By Beth Fitzgerald/NJBIZ
August 18, 2011
It’s unlikely that the nation will fall back into a recession, William C. Dudley, CEO of the Federal Reserve Bank of New York, said Thursday in a speech to business leaders at the New Jersey Performing Arts Center, in Newark.
Dudley reported an encouraging May survey of small businesses: more than two-thirds reported stable or increased sales in the first quarter of 2011, up from 50 percent last year. “When asked about their future outlook, while the majority of business owners, 56 percent, were neutral, many more said they were optimistic than pessimistic — 37 percent compared with only 7 percent.”
A recession is unlikely because “even though financial conditions haven’t returned to normal, they are a lot better than they were a year ago, and a year ago was a lot better than three years ago,” he said. “If we do a survey of banks and we ask them about their credit standards — whether they are tightening or loosening their credit standards — they have been on a loosening path now for quite a few months, so it looks to us like credit availability is improving.”
He talked about the critical role of the New York Fed’s bank examiners, who scrutinize bank lending practices. “It is very important when our examiners go to banks that they don’t let the needle swing too far over to conservative in terms of lending practices,” Dudley said. “Obviously, banks have to make their business decisions. We do have a role in making sure our examiners don’t overdo it. We have been very clear that we do not want to impede the ability of banks to make good solid loans to businesses.”
Another argument against another recession: “The sectors of the economy that typically drive you into recession are already very depressed,” Dudley said. “Housing activity is already very depressed; auto sales are quite low relative to what they are historically. So, if the cyclical sectors have already gone down, it’s much harder for them to go down further, so I think that also argues very much against a recession.”
Dudley’s speech concluded just prior to the 9:30 a.m. start of trading on the New York Stock Exchange, which saw a dramatic selloff that analysts said was ignited in part by global economic weakness. At about 1:30 p.m., the Dow Jones Industrial Average was down more than 400 points, and the S&P 500 was down more than 4 percent.
Dudley addressed about 150 at the NJPAC Business Partners Roundtable, a series of quarterly events that bring business leaders together for networking and to hear keynote presentations from corporate and government leaders.
Dudley said reluctance by businesses to expand is hindering the economy. “If you talk to businesses they will say, ‘we’re in pretty good shape, we’re making money,’ and then we ask, ‘are you hiring?’ Some are expanding, but there are some that are holding back, and I think holding back is really an important factor in terms of why we’re not getting more traction. When you have a financial crisis of the type that we had, it’s just harder to recover.” He said households are reducing debt and, “It’s that financial retrenchment that makes it harder for the economy to pick up speed. The good news is that we are well into that financial retrenchment,” but the current high rates of delinquency and foreclosure suggest, “we are not yet at the end of that process. So it’s still a headwind that the economy faces.”
New Jersey, Dudley said, “is well-positioned for growth,” with its highly diverse economy and a population where more than 40 percent of those over 25 have a college degree. But the state lost 250,000 jobs in the recession, and the employment comeback has been sluggish. Jobs have returned in professional and business services, education and health, and leisure and hospitality, but the state is losing jobs in manufacturing, residential construction, and state and local government.
“Underneath the slow overall job growth, however, there is a considerable amount of churning in the labor market,” Dudley said. “Job creation in the state and the nation since the recession ended has been closely balanced between hiring into industries that lost jobs during the recession and jobs in expanding industries. Thus, many unemployed workers may be returning to work without needing to retrain or look far afield from the job they lost. However, an equal number may need to search outside the industry they know best and this may require retraining in some cases. Thus, the need for job search assistance and training opportunities is likely to be high in New Jersey and the nation in the near term.”
Serious financial pressures persist: 7.4 percent of all debt in New Jersey is delinquent, about the same rate as the nation, Dudley said.
“While there have been indications that home prices in the area have been firming in the past few months, the mortgage crisis continues to take a toll on New Jersey homeowners. As of March of this year, 10 percent of all borrowers in the state were either 90-plus days delinquent on their mortgages or their homes were in foreclosure — above the national rate of 7.7 percent,” Dudley said.