This is the tenth installment of the LEIPLINE. Our focus each quarter is generally on the four variables for which we collect data and the implications of those data for the Jacksonville MSA overall. The unprecedented turmoil that began in October of last year has clearly extended into the first quarter of 2009 (and beyond). We believe that it would be neglectful not to continue to focus on these events in our discourse. Consequently, we only provide one article again for this quarter.
The Macro Economy
Both the fourth quarter of 2008 and the first quarter of 2009 have implied negative real GDP growth in excess of 6.1% per quarter. The last time GDP fell this much in two consecutive quarters was 1958 with the fourth quarter of 1981 and first quarter of 1982 almost as bad. The third quarter of 2008 was down 0.5%, so cumulatively, we have lost over 13% of output in just 9 months. In dollar terms, real GDP has fallen nearly $400 billion and in the first quarter of 2009 nominal GDP even fell (which almost never happens)!
Relative to inflation, the news is also indicative of considerable weakness. With the exception of January 2009, the general level of prices has fallen or remained unchanged every month since October 2008 both nationally and locally. While declining oil prices helped start the decline, prices are now falling in virtually all categories with food down, apparel down, car prices down, professional fees down, etc. Ordinarily lower prices mean increased purchasing power which is a good thing, but prices are falling because consumers simply are not buying! When consumers do not buy, producers do not produce and workers lose their jobs.
The current unemployment rates are higher than any have been since Ronald Reagan took office in 1981, both locally and nationally. However, even with these escalations to nearly 9.0% unemployment, the numbers do not tell the real story. Many states and particularly the worst hit areas have double digit unemployment. Further, if you investigate alternative measures of unemployment published by the Bureau of Labor Statistics, you discover that when you adjust for discouraged workers, those working less than full time, or those in jobs for which they are over qualified, the unemployment rate is closer to 18%. We have not seen numbers like this last one since 1939.
Interest rates are declining and finally, due to FED intervention in the market, mortgage rates are coming down too. We hope that the combination of the lower mortgage rates and the $8,000 tax credit for first time home buyers will stimulate the housing market beyond simply refinances. There is some preliminary evidence to suggest this is happening, but more in resale of existing property than new construction.
The Balance on Trade is improving, but this too does not suggest that the US economy is gaining strength. Rather, because imports and exports are both falling, but imports by more, these data reveal that the rest of the world is worse off than we are. This week's data on Japan, Mexico, and Germany is disheartening, with their GDP declines much worse than ours.
What Does It All Mean?
Both the U.S. economy and those elsewhere in the world are far from any meaningful recovery. Financial markets have recovered somewhat, but it is unclear why. A cynic (our camp) might argue that since financial firms started their clocks over after they lost close to 60% of their value after the financial crisis of October 2008, they are on the rebound since they hit rock bottom in December. However, retail sales continue to decline, automobile sales were off close to 50% last month from one year earlier, and people are not improving their homes, buying big ticket items or traveling. Forecasts suggest that the world has lost $13 trillion of wealth in the last 7 months and that another $11 trillion is yet to be lost in the next year.
Despite all of this doom and gloom, there are a few positive signals. The decline in housing prices seems to have at least stabilized. Foreclosures are being cleared and mortgage markets are starting to work again. While layoffs are continuing and workers are going back to school or leaving the labor force, there are jobs for many new entrants. With falling prices there are bargains in particularly luxury items, but basic subsistence is also getting less costly. Most analysts suggest that real GDP growth may be less negative in the second quarter of 2009 and beyond. When things a horrendous, we discover than less bad news can be reassuring.
The Local Data
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 2009.1 Jacksonville CPI
Prices in the Jacksonville MSA during the first quarter of 2009 were pervasively down. Thus far this year (including April) we are on track for prices to fall almost 2% for the year. With oil and gasoline prices inexplicably starting up again, this trend is not likely to continue, but moderate price increases mean that when consumers finally start to spend more freely again, their purchasing power will initially be good.
The outlook for the second quarter of 2009 relative to inflation is likely to be a return to positive inflation rates, but not large ones. Although we do not expect much impact from the miniscule stimulus dollars, consumers have been saving more and spending less for nearly seven months. With gasoline prices much lower than they were last summer, and pent up demand for vacations, we might see a spike in prices in travel related industries and greater prices of recreational products. However, whatever incentives that arise to cause prices to rise will be mitigated by reducing purchasing power for the unemployed and underemployed.
Unemployment rates in Jacksonville during 2009.1 for the third quarter in a row exceeded the national rate each of the three months. Specifically, the unemployment rate is now 8.72 percent in the Jacksonville MSA, higher than any time in the last 8 years, but now slightly below the national average of 8.9% reported for April 2009. 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 stayed the same in February and March of 2009, but unemployment actually jumped moderately from 8.78% to 8.91% during this period. The outlook for the second quarter may be looking up. April's decline may signal that March was the peak unemployment rate locally, but initial claims for unemployment insurance were on the rise again in April, so continued increase in the unemployment rate may still occur.
Leading Indicator (LEI)
The LEIP leading indicator was virtually stationary during the first quarter of 2009 due to two big drops and one big increase. The most revealing characteristic of the quarter was how large the swings were. The vast majority of the monthly swings in the LEI over the last 8 years have been between 0 and 0.5; but all three changes in 2009.1 were three or more times that size. The changes by the FED and the stimulus funds caused the money supply to rise throughout the period. However, initial claims for unemployment insurance skyrocketed exceeding 11,000 in January, falling to 7,000 in February, and then rising back above 9,000 in April. For historical perspective, since we began LEIP in 2001, these new acquisitions of unemployment compensation have averaged less than 2000 a month. Local stocks are improving along with the DOW, but still lag the DOW considerably from their major declines last year. Building permits are still way off from historical norms, meaning less economic activity and state tax revenue for the foreseeable future (although there was a spike in January). Preliminary evidence showed some strengthening in April, but the LEI numbers should not really be accepted until they are revised a month later. The best news that we perceive is the two month increase in consumer confidence that may spur spending increases. If the April LEI number is confirmed with more increases in May and June then perhaps the worst is over, but there is so much bad news out there still that we remain pessimistic for at least the second quarter, if not beyond.
Stock Price Index
Local stocks continue to lag behind the DOW although April revealed a rebound locally. The local headquarters stocks are now 700 below the DOW, while the local presence stocks are now 1800 below the DOW. Last quarter we implied that local stocks seem to have been hit harder than the DOW companies due to the substantial presence of financial companies in Jacksonville, and the first quarter numbers reveal that we were correct. Stocks have rebounded, but the local stocks dug a bigger hole than the national ones from which they have not yet recovered as well.
The Bottom Line, Locally
Overall, 2009.1 was the fifth 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 were down 4% in April after declines in February and March too, unemployment rose, and inflation fell, but due to weakness in the economy not strength. The LEI remained virtually the same. The outlook for Jacksonville continues to be weak for the spring and summer of 2009. If the up tick in consumer confidence continues and the stimulus programs generate increases in spending (the latter which we doubt) then the beginning of the recovery could be in the latter part of 2009. However, recovery will be different in different sectors with unemployment and real estate recoveries (particularly commercial) lagging well behind the recoveries in financial markets and consumer spending. At the earliest, we predict a return to normal expansionary conditions across markets by the end of 2011, but we are not very confident that unemployment and residential and commercial real estate values will return to pre-October 2008 levels until well after, particularly if the federal government continues its socialistic practices.