LIVEBLOG: Breakfast Briefing on National and NY Economy

Interesting, right? Want more? Make sure to check out the NYSSCPA Manhattan/Bronx Chapter's upcoming Federal Reserve Bank of New York Economic Outlook: National & Regional Seminar on Oct. 6 from 6-8 p.m. at Deutsche Bank, 60 Wall St., Auditorium lower level, N.Y.C. It's worth 2 CPE credits (specialized knowledge). You don't want to miss it. Register today!

View the webcast and check out Bloomberg's coverage of the event by journalist John Ethan Detrixhe.

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10:35 a.m. Thus concludes our NYSSCPA liveblog of the morning breakfast briefing. We want to thank our esteemed panelists for their participation and our attendants and readers for their interest.

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10:30 a.m. - Asked from the audience about why the focus has been on large companies and not smaller companies, Goldstein said that small companies are the ones that create jobs, but that it's very hard to stimulate them. It has to happen naturally, "and it does happen naturally. We're just in a period where it happens less than usual."

Cunningham said that it's really younger companies, not necessarily smaller ones, that create jobs. A lot of smaller companies are sole proprietorships that are uncertain about taxes and employment and the regulations that may or may not affect them should they add to the payroll.

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10:26 a.m. Goldstein, speaking about the jobs speech given by President Obama last week, said the president pulled out the "old whipping boys" like carried interest, "things that should be changed," but that the real conversation should be focused on an overall restructuring of the tax code. The government has had too much short-term thinking and hasn't looked at the broader picture.

Tracy said that the fundamental question underlying all the conversations about the government is, as a country, "we have to come to a decision on what is the size of the government sector we're happy with? ... Once you decide that, you have to say we need a tax system that will fund that size sector." Until that question is resolved, questions about what the best tax system is can't really be resolved effectively.

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10:15 a.m. Much like how Goldstein said that what the president can do for the economy is limited, Tracy pointed out that the Federal Reserve's tool set is also limited. One thing that people at the New York Fed ask a lot, he said, is "are the transmission mechanisms for monetary policy working as well today as in the past?" In other words, can the central bank get more stimulus into the economy, can it reduce rates, etc., and have the desired impact? One channel, for example, that the Fed can work through is the lending rate: as the central bank pushes down general rates, mortgage rates follow as well, which is meant to push refinancing, which frees up money to pay down debts. However, many do not have the equity to refinance, and there is also high unemployment, which can affect credit scores.

"So I think that the challenge to housing policy is can we somehow facilitate more people taking advantage of these mortgage rates and refinance ... I think we need to go back to the drawing board on what is preventing these programs from working and if we can get them to work, even from the same amount of stimulus, the system will get more benefits. There are limits to what the central bank can do, but we need to get the transmission mechanism in working order."

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10:00 a.m. Tracy noted that, in China, the low-cost trend that has sustained its growth through exports over the last few years is starting to reverse: wages are rising and some manufacturers are leaving China to chase lower labor costs elsewhere, which means that imported goods prices have been rising in the U.S. A concern some people have in terms of long-term problems is that the People's Republic will not be able to sustain its growth rates through the pure export model it's relied on for years. 

"They will have to grow a middle class with domestic demand creation and their question is how well can they manage that transition process?" 

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9:54 a.m. Moderator Greene asks the panel their thoughts on why unemployment remains high and investment remains low.

Cunningham said that a lot of unemployment is structural: people's skills have been replaced and are no longer in demand and thus workers need training. Further, he said, regulation and uncertainty has produced an environment that is hostile to businesses. For example, labor costs are rising, not in terms of wages but in terms of benefits, because of new health care costs.

"This is a challenge for businesses to deal with. We need to make it easier for business to operate and lower costs to let them do their job," said Cunningham.

