LEIPLINE Newsletter - September 2012

The Jacksonville Economy in the Second Quarter of 2012

Introduction


This is the twenty-third 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, as usual, with a brief discussion of the national macro economy. The data both nationally and locally continue to suggest great uncertainty about issues yet to be settled about the next 18 months. In question domestically are the presidential election, which party will control the Congress, and what will happen to Obamacare, Social Security, Medicare, welfare, and the tax system. Internationally, there is uncertainty about the European debt crisis, Syria, Iran, and the commitments of large world corporations to globalization in both sales and employment. 

The National Macro Economy


The most recent release of quarterly real GDP numbers on August 29, 2012 (second estimate) revealed that real GDP growth dropped to 1.7% (annualized quarterly) from the revised first quarter value of 2.0%. The advanced estimates of second quarter GDP reflected 1.5% growth, so the revision identified a slight increase. Economists and government officials would have preferred more substantial growth, but the decline in the second quarter was well anticipated given the evidence from other sources like retail sales, international debt issues, inflation, and the rising unemployment rate. Once again, it is clear that the rate of growth was actually slowed primarily by cuts in state and local government spending and slow investment. Output growth continues to rise, but at slower levels than what is necessary to stimulate substantial drops in unemployment or promote inflationary pressures. In a normal growth economy, economists prefer growth between 2.5% and 3% annually. When the economy is trying to recover from weakness, double that amount historically has been necessary to cause unemployment to fall by around 1%. While real GDP growth of 1.7% does not imply recession like in much of the EU, it is insufficiently strong to produce improvements in the employment sector.

The August release of the 2012.2 data implied that “[t]he increase in real GDP in the second quarter primarily reflected positive contributions from personal consumption expenditures (PCE), exports, nonresidential fixed investment, and residential
fixed investment that were partly offset by negative contributions from private inventory investment and from state and local government spending. Imports, which are a subtraction in the calculation of GDP, increased. The deceleration in real GDP in the second quarter primarily reflected decelerations in PCE, in nonresidential fixed investment, and in residential fixed investment that were partly offset by a smaller decrease in federal government spending, an acceleration in exports, and a smaller decrease in private inventory investment.” (http://bea.gov/newsreleases/national/gdp/gdpnewsrelease.htm).

The table below reveals the percentage changes in the primary expenditure categories of real GDP. The four bolded descriptions reflect the major categories for which the components below them add up. It is evident from the data that personal consumption expenditures matched the overall growth during 2012.2, with all categories of investment growing more rapidly than that. Exports grew at a rate in excess of imports, which is a positive contributor to overall real GDP, but the balance of trade is still negative $404 billion dollars (not shown). Both Federal and state and local government spending fell by less in 2012.2 than in the previous quarter, but federal spending fell by $400 million dollars while state and local government spending fell by just over $5 billion. The recent peak in government spending was in 2010.2 at $2.619 trillion dollars, but that magnitude has dropped to $2.484 trillion as of the most recent quarter. In percent terms, this drop is almost exactly 1% of real GDP. While we support reductions in government spending that enhance efficiency, the types and magnitudes of cuts in state and local government spending – particularly in education and healthcare, may not reflect the optimal outcomes for quality or quantity of these services provided.

 

Table 1.1.1. Percent Change From Preceding Period in Real Gross Domestic Product
[Percent] Seasonally adjusted at annual rates
Last Revised on: August 29, 2012  

 

 

