This is the eighteenth 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. We continue this quarter with a brief review of the national macro economy to provide a comparison for the future of the Jacksonville recovery.
The National Macro Economy
The initial announcement of the first quarter real GDP numbers implied weaker growth than the values for the two preceding quarters. The revised fourth quarter numbers came in at 3.1% growth following 2.6% growth for 2010.3 and 1.7% for 2010.2. However, today the 1.8% growth rate for 2011.1 original reported was confirmed suggesting that the expansion rate slowed in 2011.1. While the magnitudes of the last two quarters’ of 2010 real GDP growth is within the normal range that economists prefer during the growth phase of the business cycle, with the economy facing much higher than desirable unemployment, and expansion faltering in 2011.1, such growth is not nearly enough to promote significantly increased hiring.
In its late April announcement the BEA implied that “The increase in real GDP in the first quarter [of 2011] primarily reflected positive contributions from personal consumption expenditures (PCE), private inventory investment, exports, and nonresidential fixed investment that were partly offset by negative contributions from federal government spending and state and local government spending. Imports, which are a subtraction in the calculation of GDP, increased. The deceleration in real GDP in the first quarter primarily reflected a sharp upturn in imports, a deceleration in PCE, a larger decrease in federal government spending, and decelerations in nonresidential fixed investment and in exports that were partly offset by a sharp upturn in private inventory investment.” (http://bea.gov/newsreleases/national/gdp/gdpnewsrelease.htm).
It is not surprising given the steps taken by Congress and the Obama administration to deal with criticism of the growth of the deficit that federal spending fell in 2011.1. This result also reflects the removal of federal stimulus dollars previously directed to the states over the last three years, which explains their falling expenditures as well. The rising relative value of the dollar at the end of the quarter promoted increased imports, but other major factors grew more slowly as well causing the positive growth to be less than desirable. There have now been seven consecutive quarters of growth despite the unemployment rate continuing to remain at or above 9% nationally (by April the unemployment rate was back up to 9% from the high 8% range in the first quarter).
Not surprisingly given the escalation of oil prices and continuing unrest in the Middle East, inflation has returned at least in the aggregate CPI. Year-on-year comparisons of annual inflation are now over 3%, but annualized inflation for just the first four months of 2011 are approaching 5%. Core inflation (excluding energy and food) is still in the 2-3% range annualized, but there is increasing evidence that as routinely happens, higher oil and gasoline prices eventually translate into higher transportation and production costs begetting higher consumer inflation. When oil prices rose to over $147 per barrel in 2008 prior to the financial and real estate market crashes (through July 2008), consumer inflation was 4.6% and escalating. Fortunately, oil prices have started downward again in the last few weeks so perhaps the trend in recent consumer inflation will decline as well. However, inflationary expectations may lag the decline in inflationary pressures and continue the adverse effects on prices into the late summer or fall even if oil and gasoline prices moderate.
The slight uptick in unemployment nationally in April likely reflects the weakness in growth in the first quarter but it could also partially reflect the decline in discouraged workers who have returned to job hunting this spring. Those who are working part-time and those only marginally connected with the workforce did not change much in the first quarter, but newly laid off or unemployed workers increased during the first quarter and into April. It is sobering to recognize that the national unemployment rate is almost twice what it was in 2007 despite seven quarters of recovery.
What Does It All Mean?
The US economy as well as many other economies in Western Europe remains relatively weak and the recovery continues to be very slow. The drags associated with the residential and commercial real estate markets are generating negative wealth effects that are counteracting the income growth that is small, but accelerating. If the Middle East turmoil ends shortly, and the Greek and other financial problems dissipate, the US and the rest of the underperforming western world countries are poised for acceleration in positive growth; but the continued uncertainty in the business and political climates are frustrating investment and substantial growth motivations.
