This is the eighth installment of the LEIPLINE. Our focus each quarter is 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 at least the middle of the following quarter to report each quarter's implications. Since the local CPI is the most significant variable that we analyze we will start with it.
The 2008.3 Jacksonville CPI
The change in the local CPI during the third quarter of 2008 revealed disinflation (declining rates of inflation) followed by another negative value for inflation (deflation) in September. The October value reinforced the deflation, suggesting for the year that inflation is less than 1.5%. During the third quarter and into October, the national CPI also revealed deflationary pressures. Such influences are rare and can either signify a very strong economy or a very weak one. There is no disputing that the events of the last four months reflect the latter. The local numbers were once again driven by fuel prices (see the article this quarter regarding the trends in fuel prices over the recent boom and bust cycles) and housing prices, but other consumer durables contributed to the declining prices, particularly new and used cars. In the latter part of the quarter apparel prices declined significantly, as did many food categories and professional services. Fuel prices, including both gasoline and fuel oil, fell dramatically during the quarter, reflecting the weakened demand and the exodus of speculators from commodities in search of more stable returns in government securities. The financial crisis has weakened consumer confidence and consumer expenditures which has reduced prices due to lagging demand.
The outlook for the last quarter of 2008 relative to inflation is more of the same. The Christmas season is likely to be dismal with deep discounting and diminished demand. It is interesting however, that fuel surcharges and higher commodity prices resulting from fuel fees have not diminished. This reality will continue to keep prices from falling further and consumers from being able to transfer expenditures from heating oil, electricity, and other fuel related goods and services to Christmas purchases. We correctly predicted last quarter that the oil and gasoline bubble was bursting, and thus, we anticipate that price decreases should continue at least through the rest of the year. In addition, thus far the bailout programs are not stimulating lending which will continue to put a damper on inflationary pressures, but will also not help stimulate economic growth. There is an eerie similarity between the events of the last quarter and those of the period between 1929 and 1933, but also relative to the Japanese economy in most of the 1990s.
Unemployment rates in Jacksonville during 2008.3 exceeded the national rate for the first months and the first quarter since we began collecting data in December 2001. Specifically, the unemployment rate is now 6.52 percent in the Jacksonville MSA, higher than any time in the last 7 years, and slightly higher than the national average of 6.5%. 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 jumped moderately from 6.4% in July to 6.7% in August, but after seasonal adjustment the increase was actually 0.58% due to the seasonality in summer employment. Inspection of the employment versus labor force data suggests that the rise has been a combination of falling employment and declines in the civilian labor force of a smaller amount. Therefore, despite the workforce declines in the summer and early fall, the decline in jobs out stripped it. The outlook for the fourth quarter is not positive with a weak Christmas season anticipated and announced layoffs set to take effect after the holiday season.
Leading Indicator (LEI)
The LEIP leading indicator has been down four of the last five months (including a big drop in October). However, what is worse is that the magnitudes of the changes are so large that the index has returned to 2002 levels. Consumer confidence in Florida has fallen to the lowest level in twenty years and to its lowest level ever nationally. Initial claims for unemployment insurance exceeded 7,500 in October alone in the Jacksonville MSA. Building permits are still way off from historical norms, meaning less economic activity and state tax revenue for the foreseeable future. Local headquarter stocks continued to hold their own in the third quarter (although October was horrendous), but the local presence stocks have plummeted as financial firms have lost considerable value. Not only does the LEI foretell problems for the fourth quarter, but the signals for the first quarter of 2009 are also disheartening.
Stock Price Index
The local stock index was dismal in the third quarter of 2008 as well. The local presence stocks fell over 3,200 below the DOW, while the local headquarters stocks recovered somewhat through September before tanking to nearly 1,300 below the DOW in October. While the DOW continues to remain well below its peak, the local stocks seem to be hit harder due to the substantial presence of financial companies that have seen bigger drops in their stock prices due to the financial crisis.
