Bill Dudley Remarks On The Regional Economy And Trends In Household Debt
Regional Economy and Trends in Household Debt
William C. Dudley, President and Chief Executive Officer
Remarks at the Quarterly Regional Economic Press Briefing, New York City
Good morning and welcome once again to the
New York Fed's Quarterly Regional Economic Press Briefing. I am pleased
to have this opportunity to talk with the journalists covering our
region—and through you, to the people in our District. This morning I
will discuss national and regional economic conditions, with particular
attention to household debt in the nation and especially in the Second
Federal Reserve District, which covers New York; northern New Jersey;
Fairfield County, Connecticut; Puerto Rico; and the U.S. Virgin
Islands. Following my remarks, my colleagues will provide more detail.
As always, what I have to say reflects my own views and not necessarily
those of the Federal Open Market Committee or the Federal Reserve
National Economic Conditions
To provide context, let me first comment on national economic
conditions. Since the Great Recession ended in 2009, the economy has
grown at a modest pace. When we last met, in October, the available
data showed that we hit a soft patch at mid-year. The recovery had
slowed, extending the time before employment and inflation could be
expected to return to levels consistent with the Federal Reserve's dual
mandate. And, with the loss of economic momentum, downside risks had
In order to foster greater economic momentum, reduce downside risks
and speed up the return to more normal levels of unemployment and
inflation, in early November the Federal Reserve announced its
intention to purchase $600 billion of Treasury securities. These
purchases helped to ease financial conditions, thereby stimulating
More recently, we have seen signs of a pick-up in the pace of
growth, with activity in the second half of 2010 turning out to be
considerably stronger than most analysts expected. Real final sales
grew at a 4 percent annual rate over the second half of 2010, up from 1
percent over the first half, led by surprisingly strong growth of
consumer spending, continued strong growth of exports and slower but
still healthy growth of business fixed investment.
Several notable forces combined to encourage the resumption of
stronger growth. On the policy side, as I mentioned, the Federal Open
Market Committee provided further stimulus through purchasing Treasury
securities. This, plus the lagged effects of its previous measures,
helped to improve financial conditions. Also, the Board of Governors'
Senior Loan Officer Opinion Survey indicates that, while the absolute
level of lending standards remains tight, banks did begin to ease
standards somewhat in the second half of 2010.
The pick-up in the economy has occurred despite renewed weakness in
the housing market. Home prices have softened anew and construction
activity remains stuck at a very low level, likely reflecting the
continued large supply of unsold homes. We believe that it will take
more time, perhaps as much as another year, for enough of these homes
to be bought that residential construction might begin a meaningful
On the labor front, the most recent employment report for January
2011 is quite difficult to interpret. Only 36,000 nonfarm payroll jobs
were added, well below expectations. Yet, we get a very different
perspective from the unemployment rate, which fell by 0.4 percentage
points for the second month in a row and now stands at 9.0 percent. Job
growth was undoubtedly held down by the severe winter storms that
affected many major cities, including our own. The decline in the
jobless rate was not an unmitigated positive, as a significant part of
this decline was due to fewer people looking for work.
Thus, neither the disappointingly slow job growth nor the welcome
steep drop in unemployment seems to paint the full picture. The truth
lies somewhere in between. Despite the stronger job growth that we
expect in the months ahead, we will continue to have a substantial
amount of slack in our labor markets that will take time to absorb.
At this point, while the soft patch is over and the risk of a double
dip has subsided, the economy still faces headwinds as a result of the
aftermath of the financial crisis, the housing bust and the high level
of unemployment that still prevails. As banks and other financial
institutions seek to strengthen their balance sheets and avoid future
credit losses, they may keep credit conditions tighter than normal. In
addition, many consumers' borrowing options may be limited by their
impaired credit histories, and the recovery is not getting the strong
boost from home construction that most previous recoveries have
benefited from. Furthermore, as I will discuss later, households are
still feeling the financial impact of lost wealth and jobs, which makes
some cautious about spending and investing.
