This is the twenty-first 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 continue with a brief 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 February 29, 2012 (second revision) suggested that growth during the fourth quarter was at 3.0% (after the initial estimates were at 2.8%). This means that for all of 2011 real GDP growth was an anemic 1.7%, which is in the neighborhood of one full percentage point below the historic trend rate of real GDP growth over the last three decades. By historical comparisons, it is actually surprising that unemployment fell even after seasonal adjustment during 2011.4 given the very low real GDP advances.
The February release of the 2011.4 data implied that “The increase in real GDP in the fourth quarter reflected positive contributions from private inventory investment, personal consumption expenditures (PCE), exports, nonresidential fixed investment, and residential 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 acceleration in real GDP in the fourth quarter primarily reflected an upturn in private inventory investment and accelerations in PCE and in residential fixed investment that were partly offset by a deceleration in nonresidential fixed investment, a downturn in federal government spending, an
acceleration in imports, and a larger decrease in state and local government spending.” (bea.gov/newsreleases/national/gdp/gdpnewsrelease.htm
The Federal Reserve is definitely concerned about the slow real GDP growth and the causes of fourth quarter acceleration. Dr. Mason provides insight for the directors of the Jacksonville Branch of the Atlanta Federal Reserve through questions provided by the FED. The first question this month was about whether “nonresidential fixed investment,” which was clearly being driven by inventories, was accumulated by businesses in planning for future sales, or rather was a reflection of lagging sales that implied large quantities of leftover product. If the former is true then the economy can expect further expansion, but if the latter is true it is yet another sign of continued weakness. Distinguishing between the two is not possible without extensive proprietary business data, so we will leave it to the readers to infer regarding their own professional circumstances.
It is clear from the quoted paragraph above that the two primary drags on accelerating growth at this point are expanding imports (still dominated by oil, which becomes a bigger negative effect as oil prices rise) and the declines in federal, state, and local government employment. We may be biased, but we believe that state and especially local government employment is being pushed below maximum efficiency levels by political maneuvering and reelection pressures on public officials. The consequences of these movements are likely to be in the long term as schools perform less effectively and infrastructure is allowed to deteriorate. We hold no such views relative to federal government spending. However, it is inescapable that if employment falls among federal government workers that cannot find work in the private sector, the economy will grow less rapidly and unemployment will rise. This is a legitimate concern especially relative to retiring or departing military personnel. Conversely, it is almost a certainty that employees departing federal government service that find employment in the private sector will be a bigger stimulus to the aggregate economy than what is lost from their previous employment (from the repatriated spending from overseas among the military and the increased domestic production as opposed to government regulation and bureaucracy domestically).
There has been considerable discussion in the media about the significance of the decline in unemployment to 8.3% in December 2011. Supporters of the president take credit for this decline from just over double digits in October 2009, while Republicans emphasize looking behind this average number to where the declines in unemployment derive. Without taking political sides we want to point out some realities of the declining unemployment. Looking at demographic characteristics, declines in unemployment occurred universally except for 16 and 17 year olds. This was true for both genders. Married or not did not seem to matter. The unemployment rate for whites fell from 7.9% in September 2011 to 7.4% in January 2012, with the rate falling for African Americans (identified as blacks) as well, but from 15.9% to 13.6%. However, as has been mentioned infrequently, the labor forces for the races identified in the BLS tables over the same time period, fell by 1.1 million for white workers, but rose by just over 100,000 for African American workers. The unemployment rate among black teenagers actually rose from 14.6% to 15.2% during the fourth quarter and through January 2012. Around 58% of those unemployed have been in that unfortunate position for 15 weeks or longer with four-fifths of those unemployed for 27 weeks or more. Finally, it is instructive to note that despite all of the political claims, government sector employment has fallen by 276,000 workers, or two tenths of one percent. Most of these have either been affiliated with the U.S. Postal Service or were state or local government workers. The government can claim they are creating jobs, but they are destroying them. The private sector is creating the jobs!
