. 12 And it's now growing at, you know, about 3 percent, 13 home prices. 14 This is in places that we've been talking 15 about, like Buffalo, and even Rochester, and even 16 some of the cities that are not doing that well in 17 job growth. 18 So, you know, you see, at least housing 19 markets in New York State, seem to be doing pretty 20 well. 21 And, I think I'll just wrap it up there, but 22 I'll be happy to take questions, if there are any. 23 MARY BETH LABATE: Thank you, Jason. 24 Any questions? 25 Okay. 1 Thank you very much. 2 Why don't we move on to Ronnie Lowenstein. 3 RONNIE LOWENSTEIN: Thank you very much. 4 And thank you, Jason, for giving me enough 5 time. 6 JASON BRAM: You're welcome. 7 Good luck. 8 RONNIE LOWENSTEIN: I'm going to be doing 9 something different, looking strictly at 10 New York City, which is what our agency is charged 11 to do; specifically focusing in on employment and 12 wages and housing. 13 Most of it's historical, but, I've included 14 some portions of our upcoming forecasts, which is 15 coming out later, I guess, midweek next week, and 16 may well be subject to change since we haven't quite 17 pinned it down yet. 18 What I would like do is start with just some 19 perspective on just how strong the current expansion 20 has been. 21 So if you turn to the first page in your 22 packet, what I've given you here is a look a job 23 growth over the last three expansions. 24 The vertical axis shows the cumulative 25 increase in employment. The horizontal axis shows 1 you years. 2 And if you look at the first line, which is 3 the red line on top, that's the most recent 4 recovery. 5 And if you look down from the very top of 6 that line, to the horizontal axis, you can see that 7 in the, roughly, five years that the city's economy 8 has been expanding, it's gained about 12 percent -- 9 the number -- well, jobs have increased by about 10 12 percent. 11 That's extraordinary; and you know -- you can 12 tell that it's extraordinary [unintelligible] you're 13 looking down. 14 So if you just come down from that 15 12 percent, you look at the recovery from the 2002 16 recession, and you can see that, first of all, that 17 recovery didn't make it five years. 18 But when it finally ended, employment had 19 increased by just 8 percent. 20 And even in the very, very long recovery we 21 saw after the very deep '90-'91 downturn, at the 22 5-year mark, employment growth was just 7 percent. 23 So that gives you, you know, a visual chart 24 to just how strong the recovery in the city has 25 been. 1 If I had done this same chart on the basis of 2 wages, it wouldn't look nearly as good, because what 3 we've seen is really strong growth in employment, 4 but not nearly as strong in wages. 5 Continuing on with the good news on 6 employment, turn the page, we're continuing to see 7 strong employment growth. 8 Based on the numbers that are currently 9 available, New York City added more than 86,000 jobs 10 in 2014. That's the fourth straight year of 11 80-plus-thousand job gains. 12 We've gained three times as many jobs in -- 13 during the recovery as we lost during the downturn. 14 Moreover, we're going to be seeing revisions 15 to this number probably within next the two weeks. 16 And, based upon our partial look at those 17 revisions, we expect that employment growth through 18 2014 could well now top 100,000. And if it does, it 19 will be a record for the city since these records 20 started being kept in 1950. 21 At the same time, the city's rate of 22 unemployment, particularly over the last 23 year and a half or so has fallen sharply. In fact, 24 it's fallen 2 1/2 percentage points over the last 25 16 months. 1 Jim mentioned the importance of labor-force 2 participation. 3 For the longest time, the city's -- even 4 though we were growing jobs, the city's unemployment 5 rate really wasn't going down very much because our 6 labor-force participation has continued to rise. 7 People were coming into the labor market, and 8 when they come into the labor market looking for 9 work, they're counted as unemployed. 10 But, now, despite the fact that labor-force 11 participation is continuing to rise, we've seen a 12 2 1/2 percentage-point drop in the unemployment rate 13 over the 16 months, which has been really good news. 14 Yes, there are other rates to look at, but, 15 for the most commonly cited rate, it's good news. 16 IBO is projecting, at least as of this 17 moment, that robust job growth will continue in 2015 18 and 2016. And right now, we're looking at gains of 19 83,000 for the current year, and 80,000 for 2016. 20 And that's taking the revisions we're expecting into 21 account. 22 Okay, so really good news on employment. 23 Wages, not quite as good. 24 Next page looks at average wages, adjusted 25 for inflation, and they've recovered far more slowly 1 than employment. 2 The first line looks at jobs in all sectors, 3 and I've just put in some years, not all of them, 4 but you can see, looking at the very top line, that 5 average wages, after adjusting for inflation, are 6 still somewhat shy of their peak in 2007. 