New York Budget Update 2021 Virtual Legislative Conference February 22, 2021 THIS INFORMATION HAS BEEN PROVIDED SOLELY UPON REQUEST. THIS MATERIAL IS STRICTLY FOR THE USE OF NYSAC AND CANNOT BE REPRODUCED WITHOUT CONSENT FROM MELLON. THIS MATERIAL IS NOT INTENDED FOR INSPECTION BY, DISTRIBUTION OR QUOTATION TO THE GENERAL PUBLIC. Dave Lucas Finance and Intergovernmental Affairs Director NYSAC 2 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). 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).