The change in the local CPI during the second quarter of 2007 reflected a major jump in inflationary pressures similar to, but structured differently, than the national CPI. April and June produced moderate single tenth increases in the LEIP CPI, but May revealed over a seven tenth increase. The aggregate effect was an annualized inflation rate of 2.75%, which is substantially below the national annualized equivalent of 4.8% for the same time period, but high for Jacksonville historically. The local numbers have been driven by a variety of categories, but fuel prices and housing prices are the primary factors causing the fluctuations in the index. Fuel prices, including both gasoline and fuel oil, grew dramatically during the quarter based on supply shocks including potential hurricanes, refinery problems, and speculation about political issues in Iraq and Iran. The local housing market rebounded in April and May, but June was weak and preliminary data for July is miserable, particularly for building permits. There is still a substantial glut in unsold homes, and with particularly condominium builders ratcheting up their construction, the outlook is poor. We do not perceive either a return to rapid price increases in this market, or further deflation of a substantial amount, even if the FED lowers the Federal Funds rate in September. The most volatile component of our index continues to be apparel prices which swing wildly from month to month, despite that we collect only retail prices.
For the quarter, some very significant changes arose, but they were different than those that dominated 2007.1. The major increases during 2007.2 were in motor vehicle parts and equipment, motor vehicle prices, PCs and equipment, and women’s and girl’s apparel. Other than these, plus housing and energy, the other categories changed very little for the quarter. Consumers and businesses are always more cognizant of price increases than decrease, so there is a tendency to expect higher rates of inflation than what actually occur.
The outlook for the third quarter of 2007 suggests a moderation of price inflation, unless the FED must inject substantial amounts of money due to sub-prime lending problems and defaults. Food prices should remain relatively stable (barring substantial weather issues), but fuel costs should decline with the end of the summer peak demand and a weakening economy. Consequently we see the third quarter as one of moderation in price changes.
Economic variables often depend on other economic variables, but not necessarily at the same time. This relationship is known as a time lag between these variables. Lags are present in economics for a myriad of reasons. Institutional, psychological, and technological factors are just a few examples of how lags can alter economic relationships between dependent and independent variables. Time lags play a vital role in explaining economic decisions, choices, and relationships.
The LEIP LEI (Leading Economic Indicator), patterned after the similar index published by the Conference Board (click here to view) is structured to reflect data that have predictive power for future values of variables such as employment, output, retail sales, etc. In this article we chose to evaluate the lag structure relating the LEIP LEI alternatively to retails sales in just Duval County, and the Jacksonville MSA (Baker, Duval, Clay, Nassau, and St Johns County). This latter methodology is used because in theory the reactions of the MSA retail sales may be dissimilar to that of a single county, therefore the lag structures between the two may be different as well.
Using various statistical procedures (details omitted), we find that there exists a significant relationship between the retail sales of Duval county and lagged values of the LEI index. Upon regressing retail sales on the LEI values, with various lags, we find that there exists an optimum lag of two periods. That is to say that the LEI exhibits some amount of explanatory power on the current value of Duval retail sales out to two time periods. This means that June’s retail sales value is not only affected by the LEI from June but also May, and April. The other very intriguing aspect to this lag is its sign structure. It seems that when the lags are combined, and certain assumptions met, the current period LEI is slightly negative and the lagged values are both positive. Also more importance is placed on earlier lagged periods than recently previous periods. This means that two months prior to a date is more highly correlated with this periods retail sales than the month prior.
Relative to the lag structure between the LEI and the Jacksonville MSA, the optimum lag structure remained two periods and the pattern of decreasing significance from more distant past to more current is also apparent. The most significant difference comes from the explanatory power of the two models. The model encompassing only Duval county’s retail sales can be interpreted to imply that twenty eight percent of the variation in Duval retail sales can be attributed to the current LEI value and two lagged values of the LEI index. The model for the entire North Florida area boasts a percentage of almost forty three percent.
It is likely then that the LEI index may be effective in making judgments about the overall level of retail sales within the Greater Jacksonville area and not just Duval County. The value that can be derived is most likely most significant for companies that depend on retail sales such as local supermarkets, car dealers, and retailers in general. If LEIP publishes that the LEI index declined sharply this month, by reading this article, you now know that in about two months time we can expect a substantial drop in the level of retail sales in both Duval County and the entire MSA. This in turn can help managers better budget, and schedule so that the “oncoming” downturn will not affect them nearly as much as their competitors who do not subscribe to this newsletter.
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