The economy is healthier, but it is not yet well. In order to reduce
joblessness significantly over the coming quarters, the economy needs
to grow at a considerably faster rate than we have seen so far in this
I am happy to say that we believe that conditions are in place for
such higher growth in 2011 and 2012. We entered this year with a fair
amount of momentum. Business and household spending has strengthened,
presumably reflecting greater confidence in the economic outlook and
progress in the repair of household balance sheets. Businesses are
expanding their investments in equipment and software at a healthy
pace. And, their spending on nonresidential structures, such as office
and factory space is no longer contracting as sharply as it was a year
ago. Further support comes from the agreement by Congress and the
administration to postpone some tax increases, to reduce payroll taxes
temporarily and to extend unemployment benefits. In addition, our
exports continue to expand, supported by strength in demand abroad,
particularly in Asia.
Higher growth, a steady reduction in spare capacity in the economy
and continued stability in inflation expectations should also slowly
begin to reverse the recent decline in core inflation. Inflation was
quite low during the second half of 2010, but we expect that to be the
low point of the cycle.
In short, viewed through the lens of the Federal Reserve's dual
mandate—the pursuit of the highest level of employment consistent with
price stability—the current situation remains unsatisfactory. However,
we appear now to be moving in the right direction.
Regional Economic Conditions (update since the October regional press briefing)
Now, how is our region doing? Overall—in contrast to the pick-up in
the nation—the regional economic recovery appears to have paused in the
fourth quarter. More similar to the nation, joblessness in the region
has retreated somewhat from the peaks recorded toward the end of 2009,
but remains unacceptably high.
As attendees at previous regional press briefings may recall, the
New York Fed produces Indexes of Coincident Economic Indicators to help
monitor the performance of the regional economy.
Based on these measures, the upturn in economic activity that we saw
for much of 2010 in both New York State and New York City has paused.
To be sure, activity in both the state and the city is higher than a
year ago, but we saw no increase over the prior quarter. This pause is
particularly evident in New York City where the economic recovery had
been relatively strong. By the way, let me note that this pause occurred
before mid-December, so it cannot be attributed to the recent spate of
heavy snow storms.
By contrast, New Jersey's economy has seen no pick-up in activity
and, in fact, activity there continued to decline at a modest pace
through the end of 2010.
We monitor Puerto Rico using an index produced by the Government
Development Bank of Puerto Rico. This index shows that the recession
there, which started back in 2005—well before that experienced in the
mainland—appears to have subsided. As of November of last year,
activity was no longer falling, although indications of a recovery are
Turning to jobs, the latest data indicate that businesses in the
region, on balance, were not expanding their workforces at the end of
last year. As a result, the total number of jobs in the region has held
steady, lagging behind the job growth rate experienced nationally.
Much of this recent weakness in employment stems from job losses in
the retail, wholesale and manufacturing sectors in our region. In the
rest of the nation, these sectors expanded during the last quarter.
Moreover, our state and local governments cut jobs much more severely
than governments did elsewhere.
At the same time, job gains in some of the region's strongest
sectors—professional and business services, finance, education and
health—were not large enough to completely offset these losses. At this
point, it is difficult to say whether the recent pause in job growth is
short-lived or not. As such, we will continue to closely monitor our
region's job situation.
Meanwhile, unemployment rates have ticked down across the region.
Given the disappointing job numbers, it is not surprising that this
change is largely due to a decline in labor force participation. In the
fourth quarter of 2010, the labor force of both New York and New
Jersey declined by about 0.3 percentage points, meaning that fewer
people were actively seeking work. December's unemployment rate in New
York and New Jersey, at 8.2 percent and 9.1 percent, respectively, were
below the national jobless rate of 9.4 percent for that month, though
these rates remain painfully high. Puerto Rico's 15.7 percent
unemployment rate, although down from its high of over 17 percent,
still shows little evidence of a sustained improvement.
Overview of Household Debt during the Crisis
Now, let me turn to this session's special topic: household debt.
This topic provides an important lens into economic conditions in our
country and our region. How families are adjusting their saving,
borrowing and spending in the aftermath the mortgage crisis and the
Great Recession will help shape the path of the recovery.
Here at the Federal Reserve, we try to answer questions such as:
what is happening to households' credit, debt and delinquencies and
what economic consequences will that have? This monitoring and research
on household debt and credit conditions helps us better understand the
connections between financial market developments, the broader economy
and families' well-being. We follow a variety of metrics, including
lending activity, the level of interest rates and of interest rate
spreads, survey data on lending standards, delinquency rates on loans,
and home and other asset price changes.
