New York Budget Update
2021 Virtual Legislative Conference February 22, 2021
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Alera Group is an independent, insurance and financial services firm partnering with NYSAC to reduce 2022 medical plan costs. Discover how to lower costs, stabilize risk, and recapture unspent premiums through the Municipal Healthcare Financial Collective (MHFC). Hon. John F. Marren NYSAC President Ontario County Presented By
Vincent Reinhart Managing Director, Chief Economist & Macro Strategist
Vincent is Mellon’s Chief Economist and Macro Strategist. In this role, he is responsible for developing views on the global economy and making relative value recommendations across global bond markets, currencies and sectors.
Previously, Vincent served as the Chief US Economist and a managing director at Morgan Stanley. For the prior four years, he was a resident scholar at the American Enterprise Institute (AEI). Vincent also worked in several roles at the Federal Reserve over 24 years, including Director of the Division of Monetary Affairs and Secretary and Economist of the Federal Open Market Committee (FOMC). His responsibilities at the Federal Reserve included directing research and analysis of monetary policy strategies and the conduct of policy through open market operations, discount window lending and reserve requirements. Prior to these roles, he was the principal liaison with the domestic desk at the Federal Reserve Bank of New York and was responsible for preparing a document outlining policy alternatives for each FOMC meeting. He was Deputy Director in the Division of International Finance and Associate Economist of the FOMC and spent five years at the Federal Reserve Bank of New York in both the domestic and international research departments.
His academic publications primarily concern the conduct of policy and issues related to the monetary transmission mechanism as well as an analysis of alternative auction techniques and Treasury debt management. After an undergraduate training at Fordham University, he received graduate degrees in economics at Columbia University.
5 Summary of What Is To Come
● The successful development of vaccines hastens the herd immunity of the world’s population, which will make people, and governments, confident in returning to market activity.
● Their distribution, however, will be uneven across countries and take time, likely exacerbating tensions across nations and societies and posing a drag on spending that keeps activity from regaining its prior peak level until 2022 or beyond in most economies.
● Policy impetus will offset some, but not all, of the lingering drag, as central banks are near the limits of their influence and politics complicate the effective application of fiscal policy.
● Political uncertainty complicates the outlook, as a new administration takes the helm in the US, the nations of the European continent bind themselves closer together, and the UK settles its places among its trading partners.
● Inflation will move higher, buoyed by the tolerance central banks of above-goal outcomes.
See Additional Information in Disclosure Statements. [27611]
6 The Economic Outlook, Briefly Noted
7 We are Not at the End but at the Beginning of the End of the Coronavirus Pandemic
● We do not have a health forecast, other than the Cumulative Confirmed COVID-19 Cases Number of People, Weekly numbers will keep going up, unevenly, as the world acquires effective herd immunity. 120,000,000 ● Vaccinations speed this along and lessen the 100,000,000 uncertainty around the base case. 80,000,000 ● People will not return completely to market activity if 60,000,000 there is a health risk. 40,000,000