Line   

2010 

 I 

2010 

 II 

2010 

 III 

2010 

 IV 

2011 

 I 

2011 

 II 

2011 

 III 

2011 

 IV 

2012 

 I 

2012 

 II 

1

Gross domestic product

2.3

2.2

2.6

2.4

0.1

2.5

1.3

4.1

2.0

1.7

2

Personal consumption expenditures 

2.5

2.6

2.5

4.1

3.1

1.0

1.7

2.0

2.4

1.7

3

Goods

5.2

3.3

3.8

7.9

5.4

-1.0

1.4

5.4

4.7

0.4

4

Durable goods

5.5

10.5

7.2

15.2

7.3

-2.3

5.4

13.9

11.5

0.0

5

Nondurable goods

5.1

0.1

2.2

4.5

4.6

-0.3

-0.4

1.8

1.6

0.5

6

Services

1.2

2.3

1.9

2.3

2.0

1.9

1.8

0.3

1.3

2.4

7

Gross private domestic investment 

19.8

14.6

16.4

-5.9

-5.3

12.5

5.9

33.9

6.1

3.0

8

Fixed investment

-0.9

14.5

-1.0

7.6

-1.3

12.4

15.5

10.0

9.8

5.1

9

Nonresidential

2.1

12.3

7.7

9.2

-1.3

14.5

19.0

9.5

7.5

4.2

10

Structures

-23.0

13.1

-2.2

9.3

-28.2

35.2

20.7

11.5

12.9

2.8

11

Equipment and software

14.7

12.0

11.9

9.2

11.1

7.8

18.3

8.8

5.4

4.7

12

Residential

-11.4

23.1

-28.6

1.5

-1.4

4.1

1.4

12.1

20.5

8.9

13

Change in private inventories

---

---

---

---

---

---

---

---

---

---

14

Net exports of goods and services 

---

---

---

---

---

---

---

---

---

---

15

Exports

5.9

9.6

9.7

10.0

5.7

4.1

6.1

1.4

4.4

6.0

16

Goods

9.9

11.9

9.0

11.2

5.7

3.7

6.2

6.0

4.0

7.3

17

Services

-2.2

4.5

11.1

7.4

5.8

5.1

6.1

-8.8

5.2

3.0

18

Imports

10.4

20.2

13.9

0.0

4.3

0.1

4.7

4.9

3.1

2.9

19

Goods

12.2

24.7

14.1

1.1

5.2

-0.7

2.9

6.3

2.0

2.5

20

Services

2.4

1.2

12.9

-5.0

-0.6

4.2

13.8

-1.7

9.0

4.6

21

Government consumption expenditures and gross investment 

-3.1

2.8

-0.3

-4.4

-7.0

-0.8

-2.9

-2.2

-3.0

-0.9

22

Federal

0.6

9.7

3.7

-4.1

-10.3

2.8

-4.3

-4.4

-4.2

-0.1

23

National defense

-3.7

7.3

7.2

-6.1

-14.3

8.3

2.6

-10.6

-7.1

-0.1

24

Nondefense

10.1

14.6

-3.1

0.0

-1.7

-7.5

-17.4

10.2

1.8

-0.3

25

State and local

-5.5

-1.4

-2.9

-4.6

-4.7

-3.2

-2.0

-0.7

-2.2

-1.4

 

Addendum:

 

 

 

 

 

 

 

 

 

 

26

Gross domestic product, current dollars

3.9

4.1

4.6

4.5

2.2

5.2

4.3

4.2

4.2

3.3

 
Inflation at the national level is amazingly mild given the rising gasoline prices due to the falling dollar and speculative pressures, the drought throughout the middle of the country, and the growth in consumer spending relative to the depth of the trough of the Great Recession. Three of the last four months have seen absolutely flat inflation with the March value reflecting moderate deflation. The parallel with the malaise of the Japanese economy after the 1990 recession is undeniable. In hindsight in a decade or so we may look back and blame traditional monetary policy aims of keeping interest rates low, as the culprit for the economic stagnation that is unlikely to lift any year soon. The FED seems complicit with the Treasury in maintaining low interest rates not to stimulate production and investment, but to reduce financing burdens for the fiscal side of government. In the 1941 to 1952 time period this type of behavior was overt in what was called the FED-Treasury Accord. It worked because of all of the pent-up demand associated with rationing and soldiers returning from WWII. While we have soldiers returning from Iraq and Afghanistan today, their numbers are not nearly as sizable and there is no pent-up demand due to the wealth losses from the financial and housing crises. We are of the opinion that it would be better for the FED to adopt the opposite stance relative to interest rates for two purposes: one, to motivate consumers and particularly investors to lock in lower interest rates for durable goods purchases or investments in capital before they rise, and two, to motivate the federal government to pay down the debt through reductions in wasteful federal agencies, entitlement programs, and initiatives more appropriately designed for the states and local governments, before the interest costs escalate.