One new, key source of information on household debt and credit
conditions is the New York Fed's Consumer Credit Panel. As you heard a
few moments ago, these data are now available for all of 2010. They
come from a nationwide sample covering all households where at least
one member has a credit report. The records tell us about five major
categories of household debt—mortgages, home equity lines of credit,
and credit card, auto and student loans.
To set the stage, one can think about the recent path of household debt in three phases.
- During the run-up to the recession—the years leading up the
crisis—households borrowed a lot of money. They took on higher credit
cards balances, auto loans, student loans and, especially, mortgages.
- As the crisis unfolded in 2008, many families' debt burdens
proved unsustainable: delinquencies rose dramatically and household
debt began to fall sharply.
- Now, we appear to be entering a process of gradual convalescence, as delinquencies begin to subside and some households begin to expand their borrowing again.
The nature of the run-up to the crisis has been well-documented, so
let me focus here on the latter two phases: the crisis and
During the crisis, weakness in the housing market contributed to
financial strains as many families found that their mortgages were
"underwater," that is, their homes were now worth less than their
mortgage balances. As a result, they had no financial buffer they could
tap if their finances came under stress. And, as the economy weakened
further, many households faced sharply reduced incomes as family
members lost their jobs or had their work hours cut. So, more families
found it difficult to pay their credit card bills and other debt
obligations on time.
As a consequence of these strains, households began the painful
process of deleveraging. They started reducing the amount of debt they
owed, relative to their income. During the run-up to the recession,
households were saving only about 2 percent of their income; now they
are saving around 6 percent of their incomes. This increase in saving
was mostly used to pay down their debts, but it also included adding to
their savings accounts and borrowing less. Of course some of the
reduction in debt reflects loan charge-offs of bad debts. But work done
here with the Consumer Credit Panel shows that some consumers also
became more frugal, rebuilding their net wealth by paying down their
debts. These actions enabled families to rebuild their financial
reserves—precautionary funds that could be used in the event of a job
loss or illness—to maintain their consumption and keep up with their
mortgage payments. But to save more, it also means that they had to
consume less, which dampened economic activity further.
Interestingly, student loans are the only part of household debt
that continued to rise throughout the crisis. More families and
students may have needed to rely on loans to fund education during the
difficult times. And going to school was more attractive for some,
given the deterioration in labor market conditions.
Just as households began deleveraging during the crisis, banks
needed to respond in light of the large loan losses that they were
taking. As defaults rose, banks tightened their underwriting standards
and raised the margins that they charged on loans. As a consequence,
they made fewer loans. This tightening of credit availability
exacerbated the decline in real activity. It created an "adverse
feedback loop" between the financial and real sectors of the economy
that deepened the recession.
Where are we now?
There are several signs that we are now convalescing; this damaging
dynamic—the adverse feedback loop—now appears to be reversing. From
historical experience with financial crises we know that this phase is a
gradual transition process—not a quick event—as households and banks
slowly complete their painful adjustments. Once the adjustments are
completed, households can consume more and regain their access to
credit, and these developments help to support a more vigorous economic
Of course, we don't yet know precisely where we are in this
adjustment process. For example, families may choose a permanently
higher rate of saving in order to rebuild their retirement savings.
What they decide to do will depend in part on their expectations for
future income, their outlook for the economy, what they think will
happen to housing and stock prices, and prospects for taxes and
benefits such as social security and Medicare payments. However, we do
know that during good times few households are likely to be delinquent
on their bills. And, overall, we'd expect their borrowing to grow at
least modestly as the economy strengthens.
The Household Debt and Credit Report released today indicates that
there has been a pick-up in credit flows. Households increased their
non-mortgage debt last quarter, a development not seen since the fourth
quarter of 2008. The number of credit card applications increased—an
indication of a pick-up in consumer demand for credit. And, the number
of open credit card accounts also increased slightly—as more accounts
were opened than were closed. Of course, signs of distress continued:
households are still reducing their housing-related debt and
delinquencies continue to be a problem. So, the adjustments remain far
It is encouraging that credit flows are no longer contracting
because households' renewed demand for credit has no doubt supported
some of the recent rise in consumer spending.