● We believe that the world is: 20,000,000 o Better at social distancing and contact tracing; 0 12/1 3/10 6/18 9/26 1/4 4/14 o Better at treatment; and, World US o Tired of strict lockdowns. COVID-19 Deaths ● As a result, disruptions to economic activity from Number of People, Weekly COVID-19 lessen over time. 3,000,000 ● The big wins were scored early as people returned to 2,500,000 work and the marketplace, even partially. 2,000,000 o As the base rises over time, increments to activity add less to growth; 1,500,000 1,000,000 o There is less of a frontier to open; and, 500,000 o More lasting damage accumulates. 0 12/1 3/10 6/18 9/26 1/4 4/14 World US
Source: Bloomberg, accessed February 16, 2021. See Additional Information in Disclosure Statements. [27611]
8 This Dynamic Cuts a “V” in Economic Activity Everywhere
Weekly US Economic Activity1 Leading Economic Indicators2 Scaled to Four-Quarter GDP Growth, Percent Index = 100 at Trend Output
6 104
4 102 100.4 2 100 99.7 0
98 99.1 -2
-4 96
-6 94
-8 92 -10
90 -12
-14 88 Oct-06 Jul-09 Apr-12 Dec-14 Sep-17 Jun-20 Oct-06 Jul-09 Apr-12 Dec-14 Sep-17 Jun-20
China Japan Euro area
1Source: FRBNY, accessed via FRED as of February 16, 2021. 2Source:OECD, accessed via FRED as of February 16, 2021. See Additional Information in Disclosure Statements. [27611]
9 Market Activity Requiring Personal Interaction has Borne the Brunt of the Shock
Real Personal Consumption Expenditure Disposition of Spending Growth From One Year Earlier, Percent Share of Total, Percent
20 2019 2020
15 Durables 10.5 11.5
Nondurables 20.5 21.5 10 9.6 Services 69.0 67.1 5 4.6
0
-5 -6.9
-10
-15
-20
-25 Apr-01 Jan-04 Oct-06 Jul-09 Apr-12 Dec-14 Sep-17 Jun-20 Mar-23
Durables Non durables Services
Source: Bureau of Economic Analysis, accessed via FRED as of February 15, 2021. See Additional Information in Disclosure Statements. [27611]
10 The Shape of the “V” Depends on the Composition of Output
Output in the Fifty Largest Economies Employment in the Fifty US States
6 7
4 6 2
5 0
-2 4
Change in Real GDP -4 unemploy-ment growth in 2020 3 rate in 2020 (percent) -6 (percent)
-8 2
-10 1
-12 0 -14
-16 -1 0 10 20 30 40 50 0 10 20 30 40 50 Share of industry in GDP in 2019 (percent) Share of industry in employment in 2019 (percent)
Source: Bureau of Labor Statistics (US employment), International Monetary Fund (real GDP growth), and World Bank (industrial share), as of February 14, 2021. See Additional Information in Disclosure Statements. [27611]
11 The Economic Incidence is Unfair, Hitting Lower-Income Households Harder
Average Hourly Earnings Employment and Average Hourly Earnings by Industry Dollars Thousands of Workers, 12-Month Change in Percent, and Dollars per Hour
28 Employment Average Level in Change To Hourly Jan-20 Jan-21 Earnings Dollars 26 Thousands of Workers Percent Mining and logging 496 -59 -11.9 $34.47 Construction 5,672 -230 -4.1 $32.11 24 Durable goods 5,488 -336 -6.1 $30.51 Nondurable goods 3,428 -102 -3.0 $26.52 Wholesale trade 4,724 -244 -5.2 $32.96 22 Retail trade 13,313 -271 -2.0 $21.77 Transportation and warehousing 5,079 -98 -1.9 $25.66
20 Utilities 440 -11 -2.5 $44.23 Information 2,334 -217 -9.3 $44.62 Financial activities 6,848 -194 -2.8 $39.34 18 Professional and business services 17,390 -783 -4.5 $35.62 Education and health services 21,528 -1,176 -5.5 $29.28 Leisure and hospitality 14,804 -3,643 -24.6 $17.24 16 Oct-06 Jul-09 Apr-12 Dec-14 Sep-17 Jun-20 Mar-23 Other services 4,901 -456 -9.3 $26.87
Service-producing Goods-producing
Source: Bureau of Labor Statistics, accessed as of February 16, 2021 See Additional Information in Disclosure Statements. [27611]
12 In the US, This is a Trend, Not a Cycle
Employment by Industry Thousands of Workers
140,000
120,000
100,000
80,000
60,000
40,000
20,000
0 Apr-38 Jan-52 Sep-65 May-79 Jan-93 Oct-06 Jun-20
Service-producing Goods-producing
Source: Bureau of Labor Statistics, accessed via FRED as of February 15, 2021. See Additional Information in Disclosure Statements. [27611]
13 Rebound is Not Recovery
Real GDP Growth in the Fifty Largest Economies Percent
15
10
5
in 2021
0 -15 -10 -5 0 5 10
-5
-10
in 2020
Source: International Monetary Fund, World Economic Outlook (October 2020). See Additional Information in Disclosure Statements. [27611]
