This is the fifteenth 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, as the recession continues, we have chosen to discuss the macro economy at the national level as well. Nationally and internationally, as new macroeconomic data are released each month or quarter, the strength of the recovery is more confusing to interpret as one piece of evidence suggests improvement and the next continued weakness. The most recent data point to weak, but positive growth, but housing was way off in July and there are increasing signs of slower growth pervasively.
The Macro Economy
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.
What Does It All Mean?
With the decline in the rate of growth in the second quarter of 2010, there is renewed concern over a double dip recession. Beginning in the early months after the recession began in late 2007, we have been stuck in a chicken-or-egg situation whereby neither consumers nor businesses were willing to increase their expenditures for fear that the other side of the market would either not buy or not produce to satisfy the demands of the other. The escalation of investment in the second quarter hopefully signals that businesses have taken the lead in trying to promote recovery. With enhanced investment eventually comes increased employment to supply the labor necessary to operate the machinery and equipment. There is growing evidence that firms have reached their limits on increasing production without new employees. The fly in the ointment is that unless consumers begin to purchase newly produced goods and services, producers will scale back again, and the negative cycle will reinforce itself. We are marginally confident that this will not happen, but this year’s back-to-school and Christmas seasons will be crucial for the speed of the recovery.
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
The local CPI has continued its downward movement since the beginning of the year. Five of the last six months have generated declines in the CPI, implying deflation. Prices in the Jacksonville MSA through July 2010 were down at a 0.54% annualized rate despite a moderate increase in May. Food prices have been virtually flat, and when there have been changes they have been downward. Automobile prices have bounced back and forth as dealers try to ride the market. Gasoline prices have bounced as well, ending the current analysis period up, but dropping since. Residential real estate sales fell dramatically after the end of the tax credit program, but residential insurance rates continued upward. The outlook for the third quarter of 2010 appears to be more deflation. Consumer confidence has fallen since the first quarter and consumer spending continues to be relatively weak. It is quite evident from talking to local business owners and tracking prices in the stores that consumers are still in an increased saving mode due to perceived if not actual uncertainty. In an economy with shortages of loanable funds (the outgrowth of increased savings), increased thrift by individuals inside a particular economy, and globally causes interest rates to fall and economic growth. However, as is the case in the present world economy, there is a massive glut of loanable funds that is being exacerbated both within and outside of the United States by consumers’ unwillingness to spend. Consequently, since interest rates cannot fall any further, growth is very slow and this outcome is reflected in low prices. There is no end in sight for this condition and so we expect the inflation rate to remain very low locally and the deflation to continue.
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.
Leading Indicator (LEI)
The LEIP leading indicator was down overall in the second quarter of 2010, although a rebound took place at least for the preliminary numbers for July of about two-thirds of the second quarter decline. New claims for unemployment insurance bounced up one month and down the next, but are still four times what they were before the recession. Consumer confidence was down during the quarter and building permits are one fifth of what they were before 2008. Through July, the most positive indicator was the stock price index, but even the financial sector has declined since the end of July. 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. While July was positive, it was driven primarily by the financial markets that have fallen off since. We perceive continued weakness in the third and fourth quarters of 2010 and unfortunately, we cannot rule out the possibility of a double dip. Consumers need to regain their confidence and find their debit cards over the upcoming Christmas season to reverse our perspective and the fate of the local economy.
Stock Price Index
Local stocks followed the rise and fall in the DOW during 2010.2 through the July rebound. Both categories are still well below the DOW, however. The local headquarters stocks are still about 2,600 below the DOW, while the local presence stocks are still around 4,000 below the DOW. For the last now five 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 second 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 until both financial firms and real estate improve locally. Both seem a long way from happening.
The Bottom Line, Locally
Overall, 2010.2 was the ninth consecutive weak quarter for Jacksonville and the nation in regards to the data LEIP collects or has access to in a consistent format. While unemployment receded in the second quarter, the LEI has turned downward and inflation, rates fell for almost all of the last seven months. The recovery appears to be faltering both nationally and locally. Given that this recession has adversely affected Jacksonville more than usual, this is worse news here than elsewhere. The outlook for Jacksonville continues to be weak for the third quarter of 2010. The NBER has still not declared that the recession is over in large part because real GDP has not yet returned to pre-recession levels and the data are still so weak in so many sectors. Things are worse in the state of Florida and here in Jacksonville. As we implied last quarter, the state and local economic drivers will need to consider alternative growth stimuli to return our economy to strong expansion. Innovative small businesses and new industries will be the key to future growth. This requires a work force that is well educated and well motivated. State government and businesses within the state will need to invest in this process to succeed and the sooner the better.