The second quarter numbers for the US economy (shown in the first table below, in the far right column, and which are preliminary) reflect sizable increases in two of the major subcomponents of real GDP; with a small increase in another and a sizable decline in the fourth. Personal Consumption Expenditures were up 1.6%. This is anemic relative to the growth rate prior to the recession (that was routinely 2.5 – 4.5%), but better than the 2.75% average decline during the period from 2008.3 until 2009.2. Gross Private Domestic Investment was also up by nearly 30%, making the fourth quarter in a row in excess of double digit expansion. Unlike the worst quarters of the recession, inventory growth was positive and in the second quarter even residential investment turned positive. However, this latter outcome is likely skewed by the residential tax credits that ended in June. It appears that businesses are gearing up for recovery, but consumers are still cautious. The government sector was up by a sizable amount, but unlike four of the five previous quarters, even state government spending rose. The foreign sector outcomes reflected the continuing increase in the value of the dollar, with sizable increases in exports but much bigger increases in imports. Since imports are a leakage from the economy, this latter outcome reduced the overall growth rate. The total increase of 2.4% was somewhat less than macroeconomists would prefer under normal growth circumstances, but well below hoped for growth as the economy is recovering.
We enclosed the second table to reveal the impacts that each of the subcategories has on the overall annualized increase of 2.4%. It should be obvious that investment drove the growth in the second quarter, with government purchases and consumption relatively muted. This table also reveals what the first does not, that inventories rose for the fourth quarter in row. However, net exports turned even more negative.
The inflation outlook is still, in its perverse way, weak. Despite more than a three tenths of a percent increase in the CPI in July driven higher almost exclusively by fuel oil prices, the second quarter inflation numbers all signaled deflation. Annualized growth in prices since July 2009 was only at 1.2%. As we commented last quarter, 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 based on the weak inflation numbers. In lieu of the discussion above whereby investment is strong and government spending continues to escalate, the reality from the data is that consumers continue to be the drag on the economy. The national unemployment rate seems to have peaked in October of 2009 (with the slight upturn in April 2010) and started downward. It has now been below double digits since January 2010.
Despite the improvement, however, there seems to have been a rebirth of discouraged workers and underemployed members of the workforce since April. A new group of high school and college graduates arose during the second quarter of 2010, many of whom are not employed yet, and likely not recorded in surveys or on the unemployment rolls. Unfortunately, it appears like we are moving closer to European style employment markets with large numbers of young workers without the experience or skills to compete when there are so many experienced workers out of work. This portends an extended period of time of unemployment rates significantly above what we have been accustomed too before the recession began. Interest rates have fallen even further as the Federal Reserve leadership has turned more towards expectations of deflation and away from concerns that inflationary forces are likely with resumed strong expansion.
Some economists are beginning to comment that yields are too low to promote profitable lending by banks and other financial firms and that what is needed is actually an escalation of interest rates to spur capital flows out of low yield, safe investments like treasury securities. In a floundering economy without strong consumer spending, business investment is even more risky that normal, motivating caution due to potential risk that newly created goods and capital expenditures will not generate needed returns. The trade sector during the second quarter of 2010 continued the trend towards increased exports; but a much higher growth rate of imports, deriving a negative overall impact on GDP growth. While the dollar remains relatively strong compared to the EURO and many other currencies, much of the current escalation in imports signals the continued movement of the US economy towards debtor status. Our trading partners are buying more from the US at higher relative prices, but we are simultaneously buying more Japanese and particularly Chinese goods as the Yuan rises (although very slowly) which increases the monetary value of our imports as well. If the Yuan was closer in value to what it should be (i.e., if the Chinese allowed their currency to rise to the level that markets unfettered would dictate), we would import less, manufacture more domestically, and grow our economy more rapidly.
Unemployment rates in Jacksonville seemed to have peaked in February, but the market worsened further after seasonal adjustment in July. Since this outcome is already adjusted for traditional unemployment arising from students and former students entering the labor market, the six tenths increase suggests what is likely happening – that new graduates are having a hard time finding employment and so are students in between years of school. The local labor market has revealed very little improvement and we continue to be concerned that a structural shift has taken place towards greater unemployment as firms have discovered greater productivity of labor and the ability to bolster profits without additional employees. 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 outlook for the third quarter of 2010 is hopefully going to continue the trend downward in unemployment, but the key will be the growth of jobs versus the growth of the labor force. In July the local labor force grew by 3,000 workers but employment grew by 4,000. As the labor force continues to grow, it takes more new and reestablished jobs to bring down the unemployment rate. In one regard, thankfully, more workers are still coming to Jacksonville or returning to the labor markets as the recession wanes. However, unemployment will either grow or fall more slowly as the labor force rises without all potential workers finding jobs. A sizable decline in unemployment rates will require considerable increases in employment by particularly small businesses, but as of now, that movement seems several quarters if not years off.
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