7 They did grow fairly strongly in 2014, but 8 definitely shy of the peak; and that's largely 9 because security sector where the wages are so much 10 higher is still well short of what it was at the 11 peak, although, securities industry, in terms of 12 average real wage growth, also had a reasonably good 13 year last year. 14 Most important, if you look at all other 15 sectors; so, everything other than securities, 16 everything else regained average wages in 2011, so, 17 they came back to their peak levels. 18 You know, '12 and '13 weren't good years 19 particularly, but, in 2014 we've seen 3 percent 20 growth. 21 So, we're finally beginning to see, putting 22 securities industry aside, some real wage growth. 23 And I think that's going to be very welcome in terms 24 of the city economy strengthening. 25 Moving along to the next page, the next 1 two pages are a little bit harder to read, so I'm 2 going to take a minute to just go over what these 3 stack-bar charts show you. 4 They look at employment and aggregate wage 5 growth, not average wage growth, but total wage 6 growth by industry. 7 I've excluded a number of industries, not 8 because they don't have large numbers of people in 9 them necessarily, but because they didn't 10 necessarily contribute much to growth over the last 11 few years. 12 So, I'm focusing on what changed in terms of 13 growth of both employment and wages. 14 The industries that we're looking at are 15 shown on the first column; starts with "Professional 16 and Business Services," and goes down to 17 "Information." 18 The next two groups of bars show share of 19 employment growth, on the left; and share of 20 aggregate real wage growth, on the right. 21 And within each of them, on the first chart, 22 you can see, on the right-hand side, the most 23 current expansion; and on the left-hand side, the 24 expansion before that. 25 So, easiest to do is take an example. 1 Look at the first two sets of bars. You can 2 see the professional and business services, and 3 education, and health, accounted for a very large 4 share of total job growth in both the most recent 5 expansion and the expansion before that. 6 In contrast, if you go on to look at leisure 7 and hospitality and trade, what we're seeing is, 8 more, a greater share of job growth attributable to 9 leisure and hospitality and trade in the current 10 recovery than we saw in last one. 11 And that makes sense, because if you think 12 about how tourism has increased in the recent 13 recovery, lots more people are coming into this -- 14 these fields. And, it's been pointed out they're 15 not particularly well-paying fields, but they've 16 definitely been bolstered by tourism. And more job 17 growth has been attributable to these industries 18 this recovery than to last. 19 It's also worth taking a look at the 20 securities industry, it always is, and you can see 21 that, in the previous expansion, 9 percent of total 22 job growth was attributable to securities. And in 23 the most recent expansion, none of the job growth 24 was attributable to securities, because securities 25 industry declined. 1 That seems to be changing. And we expect 2 that with the benchmark revisions coming out, we'll 3 be seeing some positive numbers for last year. 4 But, in general, you know, they haven't added 5 jobs. 6 And, similarly, if you look at construction, 7 very big role in the previous recovery, and very 8 little impact at all on the current one. 9 The story changes somewhat if you look at the 10 shares of aggregate real wage growth. 11 And, the most striking thing to look at is 12 that purple bar midway down, that's the securities 13 industry. And between 2003 and 2008, the securities 14 industry alone, without the rest of the financial 15 industry, was responsible for more than half of the 16 total increase in wages and salaries during the 17 expansion. 18 That's amazing. 19 If you put in the rest of the financial 20 industries, it's over 60 percent. 21 In contrast, for the most recent expansion, 22 it's all of 11 percent. 23 Huge change. 24 I mean, it's still a significant percent 25 because these jobs pay very well, but nothing like 1 what we've seen in the past. 2 I think it's also worth going down to the 3 bottom bar and looking at Information. 4 With less -- with securities contributing 5 less to wage growth, everybody else is contributing 6 more to wage growth. 7 And one of industries that's now the 8 sufficient size to contribute more to wage growth is 9 the information sector, which, like professional and 10 business services, has a high component of tech jobs 11 within it. 12 So, you know, we're seeing more -- more of 13 both employment growth and income growth 14 attributable to tech. 15 If you flip to the next chart, it's the same 16 basic format as the other one, but this time around 17 what I'm doing, is comparing the most recent 18 expansion, on the left side of each bar, to our 19 forecast, which is on the right side of each bar. 20 And here, again, professional and business 21 services, education, and health are still, by far, 22 the biggest contributors to employment growth. 