The Bottom Line
Overall, 2008.3 was the third consecutive weak quarter for Jacksonville and the nation in regards to the data LEIP collects or has access to in a consistent format. Retail sales slowed some more, particularly in October, unemployment rose, and inflation fell, but due to weakness in the economy not strength. The LEI fell overall, except for August. The outlook for Jacksonville is not strong for the latter part of 2008 and early 2009. If fuel prices remain at more reasonable levels, and this spurs a return of investment dollars to the financial markets, the second half of 2009 may not be as weak locally or nationally as the end of this year seems to be heading towards. Therefore, we forecast continued weakness until 2009.2, with a slow recovery in latter 2009. However, although we do not directly employ these data, this is dependent on housing recovering which will only be possible with declining mortgage rates and a return to more stable supply and demand relationships in housing.
Have Oil and Gasoline Price Movements been related over the 2006-2008 Cycle?
During the last 2 years oil and gasoline prices first surged to a new all time high and then fell in the last two month over 60% from their respective peaks. Consumers all over the country felt the pain at the pump. During the same time the biggest oil companies posted record earnings every quarter until the last one. The relevant questions to answer are whether the oil companies took advantage of the increasing oil prices by inflating the prices of gasoline more quickly and beyond their increases in costs during the bull market for oil commodities; and furthermore, did they also gouge as oil prices fell by not lowering gasoline prices by as much or as quickly as oil prices fell? On the surface, the answer seems pretty obvious since oil companies were able to increase their earnings. But was the increasing gas price a factor in the increased earnings?
Initially, by looking closely at the regular gasoline and oil price data from the Energy Information Administration over the last three years, the data reveal that the oil price and gasoline prices are closely tied together. Consider the two graphs below that outline the oil and gas prices over the last 4 years. Even the uneducated eye can see the close similarities in the movements of these prices at the same time periods.
Alternatively, their close relationship can be identified by running a regression of gasoline prices against oil price and time. The results implied that at a 95% confidence level, oil prices and time account for 86% of the gasoline price (although this result may be biased by potential autocorrelation that could not be removed). Further, the correlation between oil prices and gasoline prices in the bull market through its peak in the week of July 18, 2008 can be compared to the most recent two months of falling prices in the bear market. The data reveal that there was a strong correlation of 92% between oil and gasoline prices in the bull market and 92.7% in the bear market.
The final approach was to specifically compare corresponding gasoline and oil prices as they occurred during the bull market and then again during the decline in both price levels. The first example is April 1, 2005 with a gasoline price of $2.15. During the following weeks oil prices jumped to over $50 however the gas price stayed around $2.15 a gallon. During the week of November 14, 2008, gasoline prices returned to $2.15 per gallon and correspondingly, an average oil price of $50.23. Gasoline prices have hit $3 per gallon several times in the last few years. For example, between April 28th and August 25th 2006 gas prices were between $2.90 and $3.00 per gallon, with oil prices of $64 to $69 Dollars a barrel. These gasoline prices were reached again between May 4th and July 13, 2007 with oil prices between $59 and $70 Dollars per barrel. However, after a brief decline at the pump, the price reached $3 again in November of the same year with an oil price of $86.88 per barrel. This price level was constant until February of 2008 when at that point the oil price sky-rocketed. In the recent month, the gasoline price reached a comparable price of $2.91 a gallon on October 20th 2008 with an oil price of $62.81 a barrel. Therefore, with only one exception, oil prices sometimes rallied faster than gasoline prices, but overall the price relationship between oil and gasoline was close to the same both on the rise and the decline over the last few years. The conclusion from this research seems to suggest that the oil companies did not take advantage of rising oil prices to increase their profit margins and earnings by artificially inflating gasoline prices during the bull market or the bear market, but rather, other influences on costs stimulated the profit gains, or more likely, speculators in the oil markets were the ones making gains from the movements in oil and gas prices.