This is the twentieth 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. This quarter we beefed up the discussion of the national macro economy to provide a comparison for the future of the Jacksonville recovery.
The National Macro Economy
The most recent release of quarterly real GDP numbers on November 22nd, 2011 (first revision) suggested that growth during the third quarter was at 2.0% (after the initial estimates were at 2.5%). This means that so far in 2011 real GDP growth has consistently been below the historic trend rate of GDP growth over the last three decades. In the 2011.2 LEIPLINE we reported that the real GDP growth rate was 1.8% for the first quarter initially, concluding that it appeared that growth had slowed from 2010.4. However, we could not be aware at that point just how much growth had slowed. The 2011.1 growth rate originally reported was reduced (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. The second release of the 2011.2 value was lowered from the original estimate of 1.3% to 1.0% growth, but then raised back in November. If the 2011.3 value stays the same or rises, then the growth rate it implies is better than the first two quarters, but Okun’s Law suggests that it takes about 5% annual growth in real GDP to lower unemployment by one percent, so the current growth rate is still far from enough.
The November release of the 2011.3 data implied that “The increase in real GDP in the third quarter primarily reflected positive contributions from personal consumption expenditures (PCE), nonresidential fixed investment, exports, and federal government spending that were partly offset by negative contributions from private inventory investment and state and local government spending. Imports, which are a subtraction in the calculation of GDP, increased. The acceleration in real GDP in the third quarter primarily reflected accelerations in PCE and in nonresidential fixed investment, a smaller decrease in state and local government spending, a deceleration in imports, and an acceleration in exports that were partly offset by a larger decrease in private inventory investment.” (bea.gov).
1.16 Real Gross Domestic Product, Chained Dollars Table [pdf]
This quarter we decided to go back to including the BEA table for the components of real GDP (2005 chain-weighted dollars) to show where we are relative to 2007.4 when the recession began. As one can readily see from the bolded categories in the table, 2011.3 was the first quarter whereby the real GDP adjusted for inflation was above what it was in 2007.4. Consequently, although growth resumed in 2009.3, actual real output is only now above what it was in 2007. When you translate this for population growth, however, our standard of living on a per-capita basis has still not returned to 2007.4 levels. This is just part of the reason why it does not feel like the recession is really over. The largest factor inhibiting growth is clearly the lack of investment and most of that is due to the $200 billion decline in residential investment. However, as the red row reveals, there has also been an $80 billion reduction in state and local government spending that has contributed significantly.
One of the primary factors allowing growth to return is a decline in net imports (i.e., while imports and exports have both grown, exports have grown by more, so the net effect is advantageous). A $60 billion increase in federal government spending has contributed as well. It is revealing that despite the over $1 trillion dollars of stimulus from the Federal Government, the direct contributions to real GDP are so small. Ultimately, despite a return to growth two years ago, the expansion is simply too slow to make us feel that we are better off. A recent Federal Reserve Bank article suggests that the primary reason why unemployment has failed to recover is not associated with any structural shifts, but simply real GDP growth that is too slow.
Last quarter we directed you towards Table A-15 on the BLS website to view more than the standard unemployment rate. Another quarter’s worth of data suggests that the U-3 standard rate fell one tenth to 9.0% and the U-6 broadest rate fell to 16.2% in October after hitting 16.5% in September. These are still double what would be considered full employment and disadvantageous. It is not the most astute of observations, but Americans will not feel like we are truly recovering until unemployment drops considerably. What is necessary at this point is for the private sector to gain the confidence to hire extensively again; and that will not happen until American business entities receive some signals of normalcy from consumers and the federal and state governments that taxes, entitlements, and political turmoil are cleared up.
Inflation rates have declined as we are approaching the end of 2011. The 0.1 drop in the inflation rate reflected declining gasoline prices despite oil prices returning to a pattern approaching $100 per barrel. Food price increases also moderated. The continued debt issues throughout the world have dampened growth prospects and price leaders have returned to greater reluctance to attempt price increases across the board. The reader should also be advised that despite all of the fiscal stimuli monetizing the debt, and separate monetary stimuli by the Federal Reserve, the real M2 money supply is not growing as rapidly as historical norms. The largest banks and other financial intermediaries that are receiving loanable funds by selling securities to the FED are simply holding those funds in reserves at the FED. This prevents extensive money growth and consequently mitigated significant inflation.
What Does It All Mean?