23 But, we're expecting that the share of 24 employment growth due to leisure and hospitality and 25 to trade is going to decline from what it did. 1 So in our forecast, leisure and hospitality 2 is expected to contribute 16 percent of all 3 employment growth over the next two years; trade, 4 11 percent. And those numbers are down considerably 5 from what we had seen throughout the rest of the 6 expansion. 7 That's because we're expecting the strong 8 dollar to have an impact on tourism, in a couple of 9 different ways. 10 Certainly, discouraging more European 11 tourists from coming here, but at the same time, 12 perhaps encouraging more domestic tourists who would 13 have otherwise come to New York City, but decide to 14 go to London or Barcelona instead. 15 Why they would want to do that is unclear to 16 me, but, expect it to happen. 17 Securities industry, we're finally expecting 18 them to resume hiring, but not by a lot. And, you 19 know, small impacts from the other -- the other 20 sectors. 21 Once again, going to the right, and looking 22 at shares of aggregate wage growth, this is a very 23 different securities industry than we've seen in the 24 past. 25 We're still expecting the securities industry 1 to have a significant contribution to total wage 2 growth, but it's going to be more on the order of 3 9 percent, as opposed to 50 percent which is what 4 we've seen in some past expansions. 5 Okay, taking a closer look at Wall Street, 6 and I can tell you what's happened, although I don't 7 necessarily have good answers for why it's happened 8 this way. 9 What you're looking at in the top part of the 10 chart is revenues and expenses. 11 Revenues are in blue, expenses are in red. 12 And I should note that these are all for 13 New York State -- I'm sorry, New York Stock Exchange 14 member firms, which is just a subset of the 15 securities industry, but acts as a good bellwether 16 for what the rest of industry is doing. 17 Looking first at revenues, the blue bars, you 18 can see that revenues are about half of what they 19 were at the peak, which is definitely not good news. 20 We've been assuming, although we have no 21 proof for any of this, that tighter regulations, and 22 especially limits on proprietary trading, are, in 23 part, responsible. 24 But, we don't have firm answers on that. 25 But, fortunately for the industry, you can 1 see that expenses have been almost commensurately 2 lower in recent years. 3 That's because interest costs have been so 4 low. 5 You know, obviously, that's going to change; 6 and when it changes, what happens here is an open 7 question. 8 So the difference between revenues and the 9 expenses is, of course, profits. And you can see 10 those charted in the bottom part of the graph. 11 And you can see the profits have been in the 12 $15 billion range for New York Stock Exchange member 13 firms for the last couple of years. We're expecting 14 it to stay in that range for this year. 15 We don't have the last quarter yet, and for 16 next year. 17 But, I think there's a real question of 18 whether -- as interest rates inevitably rise, 19 whether the securities industry will find new 20 revenue sources to increase commensurately and to 21 keep profits at that level. 22 So, there's some real downside risk here. 23 Okay, moving on to real estate, I start with 24 commercial real estate. 25 And commercial real estate, for those of you 1 who recall what happened, the market for commercial 2 real estate, effectively, collapsed in the midst of 3 the financial crisis and the subsequent recession. 4 The orange bars in the chart are commercial 5 sales in billions of dollars. 6 They plunged from 74 billion in 2007, to a 7 low of 15 billion in 2009. 8 And, somehow, they've managed to come up to 9 64 billion, the second-highest level in 2014. 10 That's an estimate. 11 That's an extraordinary bounce-back. 12 I think many of us would have argued that the 13 $74 billion level was unsustainable, and that there 14 was a bubble involved here. 15 It's harder to say it's unsustainable if it's 16 happening again, so we'll see what occurs there. 17 But at this point, at least, there doesn't 18 seem to be any waning of interest in the sale of 19 commercial buildings, particularly in Manhattan. 20 The number of sales, the number of commercial 21 transactions, for very large transactions, which are 22 buildings over 100 million, is charted in the blue 23 line. 24 You know, so -- you can see clearly that the 25 dollars are being driven by these very large 1 commercial transactions. 2 There are a little over 100 of them, we 3 estimate, in 2014. 4 We certainly didn't expect to see anything 5 like that again, and here it is. And, that's a huge 6 risk to the forecast as well. 7 Moving on to residential, not nearly as 8 exciting. 9 If you look to the right where the charts 10 are, the first chart is just Manhattan. 11 The top part of the chart shows median sales 12 prices for Manhattan co-ops and condos. 13 There aren't enough single-family homes in 14 Manhattan to allow us to do the repeat-sales index. 