14 Why Wasn’t it Worse?
15 Fiscal Support Has Been Massive in the US…
Real GDP and disposable income Growth from one year earlier, percent
20 16.7
15
10
5
2.8
0
-2.8
-5
-10 -9.0
-15 Jun-57 May-64 Mar-71 Jan-78 Nov-84 Sep-91 Jul-98 May-05 Apr-12 Feb-19
Real DPI Real GDP
Source: Bureau of Economic Analysis via FRED as of February 16, 2021 and Mellon calculations. See Additional Information in Disclosure Statements. [27611]
16 …and Around the Rest of the World
Advanced Economies: Cyclically Adjusted General Government Balance, 2019 vs. 2020 Relative to Potential GDP, Percent
0 -20 -15 -10 -5 0 5
-2
-4
-6
-8
-10
Balance in 2020 -12
-14
-16
-18
-20 Balance in 2019
Equal Deficits Both Years
Source: International Monetary Fund, Fiscal Monitor (October 2020). See Additional Information in Disclosure Statements. [27611]
17 But the Economic Effects are Complicated
Personal Saving Rate Disposable Saving "Excess" Saving As a Share of Disposable Income, Percent Income Rate
40 Monthly Cumulative $ Billions Percent $ Billions Jan-20 16,714 7.6 35 Feb-20 16,831 8.3 11 11 Mar-20 16,550 12.9 74 86 30 Apr-20 19,036 33.7 416 501 May-20 18,147 24.7 260 761 25 Jun-20 17,900 19 172 933 Jul-20 18,045 18.5 165 1,098 20 Aug-20 17,495 15 109 1,208 Sep-20 17,626 14.4 101 1,309 15 Oct-20 17,483 13.6 89 1,398 Nov-20 17,227 12.9 78 1,475 10 Dec-20 17,339 13.7 90 1,565
5
0 Jan-78 Nov-84 Sep-91 Jul-98 May-05 Apr-12 Feb-19
Actual Counterfactual
Source: Bureau of Economic Analysis, accessed via FRED as of February 16, 2021 and Mellon calculations. See Additional Information in Disclosure Statements. [27611]
18 The Composition of Production, the Regressive Nature of the Shock, and Federal Support Have Helped States and Localities
State and Local Government Current Receipts and Expenditures
Billions of dollars, seasonally adjusted at annual rates
2018 2019 2020
Q1 Q2 Q3 Q4
Current receipts 2643 2743 2785 3455 2916 ---
Personal current taxes 468 490 496 496 507 516
Sales taxes 421 435 444 393 428 436
Excise taxes 205 208 212 191 216 209
Property taxes 549 564 576 582 589 596
Current transfer receipts 723 753 774 1544 876 887
Federal grants-in-aid 583 608 628 1397 728 738
Current expenditures 2857 2951 2988 2984 2992 2981
Consumption expenditures 1848 1898 1928 1885 1881 1884
Current transfer payments 727 755 767 812 829 819
Interest payments 281 298 292 287 282 278
Net lending or net borrowing (-) -285 -288 -297 379 -165 ---
Source: Bureau of Economic Analysis as of February 16, 2021. See Additional Information in Disclosure Statements. [27611]
19 Central Bank Policy Remains Extraordinarily Accommodative
Central Bank Assets Central Bank Overnight Interest Rates Index, January 2006 =100 Percent
900 6
800 5
700 4 600
500 3
400 2
300 1 200
0 100
0 -1 Jan-04 Oct-06 Jul-09 Apr-12 Dec-14 Sep-17 Jun-20 Mar-23 Jan-04 Oct-06 Jul-09 Apr-12 Dec-14 Sep-17 Jun-20 Mar-23
European Central Bank Bank of Japan Federal Reserve European Central Bank Bank of Japan Federal Reserve
Source: FRED, accessed January 6, 2021. See Additional Information in Disclosure Statements. [27611]
20 As With Other Central Banks, the Federal Reserve (Fed) Embraces Overshooting
Macroeconomic Intent Fed Balance Sheet Actions
● The Fed promises to get inflation above 2 percent ● Support market functioning; starting from below even as resource slack persists. ● Prevent private sector fire sales; and, ● The plan is to convince people inflation will rise so that inflation rises. ● Provide macroeconomic impetus.
● Fed communication is designed to avoid investors expecting that accommodation will be removed The Fed will work closely with the Treasury to keep this in prematurely. place.