The table that we find most useful in gauging the overall implications of unemployment changes is Table A-15 which is easiest to find at www.bls.gov
by employing the search engine internal to the BLS site for “A-15” (and is difficult to extract otherwise). While the U-3 unemployment rate (the official unemployment rate) fell by 0.7 from September 2011 to January 2012, the U-6, broadest rate fell from 16.4% to 15.1% over the same time period. U-6 includes those who work part-time or are marginally attached to the labor force without wanting to be in that situation. U-5 measures discouraged workers and this percentage fell slightly less than the U-3 rate from 10.5% to 9.9%. So, the Republicans are right that some of the decline in the official unemployment rate is due to a smaller rate of decline in discouraged workers, but the Democrats are right that all categories have declined – but along with the entire labor force. The numbers we just quoted have been adjusted for seasonality, but the bottom line is that all of them are much higher than what would be construed to be full employment and we have a long way to go to return to a stable labor market to maximize economic growth.
As has been the case for three of the last four years (the exception being 2009), inflation rates moderated in the second half of the years compared to the firsts. For the entire fourth quarter of 2011 prices rose by a very small rate of one tenth of one percent. This outcome is misleading, however. Housing makes up around 40% of the CPI weighting and the housing component has revealed declining inflation rates since 2008. A paper that is presently in the works within our department suggests that inflation rates would have been 3.5% higher by the end of 2011 than those reported nationally without the housing component, and over 6% higher locally without housing. While some of these differences reflect declining prices in household furnishing, household operations, etc., most of it is falling property and housing values (reflected nationally in declining owner rents of primary residences and rents and locally in lower housing prices, rents, and condo prices). For most homeowners, the declining housing values have reduced their perceived wealth and likely constrained their consumption, but they do not influence their costs for housing. Most people do not perceive this influence, rather concentrating on the higher prices in the grocery store, department stores, and for consumer durables and non-durables. While inflation statistically has been muted (amounting to 3% nationally and 2.43% locally for all of 2011), the reality is that consumer perceptions of the influences of inflation are much higher.
What Does It All Mean?
GDP continues to grow, but far more slowly than would be necessary to quickly bring back full employment. Unemployment is declining (despite the concerns about discouraged workers and those forced to only work part-time), but it is still three to four percent higher than what would be considered full employment. Inflation statistics reveal moderate to low levels of inflation, but those numbers are not without issues regarding housing implications and concealed price increases that are hidden within the aggregate numbers. We reiterate what we said the last two quarters. The US economy continues to grow far too slowly to remove us from the malaise that has now continued unabated since the recession ended in June 2009. We continue to draw parallels with the Japanese economy starting in 1990 and ongoing 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 (which may finally be happened despite government interference), 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 2011.4 Jacksonville CPI
The fourth quarter local CPI numbers continued the trend from the third quarter with further declines in the rate of inflation. Despite a moderate uptick in prices in December; for the quarter prices were nearly two percent lower at the end of the year than they were at the end of the third quarter. January continued that trend with prices falling by an annualized amount of 4.6% more, despite the beginnings of escalating oil prices and continued advances in food prices. The non-core (food and energy) trend was definitively upward, but these increases were counterbalanced by the negative effects of the housing component of the index. For all of 2011, prices locally rose by 2.43% after seasonal adjustments, higher than any year in recent past. What we mentioned last quarter still appears to be true. After local producers took advantage of opportunities to raise prices in the early part of 2011 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, the second half of the year reinforced the impact of the recession on both consumer demand and producer risk aversion.
The outlook for the first quarter of 2012 very much depends on the European debt crisis and election year policy decisions. The rise in gasoline and oil prices that have escalated thus far in January and February will correlate with higher general levels of prices, particularly if the housing markets no longer bring the CPI down like they have since, at a minimum, 2008. We continue to be flabbergasted by the audacity of oil producers, and particularly oil speculators, to bid up oil and gasoline prices with relative impunity in concerted efforts to put short term profits above long range harm to the world economy. What is more frustrating (but not surprising) is that political leaders are unwilling to constrain the speculative behavior.
