This is the fourth installment of the LEIPLINE. Our focus each quarter will be on the four variables for which we collect data and the implications of those data for the Jacksonville MSA overall. Since many of the data change for at least one month after we first report them, we have decided to wait until the middle of the following quarter to report each quarter’s implications. Since the local CPI is the most significant variable that we develop we will start with it.
The 2007.3 Jacksonville CPI
The change in the local CPI during the third quarter of 2007 reversed the escalation in prices during the second quarter, following the national CPI. July and August produced moderate increases in the LEIP CPI, but September, and preliminarily October, revealed decreases between 3 and 4 tenths each. The aggregate effect through September produced a quarterly increase of just over 7 tenths of a percent, and the annualized inflation rate fell to 3.16% through the first nine months. Through October, the annualized rate fell to 2.4%, which is two-thirds of the national annualized equivalent of 3.6% for the same time period, but high for Jacksonville historically. The local numbers were once again driven by fuel prices and housing prices. Fuel prices, including both gasoline and fuel oil, grew dramatically during the quarter based on supply shocks, refinery problems, and speculation about political issues in Iraq, Iran, and elsewhere. The local housing market continued its decline, with building permits of about 3,000 for the third quarter in a row (compared to over 5,000 per quarter in 2005), but with prices falling at the mean to $40,000 below their mid 2005 peak for single family homes. Condo prices fell even further, with housing rental prices falling only about $20 per month. It is evident now that buyers are searching for substantial bargains and sellers are desperate to try to maintain the equity they perceive in their house that no longer exists in this market. Rents are remaining stronger because of the shift of lower income housing buyers back into the rental markets. Ultimately, the housing market that drove the U.S. economy for over five years will not recover until buyers perceive that the bottom has been achieved. However, we believe that once that perception becomes wide-spread, the housing market should jump as pent-up desire for movement locally, and speculation and the inflow of new residents, start the market growing again. We are hopeful that the bottom will occur in the fourth quarter of 2007 or the first of 2008, but our confidence in this outcome is guarded. 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 2007.2. The major increases during 2007.2 were reversed in 2007.3, including motor vehicle parts 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 fourth quarter of 2007 suggests a continuation of the moderation of price inflation. The economy both locally and nationally appears to be softening and despite the actions of the Federal Reserve, spending on other than energy is diminishing. We do not expect a recession beginning in the fourth quarter, but the first quarter may very well be quite weak unless the housing market rebounds or fuel prices fall dramatically. Consequently, we see the fourth quarter as one of small price increases or perhaps more price declines as the economy weakens and the Christmas season disappoints.
Unemployment rates in Jacksonville during 2007.3 rose significantly even after adjustments for seasonality. LEIP only seasonally adjusts the unemployment rate (we do not calculate it), but doing so provides valuable short term insight into the changes from month to month. For example, the unadjusted unemployment rate in August 2007 fell from 4.2% to 4.1%, but the adjusted rate rose from 3.94% to 4.06%. Summer employment for Jacksonville for high school and college students was such that students found it more difficult to find employment. Still, the Jacksonville MSA rate of unemployment was low compared to the national average of 4.6%. The bottom line on unemployment is that job growth in the Jacksonville MSA slowed in the third quarter, for the first time in two years rising more slowing than the influx of new workers, so unemployment rates have risen by five tenths. We were wrong about employment last quarter, but we still expect a small decline in unemployment in the fourth quarter, despite the softening economy, due to the Christmas season, even after adjustment for seasonality.
Leading Indicator (LEI)
The LEIP leading indicator was up 1.7 points in the third quarter, but it fell slightly in October. However it is still 6 points higher than the comparable national LEI on which it is based, and 4 points higher than what it was in December 2006. However, looking inside the numbers reveals that the LEI is being driven positively by the growth of the money supply almost exclusively. In particular, the local components of the LEI are not revealing any significant positive movement. Thus, the outlook for the fourth quarter of 2007 in total is not strong. Ultimately, the actions by the FED will be crucial since the real M2 money supply is such a major influence on the LEI, and the broader economy.
Stock Price Index
The local stock index has had a rough year in 2007, following a dismal year in 2006. The local presence stocks have fallen nearly 3,000 below the DOW. The local headquarters’ stocks are over 3400 points below the DOW, driven down by local bankruptcies. Issues with insurance companies and health providers locally were once again likely behind the lagging local stock prices.
The Bottom Line
Overall, 2007.3 was not as good a quarter for Jacksonville as at the national level. Retail sales slowed relative to national growth rates, unemployment rose, and inflation slowed. The LEI rose, but in a shaky fashion relative to the local components. Our perspective has not changed for the fourth quarter relative to what we expected for the third quarter. The outlook for Jacksonville is not horrendous for the rest of 2007, but the data seem to indicate that our local economy is slowing. If the housing market remains weak, and consumers continue to allow the high oil prices to reduce retail sales, the local economy could decline significantly. However, more likely the local economy will only grow more slowly, without recessionary implications.
LEIP's CPI versus the National Equivalent
Now that we have nearly six years of data on the LEIP consumer price index (CPI), we decided that it was time to investigate the correlation between the Jacksonville MSA consumer price index and the national index provided by the Bureau of Labor Statistics. Thus, in a general sense, we assessed the relationship between two independent random variables in time. However, it is necessary to compute more than just the direct bivariate correlation, since there might be a lag structure that differentiates the LEIP CPI from the national values. Ideally, we hoped to validate our analysis by finding a strong positive correlation between the two CPIs without a lag, but not necessarily at the same magnitude.
The LEIP project has meticulously recorded the local CPI data monthly since December 2001. In an effort to test for a possible time specific relationships between the local CPI measure and the national measure, with a set number of lags, many statistical tests were conducted and many hypotheses were addressed to try and determine the exact structure of this relationship. However, after extensive testing, no specific lagged relationship existed. The conclusion was that there does not appear to be a definite lagged relationship between the local Jacksonville CPI and the National CPI out to five specific time periods. That is not to say, however, that there is not an interesting relationship between the local Jacksonville CPI and the National CPI.
The relationship that exists between the local Jacksonville CPI and the National CPI in economic terms is called cointegration. It seems, as time proceeds, the two CPI measures do not lag each other, rather the two variables mirror each other quite well with the difference between the two being within one positive or negative lag of each other, in all cases. What this relationship expresses is that during the time periods in the sample the two CPI measures tended to move together as time went forward. However this relationship does not hold just for values within this particular sample, but rather the testing implies that it can be extended for future time periods as well. This particular fact means that holding all other things constant the changes in the national CPI are automatically reflected in the local CPI, and due to the strength of the cointegration we can expect this relationship to hold for some time.
If these variables move together, can one be used to help discern the movements of the other, i.e. can we use the national CPI to make inferences regarding the movements of the local CPI? In this case we would need to test whether one of these variables causes the movements of the other. In most cases this type of testing can not be conducted, but because both of the variables span the same time period, we may test for causality between these two variables. In the case of the local CPI causing movements in the National CPI, the testing results turned up what one would think, with the local CPI not having a significant effect on the national CPI. Also, validating the independence of LEIP, the National CPI does not cause movements in the local CPI.
What this means is that no inference can be gleaned from the distinct movements of the two CPI measures in the short run. However, given the cointegration of the two variables, we can expect the two to move together in the long run. Thus, if economic forecasters are predicting the national CPI to rise sharply you can likely expect the prices at your local grocery store to start increasing very soon. Ultimately, we were able to validate our local CPI since the data suggest that while inflation is much lower in the Jacksonville MSA than at the national level, the two measures do move together.