LEIPLINE Newsletter - May 2012

The Jacksonville Economy in the First Quarter of 2012

Introduction


This is the twenty-second installment of the LEIPLINE. Our primary focus continues to be the four variables for which we collect data and the implications of those data for the Jacksonville MSA overall. We begin, once again, with a brief discussion of the national macro economy. The numbers are generally improving, but the European crisis continues to promote caution in any optimism relative to the rest of 2012 and 2013.
 

The National Macro Economy


The most recent release of quarterly real GDP numbers on April 27, 2012 (first estimate) revealed that real GDP growth dropped to 2.2% from the revised fourth quarter value of 3.0%. Clearly, economists and government officials were hopeful of more substantial growth so that an acceleration of output expansion could be perceived. However, the evidence is clear that the rate of growth was actually slowed primarily by cuts in government spending (particularly at the state and local level, but compounded by federal government funding declines) and increases in net imports. For all of 2011 real GDP growth was eight tenths to 1.3% below traditionally desired levels in expansion, and well below the 5% that historically would have been necessary to reduce unemployment significantly; at an anemic 1.7%. As we mentioned last quarter, 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 April release of the 2012.1 data implied that “the increase in real GDP in the first quarter primarily reflected positive contributions from personal consumption expenditures (PCE), exports, private inventory investment, and residential fixed investment that were partly offset by negative contributions from federal government spending, nonresidential fixed investment, 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 deceleration in private inventory investment and a downturn in nonresidential fixed investment that were partly offset by accelerations in PCE and in exports.” Read Article

Last quarter we revealed that the Federal Reserve is definitely concerned about the slow real GDP growth and the causes of fourth quarter deceleration (Dr. Mason provides insight for the directors of the Jacksonville Branch of the Atlanta Federal Reserve through questions provided by the FED). Virtually all of the questions in the May FED query were about capital investment by firms in the local area. In aggregate, investment is the most volatile component in GDP. But recently, structure investment has been very weak and has dragged down overall growth (see line 10 in the Table below). Firms locally and nationally are still reluctant to expand capacity given the political and global uncertainty, and growth of output and employment is suffering as a result.

 

Table 1.1.1. Percent Change From Preceding Period in Real Gross Domestic Product
[Percent] Seasonally adjusted at annual rates
Last Revised on: April 27, 2012 - Next Release Date May 31, 2012  

 

