A Federal Reserve official visited the University of Bridgeport recently to share his views on the nation”™s economy, painting a picture of a sluggish yet steadfast recovery held back by the nature of its preceding crisis.
Joseph S. Tracy, executive vice president and senior adviser to the president of the Federal Reserve Bank of New York, which oversees a district including Fairfield County, drew a captive audience of 80 as he delved into measures of the economy”™s health at a university-hosted seminar. He prefaced his presentation with a remark about how poorly the university would grade the recovery based on where it stands now.
“This has been a fairly disappointing recovery and expansion when we grade it relative to other cycles,” Tracy said. “I”™m a little nervous on how we would get graded on this. One view is that we just didn”™t try hard enough, and you should basically give us an F. I just hope you grade on a curve.”
The high-risk loans banks and other lenders distributed during the housing bubble and the fluctuating housing prices across all types of homes led to further instabilities during the economic recession, he said.
Tracy said that during the height of the economic boom, there was drastic variation in growth between counties at the top and bottom of the spectrum. “The same thing happened during the depths of the recession. If you look at the 5 percent worst-performing counties and looked at their housing prices, they were declining at greater than 20 percent. But then the housing prices at the top 5 percent were flat.”
The housing crisis was preceded by a big boom in residential development projects, Tracy said. But the declining housing prices and employment rate created delinquencies, where households could not make mortgage payments, Tracy added. The delinquencies led to the foreclosure crisis, which generated an excess supply of housing but no demand from potential homeowners and renters, leaving 3 million homes vacant nationwide.
“We had very high building rates during the housing boom, but with the fallen prices and lack of inventory, you can see the building rates come to a screeching halt,” Tracy said.
From 2008 to 2009, the delinquency rate increased more than it has ever risen historically. But the high delinquency rate created during the recession is slowing down, and the current transition rates out of mortgage delinquency are getting back closer to the precrisis level, which shows there has been some healing in the housing market, he added.
“Credit is still very tight,” Tracy said. “If you wanted to go out and try to buy a house, it still takes a fairly good credit score to be able to get the loan. Shares are slowly starting to rise for people with lower credit scores, but still there”™s not that much in terms of credit availability for those who don”™t have a solid credit score of 760 or higher.”
Through the recovery, banks are still holding onto vacant homes instead of selling them, creating a lack of inventory. About 1 million homes are unlisted in the market, which will stunt the growth of the housing market until that number is significantly reduced, he said.
At the end of the recession, the national real gross domestic product output gap dropped by an average of 5 percent below its precrisis average, Tracy said.
The current average pace at which the national economy has been growing since the recovery is slightly below the precrisis level of 2.3 percent, he added.
“The financial crisis creates very persistent headwinds that prevent growth,” Tracy said. “But once the healing happens in the economy, the housing market will pick up. Growth will be much more delayed now, but we”™ll close the output gap in the future.”
According to the most recent employment report, the national economy has recovered 8.8 million nonfarm jobs that were lost in the recession, Tracy said. Although job recovery is happening much later than GDP output recovery, the declining employment numbers can be attributed to the increasing number of retiring baby boomers. The unemployment gap may take a while to close, since the number of retiring adults is increasing each year, Tracy said.
Wage growth is still modest because of the slow recovery in unemployment numbers, Tracy said. Recent income growth was mainly attributed to working more hours. But in order to see greater growth in the labor market, wages must also increase per hour, he added. Meanwhile, the number of people unemployed for 26 weeks or fewer is down to the precrisis level, while the long-term unemployment rate is still sky high, Tracy said.
Another way to measure the economy”™s health is by looking at private investment activities, which are in low demand, Tracy said. As a result, the economy is not growing fast enough to create the jobs and income people need to make investments. Some may say there are opportunities to invest, but the capacity of investment is low because of the drop in the GDP output gap, he added. Also, a lot of businesses aren”™t investing because of government policy uncertainties that cause them to “hold off until the road looks clear.”
The main determinant of an economic boom is consumption growth, Tracy said. Consumption makes up about 70 percent of the nation”™s GDP, and if this rate doesn”™t pick up, the economic recovery will continue to lag, he added.
The two major factors that affect consumption growth are wealth and income. From the 1970s to early 2000s, there was a dramatic increase in wealth in the household sector, Tracy said. People began to put their assets in their houses in order to save for retirement. That put many Americans in a tough spot when the housing market crisis occurred because most of them realized they invested all their savings into their homes when they should have diversified their savings across multiple pots, he added.
“But we are almost fully recovered,” Tracy said. “As for the saving rate, people will have a precautionary attitude about rising levels of wealth. Some will be very cautious, and this opens up the question of whether the saving rate will come down or stay where it is.”