Trends in Household Debt in the Region
One key question we'll address today is how this process is playing out
for households in our region. In general, our region has fared well in
comparison to the nation as a whole. Following the three phases of the
cycle that I noted for the nation, I will consider three questions:
- How much debt did our households take on during the run-up?
- How much deleveraging has occurred throughout the region during the crisis?
- Are we beginning our convalescence—have households started to increase borrowing again, and what signs of stress remain?
One reason that households in our region have weathered this credit
cycle relatively well is that debt levels are lower relative to income
and this debt rose more modestly in the run-up to recession than in the
nation as a whole. Using the debt-to-income ratio to help us make
meaningful comparisons across different geographies, debt levels are
particularly low in upstate New York and New York City. Three key
exceptions to this generalization are Long Island, Edison, New Jersey
and Puerto Rico, where household debt-to-income ratios have risen to
levels above the U.S. average.
Since the vast majority of household debt is related to housing, it
is not surprising that debt-to-income ratios were highest and rose most
in places that experienced rapid rises in home prices. So, for
example, debt-to-income ratios are among the highest in the nation in
those places most associated with the housing bubble, such as
California, Florida, Nevada and Arizona.
This relationship can also be seen within our region. For example,
household debt grew more slowly than nationally and has remained
relatively low in upstate New York, which was largely bypassed by the
housing boom. The key exception is New York City, where a large share
of residents rent their homes. Overall, city residents still have
relatively low levels of mortgage debt, even though these debt levels
rose during the run-up to the recession. Elsewhere in the region, debt
levels tended to rise most in places where housing prices increased the
most, such as Long Island and parts of New Jersey.
During the crisis, in most parts of our region, households reduced
their debts. But, because they had not accumulated as much during the
run-up, the decline was well below the national average. In general,
households in our region—with some exceptions that I will mention in a
moment—have not been under as much pressure to deleverage. It's
particularly notable that in upstate New York, where debt levels are
well below the national level, households have actually continued to
very slowly add to their debt. Clearly, deleveraging has not been
particularly consequential for many upstate New York households. The
deleveraging process in other parts of New York and New Jersey, while
quite severe by historic standards, has proved milder than elsewhere in
Nevertheless, many families in the region have had to make painful
adjustments to their spending in order to pay down debts. These
families tend to be concentrated in neighborhoods where households took
on more debt during the run-up or sustained more severe income losses
during the crisis. These factors contribute to delinquency rates that
run well above average in certain areas, including certain parts of New
York City and Long Island. In fact, some neighborhoods in these areas
now have delinquency rates two to three times the national rate.
Looking forward, we see some signs that the region is turning the
corner on the credit cycle. After declining during the crisis, credit
applications have begun to increase, suggesting that the demand for
credit is rising. Although housing debt is still declining and
delinquencies are still high, households in many parts of the region
have sought and taken on some new debt in recent months. In particular,
auto debt has been rising over the past year across New York, northern
New Jersey and Puerto Rico—a signal that households in the region once
again want to increase spending on durable goods, and are willing and
able to borrow to do so.
To sum up, although the national economy experienced a pick-up in
activity during the last quarter of 2010, the region saw a pause. The
loss of momentum locally is disappointing because until the fourth
quarter, much of the region was recovering somewhat faster than the
nation. However, I would not be overly discouraged by this. After all,
soft patches are not uncommon during economic recoveries. Both
nationally and regionally, unemployment remains stubbornly high, but
many indicators suggest that conditions are in place for stronger
growth in the coming months.
With respect to debt, households in most parts of the region are in
better shape than the nation as a whole. They increased their debt
burdens less during the boom and thus have had less need to deleverage.
In addition, there are emerging signs both nationally and regionally
that consumers have begun to spend more and appear willing to take on
some new debt. This bodes well for another step forward in terms of
economic momentum in the nation and the region. However, high
delinquencies in New York City and Long Island are a reminder that many
households remain under significant stress.
Thank you for your kind attention. I will now ask Jaison Abel to provide more details on current regional economic conditions.
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