Goldstein reiterated that, ultimately, the government is limited in what it can do, though did point out that the president has "a very big bully pulpit" to draw attention to issues. While the government can't do much, if it can change its language to encourage wealth creation by building and promoting America as a good place to do business even though it's just rhetoric, it can be something encouraging. Further, he said, tax reform can do a lot to initiate an enormous flow of energy into the economy and it's something the president should capitalize upon.

"We have the best tax system in the world and I'm proud to be a part of it. We spend the least amount of money for every dollar collected and we collect 98 cents of every dollar we go after. Greece, Italy, would give their right arms for that system. We have strengths to build on and the president has the ability to lead the charge," said Goldstein.

Cunningham pointed out that nonfinancial firms in the S&P 500 are holding around $1.1 trillion in cash but a big reason it's not being spent is uncertainty: they don't know what to expect. Hampering things further is that exports are currently limited by numerous regulations, both in the U.S. and other countries. For example, other countries subsidize their exports while the U.S. does not, which makes it more costly for American firms to compete against foreign markets. It's also hard to repatriate profits and move resources around, which further dampens the ability of U.S. companies to move effectively in foreign markets.

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9:40 a.m. Stanley Goldstein, a CPA of Goldstein and Company, and an NYSSCPA member, said that all the drivers of a recovery are not moving now, and "the government can't do nearly as much as we think, and they think, the president included. They can make some short-term changes, like changing the borrowing rates, that will have some impact, but the natural stimuli that drives the economy, it takes 3.5 percent growth to really create jobs and that is what we must start working on." 

While companies have a lot of money, they're not spending it. They won't spend it, said Goldstein, until they have confidence that the money they spend will give them some sort of return. If they don't think the money will earn them more money, it won't get spent and it will stay in the sidelines.

This is why tax reform is the important first step to get a natural stimulus, not a government stimulus.

"Then I'd feel good about the stock market."

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9:30 a.m. Why don't we see jobs, asks Cunningham? His sense is, given all the structural factors, what this country may be seeing is what's called a "soft landing," where the economy slows and then grows, but the growth isn't dynamic. It's more akin to stagnation. While growth may continue, it won't be above 3 percent, which is what's needed to bring down the unemployment rate.

One of the structural factors behind the unemployment rate is education. According to the New York Department of Labor, only 1.9 percent of those with Ph.Ds are unemployed. "There is no slump, no recession, life is good." Those with masters degrees have 4 percent unemployment and those with bachelor's degrees have 5.4 percent unemployment. By contrast, those who didn't complete high school have a 14.9 percent unemployment rate.

"People with advance degrees are in short supply. There are engineering firms going abroad, not because they want cheap labor but they need someone qualified and they can't find engineers here, they can't find scientists here. ... The high unemployment rates we see are largely in areas like construction and manufacturing and that's where a lot of people with less formal education end up." 

To help with unemployment, he said, perhaps there should be policy centered on getting manufacturing and construction strong again.

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9:19 a.m. Steven Cunningham of the American Institute of Economic Research, said that his organization compiles an index of leading indicators to track the overall state of the economy, composed of metrics such as new orders, housing, supply pricing, asset pricing, employment, and more. Pulling them all together produces an index. Last month, that index, when all the metrics were pulled together, was 100. This month, it has dropped to 80. However, he said, over 50 is positive news, so even 80 suggests growth in the economy. It doesn't suggest that growth will be fast, but the economy will continue to expand.

"We are highly certain of the structural soundness of the underlying economy." 

This matches what he has observed in industrial production. Throughout the decade, he said, the country has seen a growth pattern before the "obvious profound recession." Coming out of this, though, production is returning and it's matching the same growth pattern that it was following before the recession hit. This is not to say that the level has returned to where it was: it's simply gotten back online. The major market groups in industrial production include things like business equipment, electronics, and car manufacturers, and more. This is not a recovery written in a few sectors of the economy, he said. This is a broadly based expansion.

