This is the fourteenth 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. However, in these uncertain times, we also feel compelled to discuss the national macroeconomic circumstances as well. At the national level, as new macroeconomic data are released each month, the strength of the recovery is more confusing to interpret as one piece of evidence suggests improvement and the next continued weakness. The European debt crisis is the dominant problem as of this writing, but real estate weakness, impending additional foreclosures in both commercial and residential real estate, and the recent declines in the oil and financial markets are further evidence that the negative effects of the recession are still lingering. On the positive side, retail sales seem to have picked up since just prior to Valentine's Day, net private domestic investment surged in the first quarter, and exports rose for the third quarter in row (although in the first quarter imports rose by more).
The Macro Economy
The first quarter national numbers (shown in the first table below, in the far right column, and which are after their first revision) reflected a sizable increase in each of the major subcomponents of real GDP except for Government Purchases of Goods and Services. Overall, the annualized quarterly increase was just over half as much as in the fourth quarter of 2009 (after its second revision). The government sector was down, but clearly due exclusively to declines in state and local government spending, not federal spending. For the second quarter in a row, gross private domestic investment increased by a double-digit percentage, but once again this was despite some big declines in both residential fixed investment and commercial structures. The personal consumption expenditures (PCE) increase was reflective of the third quarter in a row of increased consumer purchases, but contrary to 2009.4, far more of it was for durable goods as opposed to nondurable goods or services. As we implied last quarter, during a normal growth quarter one would expect a sizable increase in purchases of durable goods (those with life expectancies of greater than one year). The fact that more durable goods were purchased in the first quarter is a positive sign. The foreign sector outcomes reflected the rising value of the dollar, with sizable increases in exports but bigger increases in imports.
We enclosed the second table to reveal the impacts that each of the subcategories has on the overall annualized increase of 3%. It should be clear that PCE and investment were the positive factors and government purchases and the foreign sectors turned negative. This table also reveals what the first does not, that inventories climbed again (the third month in row), which this time of year is a positive sign of business confidence. With the dollar continuing to strengthen and state and local governments facing removal of stimulus money in their 2001-12 fiscal years, these negative factors have sizable potential to grow in the future.
The news regarding inflation is not positive at this point. The April 2010 inflation reduction of 0.1% ended a twelve month period that reflected the lowest annual total growth rate of prices in the last 44 years, at 1%. There are two types of economies that can reflect a low overall inflation rate; a very strong economy where the supply of goods and services is growing sufficiently rapidly to override or mitigate any increase in demand, or a very weak economy where demand is falling, or rising less rapidly and supply is either rising or remaining relatively fixed. We are still within the latter category almost certainly. Generally, increases in producer prices like we have seen over the last few months in aggregate (over 8% annualized since October 2009 despite the small drop in April) are a leading indicator of consumer price inflation. However, that impact has yet to materialize, further suggesting the likelihood that weakness in product markets continues to dominate. Once again we will warn that if the banks increase lending, the existence of large quantities of monetary stimuli due to monetary policy infusions over the last seven months will promote higher inflation if left unchecked. We continue to believe that the Federal Reserve leadership will be tardy in combating this effect in an attempt to prevent a double dip recession.
The national unemployment rate has remained below double digits since January (9.7%) after spending the entire fourth quarter of 2009 at 10% or just above. Pundits interpreted the increase in April to 9.9% as a positive sign, suggesting that previously discouraged workers have reentered the labor force in anticipation of improvements in business hiring. This seems to be borne out by the jumps in payroll employment, particularly in March and April. However, there were still many more discouraged workers as of April 2010 than in April 2009. This remains a considerable concern when evaluating the unemployment numbers, consequently, interpreters of unemployment should always consider not just the published unemployment rate, but also the other categories of unemployment that are produced and contributed by the Bureau of Labor Statistics at www.bls.gov.
Interest rates have remained at extremely low levels, and the Federal Reserve leadership continues to imply that the lack of evidence of inflation will permit them to leave interest rates low for the foreseeable future. Interestingly, the potential need for the United States to intervene in the European debt crisis may promote higher interest rates in the U.S. economy. However, to the extent that investors exit commodities and European currencies for U.S. Treasury securities, this will countermand the potential increases in particularly long term interest rates. Weakness in the domestic housing and commercial real estate markets will also foster lower long term interest rates. The uncertainty that exists in the movements of the other major macroeconomic indicators is likely even more pronounced in the potential future movements of interest rates.
The trade sector during the first quarter of 2010 reflected increased exports, but a higher growth rate of imports, creating a negative overall impact on GDP growth. The escalation in the value of the dollar due to the financial crisis that has spread from Greece to other European countries, and the associated decline in the Euro, will likely reduce US exports and further stimulate imports. This will have a deleterious impact on U.S. growth that will make the recovery even slower.
What Does It All Mean?
Ultimately, while the GDP evidence suggests that 2010.1 was the third consecutive quarter on the road to recovery, the potential of a "W" recession is stronger today than it was three months ago. For a while, Euro countries seemed to be leading the world out of the recession and the U.S. economy was lagging due to primarily real estate related weakness. At this point, the roles seemed to have reversed again, but just as the Euro block and Chinese economies were leading towards recovery, they could potentially lead us back down given the magnitude of the debt crisis that continues to unfold. Circumstances within the United States are not strong enough to withstand much global weakness without conditions turning negative again here. We would like to be able to focus on the positive news at this point, but we still have considerable concern for the path of recovery and the potential for further weakness.
