City of New York : executive budget fiscal year 2012

The national economic recovery continues to strengthen modestly with an incipient revival of the job market and sustained consumption growth. While the private sector has recovered only a fraction of the nine million jobs lost during the recession, recent broad-based gains across sectors point to further momentum in the coming years. It is projected that employment growth will reach an average annual rate of over 2 million jobs per year from 2012 through 2014. Although consumption is being boosted in the short-term by the 2010 Tax Relief Act which extended the Bush tax cuts, reduced the payroll tax rate, and increased business depreciation allowances-growth in the longer-run will be sustained by stronger job creation. In turn, rising final demand and exports will continue to spur investment spending by businesses flush with cash from strong profit growth and productivity gains. Employment growth should also foster faster household formation and, combined with high levels of affordability. boost housing demand. Residential investment is therefore also expected to grow from the current historically low level, but housing starts remain far below their 2005 peak even at the end of the forecast period. Aside from the expected slow recovery of the housing market, the main risks to future growth include the alarming jump in energy prices due to turmoil in the Middle East, the associated dip in consumer confidence and the impact of the fiscal tightening necessary to address the U.S. budget deficit.

Financial markets have rebounded quickly with most of the large banks generating strong profits as the Fed and U.S. Treasury start withdrawing crisis-era support programs. The Fed conducted a second round of stress tests on the 19 largest financial institutions. Based on the results, most of these bank holding companies were allowed to proceed with plans for new dividend payouts, unfettered by capital restrictions imposed during the crisis. Both the Fed and Treasury announced plans to begin liquidating their portfolios of securities purchased to prop up asset markets during the height of the crisis; the Fed will auction off holdings of subprime mortgage bonds from the AIG bailout, while the Treasury will sell its portfolio of agency mortgage-backed securities purchased from Fannie Mae and Feddie Mac. By far the most significant policy reversal will be the end of the Fed's second quantitative casing program in June. As a result, without major Fed purchases of long-term Treasuries, interest rates are expected to rise gradually throughout the forecast horizon. Regulators continue to flesh out details of the Dodd-Frank financial reform legislation, a process that will take several years and will likely increase banks' compliance costs. With higher interest rates and tighter regulations margins will be squeezed. Thus, Wall Street profits are expected to decline from the $28 billion earned in 2010, the second best year on record. Adding to the Fed's already complex job is the unwelcomed rise of inflation, and a concomitant rise in expectations, due to surging commodity and energy prices. However, the increase in oil prices is expected to moderate and the excess slack in the economy should help contain inflationary pressures.