The fourth quarter of 2011 was the first quarter that the local unemployment rate was entirely below the 10% level since 2009.1. After adjustment for seasonality, the unemployment rates during the quarter fell from 9.88% to 9.52% then rose slightly back to 9.58% in December. January 2012 estimates of unemployment will not come out until early March, so we can only speculate that there will be a slight improvement given the counterbalancing effects of post-Christmas layoffs and the seasonality adjustments that routinely occur in January. Duval County unemployment fell below 9% in December for the first time since December of 2008, but up until that point Duval County had double digit unemployment every month with the exception of May 2011, since April of 2009.
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 fell to 9.2%, but was adjusted upward for seasonality to 9.58% due to the natural growth of employment during the Christmas season. We suspect that unlike the end of 2010, the local post-Christmas layoffs occurred in January 2012 instead of December 2011, so the upcoming unemployment figures may not be as positive as many may suspect.
The outlook for the first quarter of 2012 is hopeful that unemployment will continue to decline. Consumer spending has been up so far this year and businesses seem more optimist regarding sales later in 2012. However, much of the increase has been in manufacturing nationwide, which is not the primary business component in the Jacksonville MSA, and exports to more rapidly growing countries worldwide may be slowed by the European weakness outside of Germany. With the trade sector becoming a more significant component of employment in our area, and the continued reductions in local and state government spending, the expansion of local employment may not be as sizable as some might expect. Last quarter we anticipated that the goal of staying below 10% may be achievable in the short run, but the longer term is cloudy given the slower than hoped local and domestic recovery; and particularly the problems in Europe.
Leading Indicator (LEI)
The fourth quarter movement in the LEI was over one point upward, despite a pretty sizeable drop in December. In particular, the November jump in the LEI was the largest single monthly increase since February 2009 and the second largest since we started LEIP in 2001. For one of the first times ever, the LEI was up for four months in a row from August through November 2011. However, for comparison purposes, the national LEI was up almost 5 points for the same time period and the same scale. Building permits took a big positive jump in November, but then fell back down to the very low levels of recent years in December. January building permits were also weak. Consumer confidence returned into the low 70 range in December, and to 77 in January, both of which are positive signs for growth in 2012.
We are hopeful that the LEI will continue its strength for the rest of 2012. At this point, as has been the case for all of the LEIP time period, housing growth and recovery is the primary driver of the LEI and most macroeconomic variables. Until housing returns to some level of normalcy, the swings in the LEI will continue despite increased optimism from consumers and business entities.
Stock Price Index
Local Headquarters stocks continued to perform better than local presence stocks in the Jacksonville MSA, and the former were actually up all three months of 2011.4. However, while October was very good for both components, December was very good for the local presence stocks and only moderate for local headquarters stocks. Both our local headquarters and local presence stocks are well below the DOW still, but they both made up ground in 2011.4. It is clearly evident that our local stocks are mirroring the DOW’s ups and downs without distinguishing themselves particularly. January was another positive month for both types of firms’ stocks, but this simply mirrored the general rise in the DOW. With financial and service firms dominating our local employment sector, the manufacturing spurt may suggest that local firms may not do as well as the national markets as a whole.
The Bottom Line, Locally
The fourth quarter evidence perhaps is providing positive recognition that the recovery is finally gaining traction in the local area. With unemployment staying below double digits, the LEI rising, local stocks gaining momentum, and moderate price increases, we are more optimist at this point than any time since 2007. The flies in the ointment at this point are the European weakness and potential broad recessions, the continuing concerns over the housing markets, and the escalating oil prices. Consumer spending is recovering and local firms are advertising more positions and hiring more. We are nowhere near the cyclical peak at this point, but we seem to have left the recessionary trough behind several months back. We are hopeful that three months from now we will be able to provide even more positive news.
THANKS TO THOSE OF YOU THAT NOTIFIED ME LAST QUARTER THAT YOU ARE READING OUR REPORTS. IF THERE ARE OTHERS OF YOU THAT ARE READING THIS AND HAVE A MINUTE TO LET US KNOW, PLEASE EMAIL DR. MASON ATpmason@unf.edu