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 2011.1 Jacksonville CPI
The local CPI was just over one full percent higher at the end of the first quarter of 2011 than it was at the end of the 2010. This translates into a 4.45% annualize rate of increase which is higher than any full year has been since we started LEIP in 2002. April’s single month increase reinforced this rate of growth. The national equivalent to the first quarter aggregate price growth was even higher at 4.8% annualized. Inflation has returned. Naturally, much of the reason for the local inflation is food and energy prices, particularly gasoline. However, the inflationary influences have transferred over to apparel, automobiles, airfares, some food products, and other consumer commodities and services. The growth of prices would be reflected in the CPI at even higher levels if it were not for the negative effects of the residential real estate markets. Owner’s rent of primary residence and other rents were quite volatile during the first quarter of the year, but housing prices are not growing much if at all and sales are inconsistent month to month.
The outlook for the second quarter of 2011 appears to suggest continued escalations in prices. The Federal Reserve leadership is starting to talk about raising interest rates to curb the inflationary expectations, but it is only talk. There is still considerable concern over the slow growth and the impact that higher interest rates would have on investment and housing. We perceive that retail inflation for the entire quarter will follow the April increases both nationally and locally in 2011.2. However, there is potential that the inflationary pressures will moderate as the FED ends QE2 and if oil prices return to levels more consistent with market forces as opposed to speculative excess. If we had to make a guess, an annualize rate of inflation of about 3% seems likely for 2011.2.
The unemployment rate in Jacksonville in December at 11.42% meant that 2010 had only one month with seasonally adjusted unemployment below 11% (June). However, since 2011 began we have seen a consistent decline in the unemployment rate that is positive news for the local economy. April’s value for the local MSA broke the double digit barrier in the right direction, falling to 9.85% after seasonal adjustment. This value was even more positive than it appears if you investigate the employment numbers because the work force remained very steady from March to April with the number of workers unemployed falling by about 3,000 and the number of employed rising by virtually the same amount. This suggests that unlike the national numbers for April, few discouraged workers likely took the new jobs swelling the labor force and those who needed the jobs got them to a greater extent than normally.
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 April 2011 is not quite as good as the unadjusted rate because there is a natural tendency for employment to pick up in the spring. These numbers also reveal that the amount by which the local unemployment rate exceeds the national numbers is shrinking, illuminating that the local economy may finally be improving at a rate in excess of the national recovery.
The outlook for the second quarter of 2011 is hopefully more of the same. The acceleration of inflation combined with improved employment may finally signal local businesses to become more bullish on their future sales. This in turn can stimulate additional hiring that can bring the unemployment rate down further. However, caution suggests that on the horizon is diminished employment of, and spending by, federal, state, and local government workers as each of these government groups locally tries to adjust to diminished revenues. Local, state, and federal government workers make up a substantial portion of the local work force (about 13%) and reduced government budgets combined with changes in retirement structures will reduce spending by these workers and thus motivations by private sector firms to produce more output and hire more workers. At this point it is not clear which influences will dominate in the remainder of the spring.
Leading Indicator (LEI)
With the exception of the preliminary April numbers, the LEIP leading indicator was up a point and one-half since the end of 2010 (and up exactly one point from December until the end of April). This too is a reason for cautious optimism. The LEI locally has been up six of the last eight months and it rose almost two full points in the first quarter of 2011 alone. For the first time in a long time the local LEI was stronger than the national LEI as well. Ignoring April (which has not yet been finalized) suggests continued strength for the foreseeable future, at least through the summer. While building permits still lag and initial claims for unemployment insurance are falling very slowly, help wanted ads were way up in the first quarter and interest rate spreads and the local stock price index were both up during January through March. Consumer confidence has taken a dip lately, however.
We are hopeful that the LEI will continue to rise during 2011.2 suggesting a stronger fall and Christmas season. However, if we have learned anything about the LEI over the last ten years it is that it is fickle and dependent on swings that can be substantial from one month to the next.
Stock Price Index
We had some data collection issues for the local stock index this quarter that we hope to fix by 2011.2. Please stay tuned for this one.
The Bottom Line, Locally
The rekindling of inflation, combined with the decline in unemployment seems to suggest that the local economy may have turned the corner towards gaining strength as we move into the middle of 2011. The strength of the LEI during 2011.1 recommends that the remainder of the year should provide further improvement. However, the optimism needs to be tempered by the European debt crisis, high oil and gasoline prices, continued unemployment well above full employment, and political unrest throughout the developing world. We believe that a positive stance is more warranted than it has been since early 2008 and we expect more positive news in LEIPLINE nineteen.