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9:08 a.m. James Andrew Orr from the NY Fed: 

When looked at regionally, New York state has been on a slight uptick in job recovery, as has New Jersey. In New York City, employment continues to grow, even as the national economy declines, showing a 50 percent recovery to date of jobs that have been lost. In contrast, states such as Florida and Nevada, which relied heavily on housing and were badly hurt by the downturn, saw sharp employment rate declines. While there has been some uptick over the years, there is still "a long way to go." By a different measure, North Dakota, which has a lot of natural resources to lean on, didn't have much decline during the downturn.  

Still, he said, the rise of unemployment in this particular crisis dwarfs anything that has been seen in other recessions. The downturn has produced a number of sector-wide changes in employment figures. Around December 2007, the New York state economy saw big declines in the manufacturing, financial activities, trade, professional and business services, construction, information, and the transport and utilities sectors. Since August 2011, though, New York has seen some recovery, largely centered on professional and business services, along with education and health, and hospitality. However, manufacturing and construction remain in decline, as are government jobs. New York City's recovery has also been centered mostly on professional and business services such as lawyers, markets and office temps. Other growth areas in the city have included finance and trade (largely retail).

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8:50 a.m.  Tracy: "What is the one bright spot? It was really foreign growth, so exports by the U.S. But a concern is, really, people's outlook in terms of what is happening in Europe and Asia. If you look at ISM indices, you see those indices indicated growth... for manufacturing and non-manufacturing, reflecting good export opportunities. As concerns over Europe and perhaps China slowing down intensify, these indices still show growth but just barely. If so many sectors are not hiring, there's very little support for manufacturing and other sectors if they start to slow. This is a concern. The household sector is very cautious. State and local government is also in fear of retrenchment. So if we lose manufacturing and export, there's not too many other areas to support an economic growth." 

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8:47 a.m.  The collapse of the housing bubble, said Tracy, caused a sudden a traumatic loss of wealth for many people who saw their equity shrink. This caused them to begin raising their savings rate so that they can deal with other sudden losses, meaning they are consuming less. This has been much more intense than in similar situations: in other times of crisis, the consumption simply slows; in this crisis, consumption went into the negative. This trend could continue.

"If households are concerned about additional wealth losses, there's reason to believe that the savings rate could move even higher, causing even more weakness in consumption." 

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8:41 a.m.  Joseph Tracy, from the NY Fed, said that policy intervention staved off another Great Depression but that, nonetheless, the damage has been extensive. There are two schools of thought when it comes to the current Great Recession. One is that the greater the recession, the greater the recovery: the 'V'-shaped recovery that some talk about. The other is that this recession is different. What does Mr. Tracy say?

"If you look at recessions that follow financial crises, and we had a major financial crisis in this period, those recessions [are followed by] fairly weak growth... Looking at the data so far, we will have this slow recovery."

He said that this is in terms of economic growth. Looking at employment, he said "the contrast is even sharper," as the recession wiped out "an entire expansion worth of jobs during the downturn." 

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8:30 a.m. Good morning. The NYSSCPA is pleased to welcome both the people online and those right here at our Park Avenue office to our breakfast briefing on the economy on both a national and state level. The esteemed speakers on the panel include: 

• Steven R. Cunningham -- director of research and education with the American Institute of Economic Research. He has also served as research assistant to the vice chairman of the Board of Governors of the Federal Reserve System.
• Stanley Goldstein -- founder of Goldstein Golub Kessler and Company, one of the largest single-office accounting firms in the U.S., as well as Fund Tax Services, Binary Application Network and the New York Hedge Fund Roundtable.
• James Andrew Orr -- assistant vice president and head of the regional analysis department for the Research and Statistics Group of the Federal Reserve Bank of New York.
• Joseph S. Tracy -- executive vice president and special advisor to the President for the Federal Reserve Bank of New York, and a member of the American Economic Association.

Our moderator is Robert Lane Greene, business correspondent with the Economist, covering professional services, as well as the chief blogger for Johnson, the Economist's blog on language. Greene is the author of "You Are What You Speak."