Line  

  Description    

2010 

I 

2010 

II 

2010 

III 

2010 

IV 

2011 

I 

2011 

II 

2011 

III 

2011 

IV 

2012 

I 

1

Gross domestic product

3.9

3.8

2.5

2.3

0.4

1.3

1.8

3.0

2.2

2

Personal consumption expenditures

2.7

2.9

2.6

3.6

2.1

0.7

1.7

2.1

2.9

3

Goods

6.4

3.8

4.8

8.3

4.7

-1.6

1.4

5.4

6.2

4

Durable goods

9.9

7.8

8.8

17.2

11.7

-5.3

5.7

16.1

15.3

5

Nondurable goods

4.8

1.9

3.0

4.3

1.6

0.2

-0.5

0.8

2.1

6

Services

1.0

2.5

1.6

1.3

0.8

1.9

1.9

0.4

1.2

7

Gross private domestic investment

31.5

26.4

9.2

-7.1

3.8

6.4

1.3

22.1

6.0

8

Fixed investment

1.2

19.5

2.3

7.5

1.2

9.2

13.0

6.3

1.4

9

Nonresidential

6.0

18.6

11.3

8.7

2.1

10.3

15.7

5.2

-2.1

10

Structures

-24.7

7.5

4.2

10.5

-14.3

22.6

14.4

-0.9

-12.0

11

Equipment and software

21.7

23.2

14.1

8.1

8.7

6.2

16.2

7.5

1.7

12

Residential

-15.3

22.8

-27.7

2.5

-2.4

4.2

1.3

11.6

19.1

13

Change in private inventories

---

---

---

---

---

---

---

---

---

14

Net exports of goods and services

---

---

---

---

---

---

---

---

---

15

Exports

7.2

10.0

10.0

7.8

7.9

3.6

4.7

2.7

5.4

16

Goods

12.1

11.8

8.9

9.2

10.6

2.5

5.0

3.6

4.1

17

Services

-2.7

6.1

12.6

4.7

1.7

6.2

4.0

0.4

8.6

18

Imports

12.5

21.6

12.3

-2.3

8.3

1.4

1.2

3.7

4.3

19

Goods

14.4

26.0

12.4

-0.5

9.5

1.6

0.5

3.3

3.0

20

Services

4.6

3.3

11.6

-10.4

2.2

0.4

4.8

5.6

11.0

21

Government consumption expenditures and gross investment

-1.2

3.7

1.0

-2.8

-5.9

-0.9

-0.1

-4.2

-3.0

22

Federal

2.8

8.8

3.2

-3.0

-9.4

1.9

2.1

-6.9

-5.6

23

National defense

0.5

6.0

5.7

-5.9

-12.6

7.0

5.0

-12.1

-8.1

24

Nondefense

7.8

14.7

-1.8

3.1

-2.7

-7.6

-3.8

4.5

-0.6

25

State and local

-3.9

0.4

-0.5

-2.7

-3.4

-2.8

-1.6

-2.2

-1.2

 

Addendum:

 

 

 

 

 

 

 

 

 

26

Gross domestic product, current dollars

5.5

5.4

3.9

4.2

3.1

4.0

4.4

3.8

3.8


 

A January 2012 article in CNNMoney indicated that states and local governments shed a quarter of a million jobs in 2011 and that almost 660,000 state and local government jobs have been lost since mid-2008. The latter number of jobs added back to the ranks of the employed would cut the unemployment rate nationwide by four tenths of one percent to 7.7%. The Table above reveals this in line 25, with every quarter but one since 2010.1 indicating this decline in state and local government spending overall. As we noted last quarter, despite all of the job-growth related political claims, government sector employment has fallen over the last three years as the recovery began. This is not necessarily a bad thing if the cuts reflect true improvements in efficiency and these former employees find jobs in the private sector. However, cutting teachers from schools with classroom size mandates as we have in Florida, combined with reductions in university payrolls by instituting larger classes taught by part-time instructors instead of permanent faculty seems less than optimal. The government can claim they are becoming more efficient and creating jobs, but they may or may not be doing the former, and they are clearly destroying jobs in aggregate. The private sector is not only the primary source for job creation presently, but this is generally the case relative to long-lasting and superior jobs!

Inflation remains muted due to slower than preferred growth combined with reluctance on the part of producers to try to pass on higher prices for fear of loss of market share to competitors. The automobile industry is growing again and car sales have been brisk (both used and new), but prices have not risen much and when they do they tend to fall back the very next month. Food prices have grown very little so far in 2012 and while gasoline prices rose in January through early March, they have finally trended downward during the last six weeks or so. In the last two months the housing market has rebounded some with prices and sales rising. Housing drove real GDP growth in the 2002-06 time periods. Nobody anticipates similar growth in the near future (or likely prefers it given the bubble effects that decimated the economy), but positive movement in this sector could go a long way towards improving household wealth and motivations by consumers to spend, and employers to hire. Thereafter we will see rising prices, rising interest rates (both real and nominal), and hopefully, rising output growth.



What Does It All Mean?


With GDP growth still below desired levels, unemployment rates nearly double full employment values, and inflation barely rising, the expected path would seem to be continued slow recovery with excessive unemployment. However, we are moving in the right direction in virtually every important economic category. Economists clearly recognize that there will always be swings in the business cycle between recession and recovery. We would all prefer that the downturns be shallow and short and the expansions rapid and lengthy, but economic conditions are fickle. The U.S. economy seems to be recovering, but the overlying cloud concealing the silver lining is the European debt crisis and especially the condition of Greece’s continued inclusion in the EU. If Greece withdraws from the EU they will likely soon thereafter default on large shares of their debt. This would have a substantial negative impact on foreign governments and both domestic and foreign banks that hold much of this debt. If Greece is successful in withdrawing and writing off their debt without substantial penalties, what will prevent Spain, Italy, and others from following suit? Fifty to one hundred years ago, the U.S. economy could recover in isolation from economic conditions in other countries, but we no longer have that ability or the luxury. Keep your eyes on the EU for determination as to whether we can leave the “Great Recession” behind, or we have to prepare for GRII! 

