This is the nineteenth 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
In the 2011.1 LEIPLINE we reported that the real GDP growth rate was 1.8% for the quarter and that as a consequence it appeared that growth had slowed. However, we could not be aware at that point just how much growth had slowed. The 2011.1 growth rate originally reported was changed by a major amount downward (with virtually no fanfare or media attention) from 1.8% to 0.4% when the 1.3% growth initial estimates for 2011.2 were released. This morning the BLS announced the first revisions for the second quarter of 2011, which were downgraded as well to 1.0% growth (leaving the 2011.1 alone). While the magnitudes of the last two quarters’ of 2010 real GDP growth were within the normal range that economists prefer during the growth phase of the business cycle, now two weak quarters in 2011 suggest that the recovery is faltering. The economy will not be capable of reducing the nearly ten percent unemployment rates without a resumption of stronger growth.
In this morning’s April announcement the BEA implied that “The increase in real GDP in the second quarter primarily reflected positive contributions from nonresidential fixed investment, exports, personal consumption expenditures (PCE), and federal government spending that were partly offset by negative contributions from state and local government spending and private inventory investment. Imports, which are a subtraction in the calculation of GDP, increased. The acceleration in real GDP in the second quarter primarily reflected a deceleration in imports, an upturn in federal government spending, and an acceleration in nonresidential fixed investment that were partly offset by decelerations in PCE and in exports and a downturn in private inventory investment.” (www.bea.gov/newsreleases/national/gdp/gdpnewsrelease.htm).
Not surprisingly, despite all of the rhetoric associated with the completion of the discussions to raise the debt ceiling, the federal government spending surged in the second quarter. The need to raise the ceiling derived from continued spending by the legislative branch to fund national, state, and local projects for both political and stimulus reasons. It is also not shocking that state and local government spending was down as politicians at these levels perceived the public’s unwillingness to pay additional taxes and revenues continue to dry up due to reduced: incomes, tourism, construction, and consumption. Business firms are still reluctant to invest given the malaise of consumer spending and the housing markets are still at best creeping upward. There have now been eight consecutive quarters of growth despite the unemployment rate continuing to remain at or above 9% nationally, but nowhere near the growth necessary for unemployment relief.
Since little has really changed from what we reported in last quarter’s LEIPLINE we include much the same verbiage here. Given the escalation of oil prices earlier in the year and the continuing (although improving) unrest in the Middle East, inflation has continued to escalate, at least in the aggregate CPI. Year-on-year comparisons of annual inflation are now over 3.6%, but annualized inflation for just the first seven months of 2011 are over 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 consumer inflation was 4.6% and escalating (i.e., through July 2008). Fortunately, oil prices have started downward again in the last couple of months 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 flat official unemployment rates nationally through July likely reflect the weakness in growth in the first two quarters of 2011. These rates that are widely distributed are identified as U-3 in the table below which comes from the www.bls.gov website. With the exception of March 2011 the values seem stuck in the low 9% range. However, the broader measure, U-6, which takes into account discouraged workers, those marginally connected to the labor force, and those working part-time who would rather be full time; reveals a great deal about the total picture. An upward trend continues in this measure of unemployment since March (and actually although not pictured, before that) suggesting that a more complete picture of unemployment is weaker than the official numbers imply.
What Does It All Mean?
The US economy continues in a malaise that has now continued unabated since the recession ended in June 2009. Unfortunately, it is hard to ignore the parallels with the Japanese economy starting in 1990 and continuing until this day. Each country’s government has extensively employed traditional demand side policy initiatives: quantitative easing, which is just another name for expansionary monetary policy; and government stimulus programs, which are nothing more than expansionary fiscal policy. Neither has been effective in either country. The current weakness as well as the “great recession” began and continue on the supply side of the economy. Until the private sector business entities are either stimulated (lower taxes, reduced burdensome regulation, incentives for small business development) or decide on their own (like the CEO of Starbucks) to grow their businesses and increase employment, the US and European economies will continue to stagnate. It has already continued in Japan this way for almost 22 years! We do not think that the citizenry of the United States want to emulate the Japanese in this regard!
