This is the eleventh 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. Although we provide two articles this quarter, the continuing recession suggests that we maintain our vigil beyond just the local data that we collect.
As of this writing, the recession that began in November 2007 is still maintaining its grip on world economies. There are signs that recovery may begin in the third quarter, but caution is necessary due to fiscal stimuli like "cash for clunkers" and first home-buyer programs that may end before the end of 2009. If these programs are followed by slack demand as they terminate, the positive signs now evident beyond the two industries directly influenced may depart with the clunkers and first homes. However, for the first time in nearly two years, there is room for optimism that the worst is behind us.
The second article this month relates to the role and future of Jaxport. One of the bright spots in the local economy over the last two years is related to the establishment of cruise ships in Jacksonville and the expansion of the port both completed and slated for the next five years. Jacksonville is now billing itself legitimately as a transportation and logistics center due to our highway system, rail systems, and Jaxport. The article talks about where Jaxport is and where it needs to go to become a major trade player on the eastern seaboard.
After annualized drops in the fourth quarter of 2008 and the first quarter of 2009 in real GDP in excess of 5.3% per quarter, the decline in the second quarter real GDP was reported preliminarily at 1%. Recall that the last time that GDP fell by as much as it did in 2008.4 and 2009.1 was 1958, with the fourth quarter of 1981 and first quarter of 1982 almost as bad. Clearly, the smaller decline in 2009.2 was welcomed news, but this number is far from telling the whole story. If you look at the table below taken from the Bureau of Labor Statistics website (www.bea.gov), and focus on the 2009 II column, the reason should be obvious.
Concentrating on the bolded categories, it is clearly evident that personal consumption expenditures (PCE) were down 1.2% in 2009.2 on an annualized basis after a small recovery in 2009.1. PCE reflects between 65% and 70% of real GDP, so its movement is crucial. However, this is the smallest decline, by a long shot, EXCEPT FOR GOVERNMENT SPENDING. It is only due to massive increases in FEDERAL government spending that prevented the decline in 2009.2 real GDP from being much closer to the declines in 2008.4 and 2009.1. You may note that state government spending went up 2.4%, but that was subsidized by the federal stimulus almost exclusively.
Measurements of the business cycle reflect the aggregate changes in real GDP in total, and so if in 2009.3 the massive federal government spending continues as anticipated, it will once again move the economy towards expansion. However, the labor market will not recover until the private sector recovers, and we are a long way from there. It is also worth noting that similar outcomes took place that dominated 1938, whereby government spending drove real GDP while the private sectors of the economy languished. Real, pervasive, recovery from the depression during which this occurred did not take place until late 1941. Let's hope that the delay is not as long this time.
The inflation news suggests an overall inflation rate for the year of 2.8%, which is somewhat higher than Federal Reserve officials would normally desire. However, it has been anything but consistent through 2009.2. The June inflation rate nationally was increasing at a 7.02% annual rate, primarily due to higher fuel prices. However, without this major jump (which subsided to a flat inflation rate in July), the annualized inflation rate for the first six months of 2009 would have been less than two percent. While oil prices have been volatile, prices are still falling in numerous other categories with food down, apparel down, housing prices either down or moderately rising depending on the region of the country, airfares down, etc. It is interesting to note that new car prices have risen simultaneously with the "cash for clunkers" program; but used car prices are down quite significantly.
The national unemployment rate fell for the first time in many months in July from 9.5% to 9.4%, but care is required in interpreting this as well. This average unemployment rate does not include workers who depart the labor force because they give up on finding a job (called discouraged workers), and it does not include potential new entrants into the labor force, like high school and college graduates, and students during the summer, who simply choose not to try to find a job because of the perceived futility. A numerical example may help. For 100 people in the labor force, 9 being unemployed means a 9% unemployment rate. If one of these nine gives up and becomes a discouraged worker, then there are 8 people unemployed out of a labor force of 99, which is 8.08%. Clearly the U.S. labor force numbers are much bigger, and thus, the impact of one discouraged worker is not as large, but hopefully you see that a decline in the unemployment rate in a climate such as exists currently does not necessarily imply an improvement.
Short term interest rates have remained relatively steady, with recent declines in long term rates, including mortgage rates a positive step. The Federal Reserve appears to be driving long term rates lower, with market forces dominating the short term rates. Credit is still tight, however, and eventually as the economy recovers, interest rates will start up as the FED removes liquidity from the system to prevent inflation. Anticipate that the debt instruments that the FED sells to rein in liquidity will have to be sold at higher interest rates to motivate sufficient buyers, and all terms of interests will escalate. The FED will likely be very careful when doing this to avoid stifling the recovery. We believe that the FED will wait too long to prevent the inflation to avoid a "W" shaped recovery.
