[Wobbling on Bike] NY Fed President Dudley’s Outlook

William C. Dudley, President and Chief Executive Officer of the Federal Reserve Bank of New York gave a speech today providing a national and regional economic outlook. He is Vice Chair of the FOMC.

Here are my favorite semi-housing related points of his presentation:

*…the output of the U.S. economy—grew at a 3 percent annual rate from mid-2009 through 2010. While hardly a blistering pace, this growth was sufficient to add nearly 1 million jobs and reduce the unemployment rate by a half percentage point during 2010. Then, during the first half of 2011, growth slowed abruptly to a 0.8 percent annual rate. Job growth slowed so much that the unemployment rate rose back up to 9.1 percent.

Growth slowed partly because of temporary factors…Energy and commodity prices rose sharply…April’s tragic earthquake and tsunami in Japan disrupted many global supply chains.

Residential construction—which typically boosts economic activity during a recovery—is at a standstill. Moreover, many homeowners are now consuming less because the decline in house prices reduced their wealth…

Mortgage rates are at record lows…but obstacles to refinancing and access to credit for home purchases are limiting the support provided by low rates to house prices and consumption…the prospect that unemployment and negative equity will continue to feed the foreclosure pipeline—continues to put downward pressure on home values.

…cutbacks in employment and spending by state and local governments intensified in 2011 and are likely to continue…states are likely to cut spending further as the federal government stimulus aid to states peters out.

…the federal government will soon end much of the support it has been providing to the economy through stimulus programs….it will be very important to avoid excessive short-term cutbacks or tax increases that could harm the recovery.

…the sovereign debt crisis in Europe has weakened the outlook for global growth and with it, U.S. exports…some financial institutions are facing pressures to cut back lending.

Without robust growth, the economy is more vulnerable to negative shocks, which unfortunately seem to keep coming. It is like riding a bicycle—at a slow speed, the bicycle wobbles and the risk of falling rises. Politics here and abroad have not helped. The intense debate around raising the debt ceiling and the subsequent downgrading of the federal debt took a toll on household and business confidence.

Stabilizing the housing sector is particularly important because housing equity is an important part of household wealth...Taken together, such efforts could help shift people’s expectations about future house prices. If prospective homeowners no longer fear that prices could decline further, they will be more willing to enter the market to take advantage of reduced prices and low financing costs, and existing homeowners will feel more confident about spending. A vicious cycle could be replaced by a virtuous circle, in which stabilization in house prices supports spending, growth and jobs.Citywide employment fell by nearly 4 percent during the downturn, much less than the nationwide job loss of 6.5 percent. During the recovery, New York City has already regained half of the net jobs lost during the recession. This has happened without much help from the securities industry (Wall Street), which has been a driving force behind local economic recoveries in the past. This time, the strongest contributors to job growth have been professional and business services, leisure and hospitality.

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