15 On the bottom, you have sales volume again 16 for Manhattan co-ops and condos. 17 The real action is in the condos. And, yes, 18 they declined after the downturn, but then, in the 19 last couple of years, have skyrocketed. 20 That sharp increase has been due to the very 21 top end of the market, and it has been dominated by 22 this luxury development. 23 If you look to the bottom part of the chart, 24 which shows sales volume, condos are in the same 25 blue. 1 And you can see the volume is -- there are 2 relatively few sales, and that was because there 3 were relatively few of these high-end condos coming 4 onto the market, which is part of what induced the 5 frenzy that we saw. 6 I think there are a lot of other things going 7 on, particularly international, that have fueled it 8 as well. 9 But, it seems likely that with more scheduled 10 to -- more high-end condos scheduled to come online 11 in the next few years, that we may not see the same 12 sharp increases in price of condos as we've seen 13 over the last two. 14 Things have been way calmer in the co-op 15 market. 16 I have a co-op. It's appreciated in value 17 somewhat, not a whole lot. 18 And if you look at the volume of sales, down 19 on to the bottom part of the chart, you'll see that 20 the volume is actually still significantly below the 21 2004 peak. 22 Some of that has been substitution between 23 people who would have bought co-ops now buying 24 condos, but some of it is the fact that, you know, 25 this is largely a resale market and it hasn't been 1 nearly as frenzied. 2 Looking at the outer boroughs, which I don't 3 often look at, but is really important, there aren't 4 that many co-ops and condos out there, but there are 5 a lot of one-, two-, and three-family homes, many 6 more than there are co-ops and condos in Manhattan. 7 And if you look just at prices, you think 8 things are pretty good. 9 Prices have been -- for one-, two-, and 10 three-family homes have been rising relatively 11 slowly, but, rising. 12 And -- but they still remain about 8 percent 13 below the peak. 14 Okay, but then you get a really different 15 story when look at sales volume. 16 And if you look at one-, two-, 17 three-family-homes sales volumes, sales volume is 18 about one-half of what it was in the peak, which 19 was, again, about 2004. 20 So that market really has not bounced back, 21 and that's a real issue for the many New Yorkers -- 22 many more New Yorkers who are in the outer boroughs 23 rather than in Manhattan. 24 Let me just finish by saying something about 25 risks. 1 I agree that there are both downside risks 2 and upside potential. 3 I would put securities into both categories. 4 The downside risk is, as interest rates rise, 5 they've got to find ways to bolster revenues in 6 order to keep profits even at the okay levels 7 they've been over the last few years. 8 But, I would never count the securities 9 industry out. 10 I've been at this long enough to know that 11 we've counted them out many times, and, somehow, 12 they always managed to bounce back. 13 And I would not bet against them this time. 14 Other downside risks: 15 Obviously, tourism, to the extent the 16 stronger dollar leads to fewer foreign tourists and 17 more U.S. domestic tourists choosing to go 18 elsewhere. 19 And I think another major downside risk is 20 whether the fed will successfully engineer a soft 21 landing, and I don't think we can assume that that's 22 a given. 23 In terms of upside potential: 24 GDP growth we think could genuinely be higher 25 than what the consensus is at the moment. It could 1 be lower, but it could be higher as well. 2 And, we have under-- you know, based upon the 3 numbers we expect to come out next week, we 4 definitely undershot on our employment forecast. 5 And, it's entirely possible we will do so 6 again. 7 So, I think the risks are pretty much 8 balanced, but the forecast for this city, given the 9 positive forecast for the U.S., looks pretty good 10 going ahead. 11 Thank you. 12 MARY BETH LABATE: Thank you, Ronnie. 13 Any questions? 14 Yeah. 15 SENATOR DEFRANCISCO: It sounds like a pretty 16 upbeat report for the city of New York. 17 Can I translate that into the conclusion that 18 you need less State aid than you've gotten? 19 [Laughter.] 20 RONNIE LOWENSTEIN: As a New Yorker -- as a 21 New York Citier, I would never say that. 22 MARY BETH LABATE: Nice try, though. 23 RONNIE LOWENSTEIN: Good try. 24 MARY BETH LABATE: Okay, anything else? 25 Okay, well, I want to thank all of our 1 presenters today. 2 I have been told that this is our 3 20th Consensus Conference. Let's hope it's another 4 successful one. 5 We look forward to working with you all over 6 the next few days to come up with the consensus 7 number, and thank you for your expert opinions. 8 SENATOR DEFRANCISCO: Ditto. 9 MARY BETH LABATE: Have a nice evening, 10 everyone. 11 12 (Whereupon, at approximately 5:21 p.m., 13 the 2015 Economic and Revenue Consensus 14 Forecasting Conference concluded, and adjourned.) 15 16 ---oOo--- 17 18 19 20 21 22 23 24 25