The trade sector is weakening pervasively with imports and exports both falling. This outcome is not advantageous, but it reflects that the world as a whole is still weak. Although real GDP figures in Europe and Asia seem to have recovered some, the motivations for these improvements are the same as here in the United States. Government injections of stimulus money have been sufficient large to override the declining private sectors. However, trade will not increase until the non-government sectors have the confidence to resume production on a much larger scale than they are presently generating.
Despite the caveats that we expressed above, there are some positive signals that may suggest that the recovery will start soon. Vendor deliveries and orders are up. Some retailers are facing lower than normal inventories that will promote further build-ups in orders. Housing prices in many areas of the country have stabilized as foreclosed properties are being sold and short sales have cleared other inventories. Industrial production is on the rise and labor productivity is much higher than before the recession; which on one hand suggests that employment has been diminished sufficiently at many firms so that productivity per worker is higher than normal, but on the other hand implies that firms will only be able to expand production by increasing hiring again. The most likely outcome for the third quarter of 2009 and beyond is that real GDP growth will show positive numbers in the next quarter or two, but that the private sector component of that will still lag in the negative range. Hiring will begin to recover, but very slowly, with particularly commercial real estate lagging behind for several years, not months. We are confident that the worst is over for the first part of the decline, but there is too much uncertainty regarding whether smooth improvement is forthcoming in the next several quarters, or rather, some recovery followed by additional decline.
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.
Prices in the Jacksonville MSA through June were down for four of the six quarters. However, June and July revealed the first increases since January. Thus far this year (including July) we are on track for prices to fall almost 0.2% for the year. Inflation rates on a monthly basis have been too volatile thus far this year to forecast very effectively, but if June and July are beginning a trend, inflation for the year will exceed last year by a sizable amount. However, last year generated deflation. Consumers still appear to be reticent to spend on big ticket items and that will likely keep inflation moderate locally. Inflation will also move lower if oil and gasoline prices return to the fundamentals of supply and demand, as opposed to the drivers from speculators that have dominated this important commodity market since before the recession began.
The outlook for the third quarter of 2009 relative to inflation is likely to be a continuation of small positive inflation rates. Although we continue to not expect much impact from the miniscule stimulus dollars, consumers will need to spend for back-to-school items and the longer consumers avoid replacing durable goods, the more likely that it will be that these goods will break and need replacement. Expect consumers to still be unwilling to make large purchases until the labor market returns to more normal hiring practices and employment uncertainty wanes.
We are concerned, as are other economists that with the advent of larger government involvement in private sector firms in the United States in general, and locally as well, it will generate a European-like labor market whereby double digit unemployment is the norm instead of the exception. We need to be very vigilant over the next few years that this does not occur.
Unemployment rates in Jacksonville during 2009.2 continued their rise to almost the 9.2% level after seasonal adjustment, but we remained below the national rates for the second consecutive quarter. 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 rose by 9 tenths from May to June 2009, but the adjusted rate actually remained the same. This effect is due to college and high school graduates entering the labor force and summer hiring of younger workers still in school. The outlook for the third quarter is likely to suggest a further weakening of the employment numbers. Large numbers of graduates have still not found jobs and layoffs continue in a broad array of industries. The new claims for unemployment insurance and job losses are still way above normal and the economy needs to actually produce substantial job creation to lower unemployment rates even moderately. Ten percent seasonally adjusted unemployment rates are still likely to occur in the early fall and they may continue into 2010 unless consumers change their spending behavior.
The LEIP leading indicator was up nearly 1.6 points during the second quarter of 2009 due to two sizable increases and one small drop. Up until July, there were sizable increases in the money supply due to FED policy and the stimulus programs. Although not as bad as January 2009, initial claims for unemployment insurance each month in the second quarter were much larger than historical norms and totaled over 26,000 new claims for 2009.2. 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 have also started upward, but they are way below the norms before 2008. Preliminary evidence showed some strengthening in July, but the LEI numbers should not really be accepted until they are revised a month later. We cited the two month increase in consumer confidence during 2009.1 as a positive outcome, but consumer confidence has fallen each of the last three months through July. We remain pessimistic for at least the third quarter, if not beyond.
Local stocks continue to lag behind the DOW although July revealed a rebound locally. The local headquarters stocks are now 1,150 below the DOW, while the local presence stocks are now 3,250 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. However, if one compares last quarters LEIPLINE to this one, local stocks have fallen even further behind. This does not bode well for the speed of the local recovery.
Overall, 2009.2 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 continued to fall in 2009.2, July, 2009 unemployment continued to be well above desired levels, and inflation started to creep up; but due to weakness in the economy not strength. The LEI was somewhat higher. The outlook for Jacksonville continues to be weak for the summer and fall of 2009. When the recovery begins, it 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 still 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. Perhaps the Obama administration will learn a lesson from the failure of their health care initiative and recognize that Americans do not want massive government involvement in the private sector. We certainly hope so for the future of the economic cycle.
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