Unemployment rose again in July to 8.3% as some layoffs took place and particularly large businesses derived additional benefits from cutting their workforces. Even though the Great Recession ended over two years ago, large business entities have discovered and continue to take advantage of the realization that they can meet consumer demand with fewer workers. While twenty years from now this might be a valuable stance given that baby-boomers will have almost entirely retired by then and the replacement population will be substantially smaller, but in 2012 with baby-boomers only starting to retire, the impacts are more than just disconcerting. The broadest measure of unemployment, U-6 (Table A-15 on the BLS site, www.bls.gov) has risen for four months in a row to 15.0%, almost back to the level from a year earlier after falling in March to 14.5%. Comparing this value to the U-5 rate of 9.7% suggests that most of the difference is from escalating unemployment amongst those who only work part time. These trends reflect not just the behavior of private sector employers, however. As emphasized last quarter, the decline in federal, state, and local government employment has placed greater pressure on unemployment figures. We have been discussing (only partially in a tongue-in-cheek fashion) the beneficial effects of paying federal employees to not work, extracting the substantial budgets provided to these bureaucrats to pay down the debt, and thus improving the climate for private sector businesses; motivating additional hiring, and generating incentives and funding for state governments to provide for their own constituencies without trying to fund local initiatives at someone else’s expense.



What Does It All Mean?


With GDP growth still well 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. Last quarter we thought that we were moving in the right direction. However, the second quarter dashed those hopes as domestic events seemed to be moving as negatively as those in Europe. We will refrain from making political commentary in this venue, but the election in November will reveal a lot about how we will respond to the growing weakness in the fourth quarter and in 2013. Will we continue on the path towards European socialism, or will the president and the congress return us to a path of the private sector taking care of itself without excessive dependence on government entities to provide for our needs. A reporter by the name of Dan Cofall (moderator of Wall Street Shuffle) commented last year that the problem we face today is that the people who vote for a living outnumber the people who work for a living! The U.S. economy thrived for two centuries based on private sector initiative and innovation based on quality education and entrepreneurial spirit. We desperately need to return to those ideals – and the sooner the better.  

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 second quarter CPI numbers suggested very slow growth in prices in aggregate. However, there has been inflation of about 1% annualized locally while the national rate has actually suggested slight deflation since March and through July. The recent jump in oil prices in late July and early August may create some general inflation during the third quarter, but prices remain relatively muted due to the uncertainty and general weakness in consumer and investment demand. We perceive that the primary reason that Jacksonville has seen some inflation over the last four months is due to improving conditions in the local housing market. Due to increases in prices (rents) and sales (rentals) of single family, multi-family, manufactured, and rental homes and apartments, the local CPI has generated more substantial inflation (about five percent) from this source than elsewhere in the country as a whole. The combination of assimilation of foreclosures and short sales with bank behavior that has limited the supply of such properties has reduced inventory from the high levels of 2010 and 2011. The extremely low mortgage rates, despite the difficulties in closing loans have spurred demand that has been pent up for four years.

Other components of the CPI have remained constrained despite the national drought and cost increases in manufacturing and commodities. Airfares moderated with fuel oil prices, food prices were mostly down, reduced sales from home stores and high end retailers reduced pressures on product prices and service providers were reluctant to raise prices due to increased competition from new providers in start-ups associated with job losses for these new entrepreneurs. If one omits the housing sector from local inflation, the local area CPI suggests moderate deflation, consistent with the national numbers.
.
The outlook for the third quarter of 2012 is not likely to change much as the uncertainty continues and the housing market gains slow down due to the seasonal influences of exiting the peak summer selling period. As of this writing the EU is in recession (pretty much except for Germany), but there is optimism that conditions are improving. This has driven down the value of the dollar which raises oil and gasoline prices, but enhances exports relative to imports. There is nothing on the horizon that suggests that prices will escalate dramatically any time soon and the reader should remember that government policy leading up to major elections tends to be accommodative with the goal of not swaying the election. Therefore, we anticipate that the third quarter will be more of the same, moderate increases in prices, varying dependent on attempts by producers in specific industries trying to raise prices, and then falling back when it adversely impacts on sales and market share.