We reiterate what we said last quarter, because it still is our opinion. 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 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 2011.3 Jacksonville CPI
The third quarter local CPI numbers revealed an outcome that has been prevalent for three of the last four years – a decline in the growth rate of inflation during the third quarter. In fact, if October numbers are included, the inflation rate for the last three months has been virtually zero. One cannot help but notice the eerie similarity of the 2011 CPI numbers to those of 2008. However, there do not appear to be any domestic bubbles on the horizon so we do not believe that this evidence is a precursor of another recession. It is difficult to rule out another recession, however, if the European debt crisis spreads or worsens in Greece or Italy. What is clear, is that after local producers took advantage of opportunities to raise prices in the early part of the year as the result of rising gasoline prices and pent-up consumer demand for durables to replenish what they chose not to buy over the preceding three years, those opportunities have passed.
The outlook for the fourth quarter of 2011 appears to suggest continued escalations in prices, but likely at very low levels. Discounting during the Christmas season will likely keep gift-product prices relatively low and food prices have moderated as harvests have not been severely damaged by weather issues. Housing prices continue to fall due to weak demand relative to normal markets which also dampens inflation. The key, like has been the case for at least the last five years, is what happens to oil and gasoline prices. Oil prices have returned to growth as pundits emphasize continued recovery throughout the world. However, the reality is that oil prices are considerably larger than they would be without commodity speculation that is driving these financial markets. If legislation or market forces reduce oil price speculation, oil and gasoline prices will fall considerably, but we do not see that on the horizon, if for no other reason, weak housing markets have eliminated this alternative source of hedging for large financial intermediaries and corporations.
Two of the three months during 2011.3 revealed unemployment rates below double digits with the seasonally adjusted rate for September at 9.91%. October’s unemployment rate fell further to 9.83% after adjustment for seasonality. Duval County unemployment is naturally dominant in the MSA figures, and it has only been below double digits once in 2011 and was at 10.13% in October. It comes as no surprise to anyone that unemployment is foremost on the minds of local residents as we move into the end of 2011.
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 September was still at 10.0%, yet the seasonally adjusted value was below 10. History shows us that the psychological double-digit barrier for unemployment is an important one. Evidence suggests that it is easier to lower unemployment rates once they stay below 10% than when they stay above that level. A sizable downward trend for just a few months may be the impetus for the private sector to start hiring in anticipation of enhanced consumer demand.
The outlook for the fourth quarter of 2011 for unemployment is very much dependent on the Christmas season. Early sales data are not particularly robust with many shoppers in the stores and online, but most making fewer and smaller purchases. This is not surprising given the continued uncertainty about employment and the still elevated new claims for unemployment insurance locally, but what will be more revealing is how many post-Xmas layoffs occur in late December and early January. We are not confident that 2011.4 data will show much improvement in unemployment, but the goal of staying below 10% may be achievable in the short run.
Leading Indicator (LEI)
After beginning 2011.3 on a down note in July, the LEI has been up for three months in a row. Cumulatively for August, September, and October, the LEI was up over 1.3 points. However, for comparison purposes, the national LEI was up almost 5 points for the same time period and the same scale. Since the local LEI projects most effectively three to five months ahead, the end of the year may turn out to be better than anticipated. Money growth has been one of the most stable indicators of the positive outcome for the LEI and in the most recent months the stock price index has contributed favorably as well. However, building permits are mired near their all-time low and new claims for unemployment insurance are way above historical norms. Consumer confidence is in the low 60s, which is way below the levels that are most desirable.
We are hopeful that the LEI will continue its strength for the rest of 2011. 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
With considerable work by Lisa Schmid we now have the stock price index back up and we encourage you to view it on the webpage. Both our local headquarters and local presence stocks are well below the DOW, but they both made up ground in October. It is clearly evident that our local stocks are mirroring the DOW’s ups and downs without distinguishing themselves particularly. Once again, a strong local Christmas season would cure a lot of ills in local stocks, which in turn could enhance hiring and the performance of the LEI. The data do not necessarily suggest this, but we are hopeful that local stocks will perform well for the rest of 2011.
The Bottom Line, Locally
The third quarter evidence continues to reflect a local economy that is treading water without definitive trends in any of the indicators. The most recent unemployment data reveal that we have broken the 10% barrier on the good side, but not that we have done so for good (recall that May, June, and July fell below 10% and then August returned to double-digit levels). It has actually been rare for the LEI to have three consecutive months of positive movement (it has only happened twice before the recent quarter, earlier in 2011 and in 2009, since 2003) so having August, September, and October positive is a good sign. However, the weakening of price increases, while advantageous for purchasing power, suggests that the business sector is still constrained in their ability to pass on cost increases. This constrains output growth and hiring motivations. With local stocks still well below the DOW as a whole, the relative local weakness still persists. Our local economy continues to be dominated by financial services and other service related industries. Until consumers regain the confidence to increase spending, local businesses will be reluctant to hire to further fuel consumer optimism. Standing most in the way is uncertainty in Washington that translate political gridlock into economic gridlock everywhere.
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