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 2011.2 Jacksonville CPI
For the second quarter in a row, the local CPI was just over one full percent higher at the end of the second quarter of 2011 than it was at the end of the first quarter. This translates into a 4.49% annualize rate of increase which is higher than any full year has been since we started LEIP in 2002. July’s increase was somewhat smaller, but the inflation rate through seven months still indicates an average of over 4.35% annualized. The national equivalent to the second quarter aggregate price growth was even higher at 5.17% annualized. There is no denying that inflation has returned. Last quarter we emphasized the influence of gasoline prices in generating the price increases. In the second quarter gasoline prices moderated, but housing prices started to rise (particularly in June – carrying over to July) and other categories of goods also rose including apparel, tuition for schools and preschools, motor vehicle parts and equipment, and recreational goods.
The outlook for the third quarter of 2011 appears to suggest continued escalations in prices, although the perception that weakness has returned to the growth rate may help mitigate some of the pressure to raise prices and some of the opportunities. We underestimated the quarterly growth in inflation locally in the last LEIPLINE (we anticipated 3% but it was actually 4.2%). Inflationary expectations have very likely risen so far this year, providing opportunity for owners of raw materials and semi-finished goods to finally pass on higher costs to retailers, who in turn are passing on their higher costs to consumers. We expect this behavior to continue into 2011.3 despite the likelihood that gasoline prices will fall even further and the growing concern over the rate of output growth. In 2008, it took the major crash in the financial and housing markets to forestall the escalating inflation through the first seven months of that year. Hopefully, that outcome will not occur again in 2011, but that means additional price increases are more likely.
The unemployment rate in Jacksonville trended downward throughout the second quarter of 2011, but jumped back up slightly in July. Each of the last three months has seen local unemployment fall below the 10% level. However, this is hardly indicative of a strong and escalating recovery. In addition, both the Duval County and Jacksonville MSA unemployment rates are still some one half of one percent higher than the national average. Closer inspection of the numbers does reveal a positive trend that is stronger than the unemployment rates by themselves indicate. The local workforce has grown by about twenty thousand workers while the number employed has growth by nearly 24,000. Some of this change is due to seasonal factors, but workers are coming back to Jacksonville (or to the labor force) and finding jobs.
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 rates for both June and July 2011 were both 10.3%, yet the June adjusted rate was 9.6% and the one for July 9.7. summer of course bring high school and college students into the labor force, but fewer than normal numbers of these students found jobs.
The outlook for the third quarter of 2011 is likely to be stronger, despite the concern at the national level regarding falling growth. Consumer spending locally appears to be rising beyond just the signals from higher prices and unemployment seems entrenched below double digits. Clearly, the reestablishment of mass layoffs could derail the progress, but rising building permits, new small businesses openings and even building in the local area, may imply a more bullish attitude. There is no expectation that booming economic growth locally is around the corner, but for a few months now we have perceived that Jacksonville, having spent the recession performing significantly worse than the national average, may be rebounding somewhat faster than the average over the last several months.
Leading Indicator (LEI)
Despite the optimism just expressed above, the LEI does not support a strong rest of the year. After data revisions that are continually ongoing, the entire first quarter of 2011 revealed positive monthly increases in the local LEI totaling nearly two full points on the index. However, the second quarter numbers revealed a collective decline of 0.12 which was reinforced by a -0.92 drop (although preliminary) in July. The primary culprit in the latter number was interest rate spreads which have dipped recently, suggesting even further reduced profitability in depository institutions. The LEI works most effectively in predicting the local economy two to three months out, so the early fall may not be strong.
We are hopeful that the LEI will once again reverse itself during 2011.3 suggesting a stronger 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 are continuing to have some data collection issues for the local stock index that we hope to fix by 2011.3. Please stay tuned for this one.
The Bottom Line, Locally
The continued opportunity for businesses to pass on higher costs to consumers combined with at least stabilized 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 weakness of the LEI during 2011.2 is disconcerting, but data revisions may provide a different outcome in the coming months. With the end of hostilities in Libya on the horizon, less concern over foreign debt problems, declining oil and gasoline prices, and the debt discussion in Washington put on hold until the Congressional Committee reveals its decisions in November, we continue to believe that a positive stance is more warranted at this point than has been the case over the last four years. However, we also believe that the private business sector will have to lead the charge, not the federal government. The sooner consumers, businesses, and especially all forms of government recognize this, the better.