Unemployment


The second quarter of 2012 plus July revealed unemployment locally firmly entrenched below 9%, but the July data did not continue the downward trend from February through June. July also saw us rise above the national rate after only one month below (June) such that the average rate in the MSA returned to 8.5%. While the number of workers employed rose through June as the number of unemployed workers fell, the workforce fell by 360 in July but the number of workers employed fell by 3,600. Part of this is normal student employment during the summer, but some was associated with layoffs, discouraged workers, and departures from the local community. Last quarter we expressed hope that we would remain below the national unemployment rate for an extended period, but July did not cooperate. Before May 2008, there was only one month where the Jacksonville MSA was above the national average since we started LEIP in 2002. Duval County unemployment fell to 8.1% in May, but was back to 9.4% in July. Consequently it appears that the other four counties in the MSA have seen significantly better unemployment numbers in the last four months than Duval County.
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 July returned to the 9% level, but the seasonality adjustment implied that the level was not quite as high.

The outlook for the third quarter of 2012 is difficult to predict given all of the national uncertainty and the continued decline in public sector employees. The no new tax stance of the legislature and the governor implies that municipalities and state employers will continue to bleed jobs without much outlook for private sector hiring. Although military personnel are not included in the headline unemployment rate, the military cuts that seem inevitable will imply less civilian employment related to the Navy bases and other military facilities. Continued expansion at the Port and the development at Cecil Field (finally) will help quell the tide of worsening employment, but the picture is not rosy despite the improving housing market.
 

Leading Indicator (LEI)


The second quarter movement in the LEI was resolutely negative, down almost exactly one full point from March. The preliminary July number reflected a sizable increase, but it was almost exclusively due to estimates of lower initial claims for unemployment insurance that are still awaiting revisions. While building permits were up in April and May to around 500 new units, they fell off in the June and July estimates. Consumer confidence rebounded in July, but money growth has slowed and so have vendor deliveries and consumer and capital goods purchases. Interest rate spreads improved in June and July, but on reduced volume.

We are hopeful that the LEI will continue its strength for the rest of 2012 based on July, but significant optimism in that regard is unwarranted. The biggest influences on the LEI are from interest rate spreads and money growth. The increases in the former have been small and the latter has declined, so it is unlikely that the LEI will reveal a major improvement for the third quarter. Consequently, the outlook for the Christmas season is not particularly strong locally, but this could radically change due to the outcome of the local and national elections and potential improvement in the European and Chinese economies.

Stock Price Index


Local stocks did well during the second quarter, actually outperforming the DOW. The exception for both was May which revealed a dip in the index numbers. July was also a strong month for local stocks. Local Headquarter stocks were up over 8% on an annualized basis from March to July; with local presence stocks up over 6%. During the same time period, the DOW was off just under 3%. Our local stocks underperformed the entire market for the three years preceding the second quarter, so it was a welcome change that revealed itself from April through July. While we are not optimistic of a strong recovery in the next few months in any facet of the data we collect, the improvement in local stocks likely suggests that at least Jacksonville is outperforming the rest of the country. 

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. That trend continued in the second quarter of 2012. The local economy outperforming the national averages in inflationary pressures, housing, and stock prices is a good sign, but ultimately until most of the uncertainties that we mentioned at the beginning of this document play themselves out after the election and thereafter, it is difficult to produce unabashed optimism, or much beyond very cautious confidence that eventually both the local and national economies will rebound.