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 2010.1 Jacksonville CPI
After ending 2009 with annualized inflation of over 4%, the local CPI has taken a significant dip since January 2010. Prices in the Jacksonville MSA through April 2010 were down at a 1.42% annualized rate despite a moderate increase in January. Automobile prices continued to drive the CPI, but contrary to the fourth quarter when automobile dealers took advantage of Cash for Clunkers early and incentives from manufacturers near the end of the quarter, particularly new car prices have fallen significantly since. Used car prices have bounced considerably over the last four months, up significantly in January and February and down even more in March and April. Food prices have been more stable despite a bout with higher tomato prices earlier in the year. Gasoline prices escalated beyond what they should have given fundamentals in the oil markets and they are very slow to come down given the recent rise in the value of the dollar and the more recent $15 per barrel drop in crude prices. Apparel prices were as they typically are; the most volatile of the components in the CPI. Residential real estate remains weak and so prices have not moved much, but sales have remained positive despite the removal of the first time buyer's credit. Homeowners-insurance prices jumped again due to legislation from Tallahassee.
The outlook for the second quarter of 2010 relative to inflation very much depends on consumer spending versus changes that arise in the labor markets and how the housing markets react to the removal of tax incentives. Consumer confidence jumped six points in April suggesting that consumers are more optimistic about their futures. However, this has to translate into greater business confidence that results in improved hiring and use of greater amounts of commercial real estate as a result, to have a major positive impact. Last quarter we were too optimistic about the recovery and the anticipated moderate inflation did not arise. Markets should heat up this spring and reverse the course of falling prices, but this will very much depend on whether the European crisis gets worse and drags down both the U.S. and local economies. We certainly hope not, but continued weak inflation numbers will not bode well for the pace of local recovery.
Unemployment rates in Jacksonville during 2010.1 continued to rise through February, but hopefully peaked that month at 11.57% (seasonally adjusted). While, as mentioned above, national pundits translated the April jump in unemployment to 9.9% as indicative of the return of discouraged workers to the labor force; locally, the April rate fell dramatically to 10.69% reflecting an increase in those employed combined with a drop in the local labor force. There is naturally an increase in employment in the early spring in the Jacksonville area, but it is historically very small. The April 2010 jump was even better news than normal, despite the level being way higher than would be preferred. 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. The unadjusted rates averaged over 12% in the first quarter of 2010. However, the seasonally adjusted value fell below 11% in April.
The outlook for the second quarter of 2010 is hopefully going to continue the trend downward in unemployment. Last quarter we commented that the local economy needed something to bolster consumer confidence to lay the groundwork for improved private sector hiring. The jump in consumer confidence arose (we still do not know why) so now it is time for local businesses to do their part. The April unemployment and employment numbers were certainly a movement in the correct direction. With local high schools, colleges and universities graduating sizable numbers of student in May and June, the prospects for these new graduates in the coming summer months will tell us a lot about future job prospects in the entire marketplace. We are hopeful that employment conditions are getting better for 2010 graduates and longer term members of the labor force and that the second quarter will continue to reveal improved job prospects at quarter's end, as it began last month.
Leading Indicator (LEI)
The LEIP leading indicator started 2010 continuing its positive values from 2009.4 through February, but March and April were both negative. In particular, building permits and new claims for unemployment insurance were driving the LEI. Both categories revealed strong recoveries in the January and February, but fell off again in March and April. As mentioned before, the recovery in consumer confidence in April was a positive sign, but it was insufficient to override the nearly 2,200 additional claims for unemployment insurance, the drop in building permits, and the fall in local stocks. The national LEI was also down in April, reversing its consistent climb since March 2009. The evidence both locally and national is that the recovery is weakening and the outlook for the next three to six months is not as rosy as we had hoped at the end of 2009. The disconnect between the falling unemployment rate and the rise in new claims for unemployment insurance is disconcerting, suggesting that the return of discouraged workers to the workforce is being reflected in further claims for compensation to get those unemployed through the downturn.
Stock Price Index
Local stocks followed the rise in the DOW during 2010.1 and through April, but the local presence stocks outperformed the local headquarters' stocks for a change. Both categories are still well below the DOW, however. The local headquarters stocks are still about 2,200 below the DOW, while the local presence stocks are still around 4,000 below the DOW. For the last four quarters 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 continue to be correct. Construction and both residential and commercial real estate declines continue to contribute significantly to the weakness. We do not anticipate that local stocks are going to gain substantially relative to national blue chips.
The Bottom Line, Locally
Overall, 2010.1 was the eighth 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 have bounced back, unemployment fell, but the LEI has turned downward and inflation, rates fell for each of the last three months. The outlook still suggests that we are in recovery, but it appears to be one that will be very slow, quite bumpy, and difficult to predict. The outlook for Jacksonville continues to be weak for the second quarter of 2010.
The NBER has still not declared that the recession is over. This strikes us as further evidence that the recovery is not far enough along to suggest that near future news is likely to be more positive. The state of Florida and Jacksonville will need to consider alternative growth stimuli to agriculture, tourism, and population relocation to anticipate future recovery to match past performance. Investment in infrastructure and particularly education will be the best ways for the state to attract innovative and high wage jobs to the state. The sooner we start, the more competitive we will be with other states and other countries in the future global economy.