See Additional Information in Disclosure Statements. [27611]
21 The Fed will Probably be Successful in Generating Inflation, but it Should be Careful What it Wishes For
Core PCE1 Inflation Percent
12
10
8
6
4
2
0 Jun-57 May-64 Mar-71 Jan-78 Nov-84 Sep-91 Jul-98 May-05 Apr-12 Feb-19
Source: Bureau of Economic Analysis, accessed via FRED as of February 15, 2021. 1Personal consumption expenditures (PCE). See Additional Information in Disclosure Statements. [27611]
22 Investors Already Believe the Fed’s Story
Treasury Five-Year/Five-Year Inflation Compensation Percent
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0 Jan-04 Oct-06 Jul-09 Apr-12 Dec-14 Sep-17 Jun-20 Mar-23
Source: Federal Reserve via FRED, February 16, 2021. See Additional Information in Disclosure Statements. [27611]
23 But the Situation Could Get Unruly if the Dollar Weakens Significantly and Commodity Prices Rise
Foreign Exchange Value of the Dollar WTI Oil Prices Index, 2006=100 Dollar per Barrel
140 160
140 130
120
120 100
110 80
60 100
40
90 20
80 0 Jan-04 Oct-06 Jul-09 Apr-12 Dec-14 Sep-17 Jun-20 Mar-23 Jan-04 Oct-06 Jul-09 Apr-12 Dec-14 Sep-17 Jun-20 Mar-23
Emerging market economies Advanced economies
Source: Federal Reserve via FRED, February 16, 2021. See Additional Information in Disclosure Statements. [27611]
24 Caution: the Economic Effects of Fed Policy on the Underrepresented are Complicated
Unemployment Rates by Group1 Household Wealth and its Disposition2 Percent Share of Disposable Income and Total, Percent 25 800 5.0
4.0 700 3.0 600 20 2.0 500 1.0
400 0.0 Mar-71 Jan-78 Nov-84 Sep-91 Jul-98 May-05 Apr-12 Feb-19 15 <- Wealth to disposable income -> Share held by bottom half
10 Median Wealth by Age and Group3
In Thousands of 2019 Dollars
5 White Black Hispanic Other
Under 35 25.4 0.6 11.2 13.5
0 35-54 185 40.1 46.1 154.5 Mar-71 Aug-76 Feb-82 Aug-87 Jan-93 Jul-98 Jan-04 Jul-09 Dec-14 Jun-20 Over 55 315 53.8 111.5 213.2 White Black or African American Hispanic or Latino
1Source: Bureau of Labor Statistics, accessed via FRED as of February 16, 2021. 2Source: Federal Reserve, accessed via FRED as of February 15, 2021. 3Source: Federal Reserve Board, 2019 Survey of Consumer Finances. See Additional Information in Disclosure Statements. [27611]
25 Some Notable Features of the Rebound and Recovery
26 This Global Contraction has Several Key Features
Real GDP per Capita1 Among the G-7, how many years does it take to Actual and Vintages of Forecasts, International Dollars recover the level of per capita GDP in 2019?2 60,000 Canada 5 14,000 France 4 50,000 12,000 Germany 2
40,000 10,000 Italy 5
Japan 3 8,000 30,000 United Kingdom 5
6,000 United States 2 20,000 4,000
10,000 2,000
0 0 2000 2005 2010 2015 2020 2025
<- Advanced economies As of 10/19 Emerging and developing economies -> As of 10/19
1Source: International Monetary Fund, World Economic Outlook (October 2019, October 2020). 2Source: International Monetary Fund, World Economic Outlook (October 2020) and Mellon calculations. See Additional Information in Disclosure Statements. [27611]
27 In this Once-in-a-Century Event, the Initiating Shock Was:
● Synchronous across most economies of the world; How Long to Reclaim Lost Ground in Nominal GDP? In US Dollar, Indexed to 100 in Year Before Crisis
120 ● Regressive in its impact;
110 ● Associated with declines in demand and supply; and,
100 ● Although initially real, will be associated with financial stresses time. 90
80
70
60 0 2 4 6 8 10 12 14 16 Year before crisis = 100
Latin America, 1981 Japan, 1995 Euro area, 2008
Source: International Monetary Fund, World Economic Outlook as of February 16, 2021. See Additional Information in Disclosure Statements. [27611]
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30 THANK YOU TO OUR SPONSOR:
Eric Lintata, Executive Benefit Consultant 585-248-8720 www.aleragroup.com [email protected]
Alera Group is an independent, insurance and financial services firm partnering with NYSAC to reduce 2022 medical plan costs. Discover how to lower costs, stabilize risk, and recapture unspent premiums through the Municipal Healthcare Financial Collective (MHFC).