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 2012.1 Jacksonville CPI


The local first quarter CPI numbers suggested virtually flat growth in prices in aggregate. Food prices have grown only very slightly and even the normally volatile apparel prices have not changed much. Gasoline drove most of the increases in prices during January and February, with housing taking over in March and April. Due to increases in prices (rents) and sales (rentals) of single family, multi-family, manufactured, and rental homes and apartments all increased in both months. March implied a 9% growth rate and April 7% more. Yet despite this driver, overall prices were only four tenths of a percent higher in April than in January on an annual basis. At the national level this increase was nine tenths, so Jacksonville is back in its familiar place, generating less inflation than the national average. In addition, this is despite local gasoline prices remaining above the national average for the last year, which has not been normal historically. Automobile prices have bounced up and down with new cars up one month and down the next, and used cars off one month, but doing the same thing.

The outlook for the second quarter of 2012 may depend even more on the European debt crisis and election year policy decisions than we hinted at last quarter. Last quarter we also expressed our frustration with oil and gasoline markets and their indifference to the impacts on global economic growth. I doubt that they listened to us, but market forces have made it more difficult for the continuation of price gouging by OPEC with the support of hedge funds and other non-oil producers. If the Greek problem is resolved without their withdrawal from the EU, then look for increasing prices in anticipation of improvements in consumer confidence, business confidence, and economic growth. If Greece withdraws, the EU will no doubt sink further into recession, other countries may follow Greece’s lead, and financial and non-financial markets will suffer further declines.

Unemployment


The end of the first quarter of 2012 and April 2012 represent the first time that the Jacksonville MSA came close to going below the national unemployment rate since May 2008! We have significant hope that in May and June we will drop below the national unemployment rate for an extended period, taking us back to where we were with only one month of exception before May 2008. Duval County unemployment fell below 9% in March and April for the first two consecutive months since December, 2008 and January 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 April fell to 7.9%, but was adjusted upward for seasonality to 8.1% to match the national number for that month.
The outlook for the second quarter of 2012 is hopeful that unemployment will continue to decline. The local private sector advertising for jobs is up and we are not aware of any major layoffs planned locally. Although most of the decline in unemployment is closely matched with the growth in employment, the workforce locally has declined, so either members of the workforce are leaving town, retiring, or departing the employment sector in excess of the new entrants. The psychological influences of declining unemployment should not be overlooked in evaluating future trends. More hiring begets more confidence in future growth, which spreads to other employers and enhances growth. However, given the employment distribution in Jacksonville, and the dominance in that spectrum of the school districts, universities, and the remainder of the public sector; continued workforce reductions in state and local government workers can offset the benefits in the private sector.
 

Leading Indicator (LEI)


The first quarter movement in the LEI was over two and one half points upward, despite a pretty sizeable drop in February. January and March alone increased the LEI by over 3 points. April numbers are still very preliminary, and could be reversed, but April added another three tenths to the LEI. While local stocks rode the growth of the stock markets as a whole, an unexpected boost came from building permits that were up from the mediocre 200 per month levels throughout most of the last four years to over 600 in March. Initial estimates suggest that April saw sizable building permits as well. Consumer confidence is still not very strong, but so far this year it is up a little. The national components that influence the LEIP LEI in this same direction are the real M2 money supply and vendor deliveries. Work hours in manufacturing are also up to over 41 hours per week, although the impact of this component is not as important for the local area as it is nationally.

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. If housing has returned to some level of normalcy, the LEI may start rising more consistently and the outlook will improve as a result.
 

Stock Price Index


Local stocks were up by a sizable amount through March. Local headquarters stocks were up nearly 14% since December 2011 and local presence stocks were up 5.8% for the same time period. However, the recent dip in financial markets due to the European debt issues reduced local stock growth as well. As mentioned several times above, the Greek situation will influence financial markets throughout the world, including trading in our local companies. Our local stocks have underperformed the entire market for the last three years collectively, so they are in danger of being affected even more adversely than the national stocks as a whole if the Greek crisis implies departure from the EU and the impacts spread. 

The Bottom Line, Locally


Since the first LEIPLINE came out in early 2007, and the Great Recession started less than a year later, there has not been much evidence to recommend optimism during the LEIPLINE run. However, with the caveats already emphasized regarding the European issues withstanding, we are more optimistic about the local economy than we have been for quite some time. Hopefully that optimism is not misplaced.