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Federal Reserve Bank CEO Talks State of Economy and Effect on Retail

Retail is undoubtedly tied to economic conditions—and despite the fact that most retailers can’t figure out how to get shoppers in stores—consumption isn’t the problem.

Speaking at a keynote session at NRF’s Big Show in New York Tuesday, Federal Reserve Bank CEO William Dudley said retail is critical to assessing economic growth.

Consumption accounts for two-thirds of GDP, and though Dudley said economic growth was weaker than the Fed would have liked last year, consumption patterns are OK now that the housing market is stabilizing.

Housing doesn’t often make headlines in retail reports, but the conditions of the housing markets have an almost direct effect on consumer spending at retail, as Dudley explained.

At the height of the housing boom, because homeowners were able to borrow against their mortgages, annual consumption was being boosted by $400 million in debt. But in the Great Recession that followed, consumption contracted by $300 billion as homeowners opted to pay down their debt instead of borrowing against their mortgages.

Now, however, consumption has picked up as consumer confidence increases and economic expansion is now in its eighth year, and Dudley says he expects that to continue for the next few years.

And the challenges in the retail space in the short term are not likely to be based on a lack of consumption, according to Dudley. The challenge lies more in figuring out how to satisfy changing demand.

Terry Lundgren, Macy’s chairman and CEO, who moderated the question portion of Dudley’s talk, and who also sits on the Federal Reserve Bank board, said considering the positive outlook for consumption, “Many of the retailers in this room aren’t feeling the love from the consumer.”


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“One reason retailers aren’t feeling the love is because people aren’t tapping that extra household income,” Dudley said, adding however, “I think it’s going to be very interesting to see how the economy performs in 2017.”

Since the U.S. presidential election in November, there’s been a boost in consumer confidence.

“Most people think the risk to the economy may be a little more on the upside than the downside because of this consumer confidence than in the last couple years,” Dudley said.

Another reason the stabilized consumption hasn’t translated all that well to retail—apart from the fact that some people are keener to pay down debt—is that productivity growth has been “very anemic” in recent years, according to Dudley.

There’s a slower rate of new business startups, which tend to raise productivity growth, generally there’s a aging demographic and there’s been a lack of infrastructure spending.

“Productivity growth has been running at less than 1 percent for the last couple of years,” Dudley said. “If you could go back to the kind of productivity growth we saw in the late 1990’s, 3.5 percent, 4 percent…it’s definitely worth trying to do.”

Turning to Brexit, Lundgren asked Dudley how he thought the U.K. EU exodus would would affect the country’s economy.

“I think the biggest surprise in terms of Brexit so far is that the U.K. economy is holding up surprisingly well,” Dudley said. Yes, the country’s currency has suffered, but household spending has also held up well. What may happen, however, is that the whole exit process will take far longer than the two years the U.K. claims, according to Dudley. “We don’t have a good road map for this. This has never been done before…it’s going to be messy. A messy divorce.”

Few sessions at the Big Show went off without raising the issue of tax reform and the current looming proposals, notably, border adjustment, and Lundgren wanted Dudley to weigh in with his thoughts on how that would work and how it would get funded.

“Most of us would agree that the corporate tax system in the U.S. is badly in need of fixing,” Dudley said. “The question is whether the border adjustment tax is the way to go.”

The border adjustment tax, which could cut out the incentives businesses get for moving or locating operations outside of the U.S., is a “pretty dramatic change” as Dudley put it.

“It would lead to a lot of change of the value of the dollar in the U.S. and import prices would go up,” Dudley said, adding that it could also affect tourism as fewer people will visit the U.S. if it becomes pricier for them to do so, and it could change the relative attractiveness of investing in U.S. assets. “I’d like to see corporate tax reform…but I want to see something that’s maybe a little bit less dramatic.”

This year may have a lot in store for the U.S., and global, economy, but Dudley doesn’t expect another 2008 financial crisis to hit, as there’s less stress on the nation’s balance sheet and a safer financial system.

“I suppose it’s conceivable, but I would be extraordinarily surprised by anything in the next five to 10 years,” Dudley said. “If we do our job and we’re not hit by any big shots from abroad—or from within the United States, then I think this expansion has a long way to run.”