The Economic Leadership Forum, held Jan. 20 in Somerset and presented by the New Jersey Bankers Association, brought together a group of industry leaders, stakeholders and a slate of prominent speakers to address a range of short-term and long-term economic challenges and issues.
Michael Affuso, NJ Bankers’ president and CEO, told NJBIZ that the forum has “always been a great platform to launch our spring educational series and this year was no exception. … Being in person for the first time in two years really allowed everyone to maximize time at the event.”
Speakers included Alberto Garofalo, market president, New Jersey for Bank of America; Patrick Harker, president of Federal Reserve Bank of Philadelphia; Ethan Harris, head of global economics research, Bank of America Securities; former U.S. Homeland Security Secretary Jeh Johnson, and many others.
The program featured discussions on topics such as monetary policy, geopolitics, the future of work, climate change, supporting community and economic growth in the Garden State, and the evolving cyber threat landscape.
“Part of NJBankers’ mission is to consistently bring value to our members,” Affuso said. “By providing these types of educational opportunities, led by speakers who are global experts in their given fields, we’re giving members exclusive access to information designed to achieve growth and success.”
Harker, for example, opened his speech by looking back on the pandemic that ravaged the economy and led to many of the scars still visible even as businesses came back to life. “You really can’t understand where our economy is, or where it’s going, without considering where we’ve come from,” Harker told the packed venue. He noted that the pandemic led to more retirements that left a labor force participation deficit, badly damaged supply chains, and prompted large doses of fiscal relief from the government.
“This led to a phenomenon known colloquially as ‘too much money chasing too few goods,’ and the highest inflation in four decades,” Harker explained. “High inflation is a scourge, leading to economic inefficiencies and hurting Americans of limited means disproportionately. I find it particularly disturbing that life’s true essentials like groceries, fuel and shelter have skyrocketed in price.”
Harker stressed that the Federal Reserve is absolutely committed to bringing inflation back to its 2% target. “And we’re doing that by adjusting our monetary policy. Last year, we raised the target for the federal funds rate to between 4.25% and 4.5%,” said Harker. “That was a significant move, and a very fast one, given that we started the year at about 0%. I expect that we will raise rates a few more times this year, though, to my mind, the days of us raising them 75 basis points at a time have surely passed. In my view, hikes of 25 basis points will be appropriate going forward.”
He said the Fed’s goal is to slow the economy modestly and to bring demand more in line with supply. “The Federal Reserve obviously can’t fix problems like supply chain issues, or an endemic shortage of workers, though it does seem like these problems are finally easing a bit,” said Harker. “But we can affect demand by making it more expensive to borrow money. And that’s clearly already happening: We’re seeing unmistakable signs of a slowdown in the most interest-rate sensitive parts of the economy, like housing.”
Harker said that one encouraging sign is that as interest rates rise and inflation cools, the national economy remains relatively healthy overall, and sectors hit hard by the pandemic, like leisure and hospitality, are still recovering. He is concerned about commercial real estate as the embrace of hybrid and remote work dampens demand for office parks and business districts.
Most pleasing to Harker is that the labor market remains in excellent shape. “Last year, the U.S. economy created 4.5 million jobs, and while we are seeing scattered layoffs in certain segments like tech, there is little evidence of a major downturn in the job market,” he explained. “In fact, a record number of Americans are employed. And indeed, the national unemployment rate is exceptionally low at 3.5%.”
Last year, the U.S. economy created 4.5 million jobs, and while we are seeing scattered layoffs in certain segments like tech, there is little evidence of a major downturn in the job market.
– Patrick Harker, president of Federal Reserve Bank of Philadelphia
Here in New Jersey, Harker said the conditions reflect the trends being seen more broadly, particularly in the labor market.
“Payroll growth continues to chug along, unemployment claims have stayed low, and the unemployment rate has continued to drop,” he said. “In fact, in the State of New Jersey, the unemployment rate stands at 3.4% – effectively, full employment.”
As for where the economy is going, Harker said that we are finally starting to see steady progress bringing inflation down across an array of goods. “With monetary policy doing its work, supply chains healing, and excess demand running off, I forecast core inflation to come in at around 3.5% this year – well over our 2% target, but suggestive of clear movement in the right direction,” said Harker. “Core inflation should fall to 2.5% in 2024 and then back down to 2% in 2025.”
Notably, Harker said he believes that GDP growth will be modest, but he does not foresee a recession. “The labor markets are simply too hot to indicate a significant downturn at this point,” he explained. “I expect real GDP growth of about 1% this year before climbing back up to trend growth of about 2% in 2024 and 2025.”
That being said, he does expect a slight uptick in unemployment, topping at about 4.5% this year, before falling toward 4% over the next two years. “It’s an underrated advantage that the Federal Reserve is taking on inflation from a position of such labor market strength,” said Harker.
Harris followed Harker with the economic outlook from the banker’s side, which he said was a bit more cautionary than the Fed official’s view. In describing the current conditions, Harris said the economy got too overheated and a correction is needed.
“On the inflation story, it’s fairly straightforward,” said Harris, noting supply-side factors that he expects to continue improving over the next year. “The sticky part of all this, which President Harker was alluding to, is the labor market, wage growth, and inflation expectations.”
Harris also referenced the housing market cooling down as interest rates rise, noting the weakening of construction activity.
He said the economy has shown resilience, citing the hot labor market as well as the amount of stimulus funds doled out during the pandemic, which gave consumers a savings security blanket, as reasons for that strength. “We estimate that there is about $2 trillion in excess savings that piled up over the course of the shutdown phase,” said Harris. “And what’s happening is that people are drawing that money down. And that’s what’s keeping the consumer looking pretty solid in the face of a lot of negative stuff.”
Overall, though, despite all that “negative stuff,” Harris believes that the economy is doing well. “Economists have been talking about a recession for a year now and it never seems to show up,” said Harris.