This is the seventeenth installment of the LEIPLINE. Our focus each quarter is mostly on the four variables for which we collect data and the implications of those data for the Jacksonville MSA overall. Since it has become habit, and the evidence remains that Jacksonville is lagging the national economy, we begin with some brief commentary on the national economy to shed light on the future of the Jacksonville recovery.
The National Macro Economy
The first announcement of the fourth quarter real GDP numbers implied stronger growth than the values for the two preceding quarters. The fourth quarter came in at 3.2% growth following 2.6% growth for 2010.3 and 1.7% for 2010.2. However, last Friday the 3.2% number was adjusted lower to 2.8% growth, suggesting that the strength of the expansion in 2010.4 real GDP was not as strong as originally predicted. While the magnitudes of the last two quarter’s growth is within the normal range that economists prefer during expansion, with the economy facing much higher than desirable unemployment, such growth is not enough to promote significantly increased hiring.
The fourth quarter growth was driven by personal consumption expenditures along with export expansion. Residential fixed investment was also up after several quarters of decline in this important measure of the housing market. This now makes six consecutive quarters of growth despite the unemployment rate continuing to remain at or above 9%.
Wholesale prices have begun to escalate in a variety of products resulting from the unrest in the Middle East, droughts in Russia and elsewhere, and monetary expansion in the U.S. that is spurring asset appreciation in other countries. In the United States this has not translated into consumer inflation in large part because unemployment is holding down wages in particularly service industries. The shift in the U.S. economy that has been taking place for at least two decades from manufacturing to service businesses means that much more of the economy is constrained by service wages that are not rising relative to particularly developing countries. This latter outcome is likely to change however, as the goods inflation permeates businesses of all types.
With escalating inflation come higher interest rates which will slow investment growth and unless checked, housing recovery. However, the housing market may actually be spurred temporarily by such a movement as pent up demand and supply in residential real estate are unleashed after three sour years to beat the mortgage cost increase. This will certainly signal the bottom of the real estate bust and return these markets to more normal growth. In most areas of the country the housing affordability indices are back down to 2004 level. Increased cash purchases in these markets suggest that real estate speculators have turned to being bullish on real estate once again.
What Does It All Mean?
The early data for the Christmas season suggest that retail sales were up almost 8% from December 2009. Wholesale and semi-finished product sales were also up substantially. Last quarter we placed a great deal of emphasis on this recently concluded holiday season as an indicator of the pace of recovery. It appears that in most sectors the season was relatively strong in terms of sales. However, the sales derived from a lot of deep discounting, so the profit implications were not as bullish. Fundamentally, consumers have regained a degree of confidence and this may be the first step in the acceleration 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 2010.4 Jacksonville CPI
The local CPI was four tenths of a percent lower at the end of the fourth quarter of 2010 than it was at the end of the third. For all of 2010, the local inflation rate was a paltry 0.11%. Food prices were quite stable during the year but gasoline prices were substantially higher at the end of the year. Those items that are typically volatile components, like new and used cars and apparel bounced up and down by substantial amounts all year. What is ultimately keeping inflation muted is the real estate market. Although single family prices were somewhat higher at the end of the year relative to the end of 2009, condo prices continued their slide and sales were relatively anemic. Commercial real estate only peripherally affects the CPI, but the glut of retail trade space lowered rents that in turn increased opportunities for discounting by local firms.
The outlook for the first quarter of 2011 appears to be more conducive to a return to normal or higher levels of inflation. The Federal Reserve leadership seems committed to quantitative easing. Wholesale price increases cannot be absorbed by firms forever. We perceive that retail inflation will be higher in 2011.1 than it has been since the beginning of the recession, driven particularly by food and energy prices. The unrest in the Middle East and other weather related factors both locally and internationally will increase consumer expectations of inflation. This will provide the opening for businesses to accelerate their reallocation of costs to consumers. Much regarding the magnitude of these price increases will depend on how long the unrest abroad continues and whether or not the FED fully invests in quantitative-easing.
The unemployment rate in Jacksonville in December at 11.42% meant that 2010 had only one month with seasonally adjusted unemployment below 11% (June). The labor force size is shrinking yet there is persistent unemployment, particularly in construction and in financial service industries. The national unemployment rate fell to 9% in January (the local data for Jacksonville for January do not come out until March 10th) but this number needs to be treated with care given the increase in the number of discouraged workers and those that the BLS puts in a hybrid category between discouraged workers and the hard-core unemployed. The local labor market has revealed very little improvement, in fact the civilian labor force from December 2009 until December 2010 grew by 1,025 potential workers, yet 378 fewer were actually employed (this of course ignores changes in employment status from full time to part-time, numbers of hours, etc.). There were 1,403 more unemployed workers at the end of 2010 relative to the beginning, locally.
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 for December 2010 appears to have fallen by 6 tenths, yet after adjustment for seasonality the change was only just over one tenth.
The outlook for the first quarter of 2011 will depend on the signals from consumers to businesses regarding future product and service demand. While some firms are still laying off workers locally, other firms are starting to hire again. Although it relates more directly to the LEI, advertised positions in the Times-Union were way off in January (although they hit their highest level ever in February). Construction activities are still a minute portion of what they were four years ago and financial service companies are only marginally increasing hiring at present. The first quarter of 2011 will likely see persistant unemployment above the 10% level (if not 11) and jobs will be difficult to acquire. However, there is some light at the end of the tunnel since consumer confidence jumped last month and that may reflect increased consumer willingness to spend, necessitating, given the low inventory levels that firms left the Christmas season with, more hiring to meet the higher spending. This is where we are placing our increased optimism, but since seven of us will likely be entering the labor market within the next 18 months, we are more hopeful than convinced that unemployment will decline much in the near term.
Leading Indicator (LEI)
The LEIP leading indicator was down over 3 tenths in the fourth quarter of 2010, with October and December down and November up. For all of 2010 the LEI was up 1.5 points overall, but for comparison purposes, the national index on the same scale was up over 6.5 points. As mentioned above, consumer confidence was up strongly recently, but not until January. Building permits fell below 170 per month, down from over 2,000 per month in 2006. Local stocks continue to be well behind the DOW as a whole. Interest rate spreads for local financial institutions continue to be strong. After nine-plus years of doing this we are aware that predicting the LEI over brief periods is a fool’s errand, but combined with the other positive news it seems likely that 2011.1 will provide better news than certainly during 2009.
Stock Price Index
Local stocks grew significantly in the fourth quarter with the local headquarters stocks up nearly 700 points and the local presence stocks up 630. Both are still well below the Dow, respectively 4,500 and 3,000 points. Therefore, both types of local stocks performed somewhat better on a relative basis during the fourth quarter of 2010. For the last now seven 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 fourth quarter numbers continue to reveal this reality.
The Bottom Line, Locally
Overall, 2010.4 was the eleventh consecutive weak quarter for Jacksonville and the nation in regards to the data LEIP collects or has access to in a consistent format. Unemployment remained a full seven percent higher than what would be optimal. The LEI fell by a small amount during the quarter and inflation rates fell for almost all of the last twelve months. The recovery appears to be very slow nationally, but given that Jacksonville has been more severely hit than perhaps every recession since 1975 (if not that one too) the local recovery has a lot further to go than the average nationally. However, 2010.4 and the early data for January 2011 provide some hope for optimism. Retail sales were better than expected during the holiday season locally as well as nationally. If the January consumer confidence numbers are the beginning of a trend; that by itself could break the logjam regarding which group will lead the recovery, consumers or businesses. The local economy is a long way from strong economic growth but the end of the weakness may be months away at this point instead of years.