This is the twenty-fourth 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 what will happen to Obama care, 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 November 29, 2012 (third estimate) revealed that real GDP growth in 2012.2 remained the same from the first revision for second quarter value of 1.3%. The advanced estimates of third quarter GDP reflected 2.7% growth, significantly better. Despite this advance, economists and government officials would have preferred more substantial growth. Looking inside the numbers reveals why the growth occurred. Federal government spending rose more substantially in 2012.3 along with residential fixed investment (i.e., housing). Because of the weakness in Europe and the slowing Chinese economy, exports rose relative to imports, but imports still increased. Consumer spending rose significantly and the most confusing portion of the measure of growth, inventory investment, grew as well. Naturally, inventory investment increases in the third quarter due to the upcoming Christmas season. Durable goods purchases rose almost 9% in the quarter.
The November release of the 2012.1 data implied that “The increase in real GDP in the third quarter primarily reflected positive contributions from personal consumption expenditures (PCE), private inventory investment, federal government spending,
residential fixed investment, and exports that were partly offset by negative contributions from nonresidential fixed investment and state and local government spending. Imports, which are a subtraction in the calculation of GDP, increased slightly. The acceleration in real GDP in the third quarter primarily reflected upturns in private inventory investment and in federal government spending, a deceleration in imports, an acceleration in residential fixed investment, and a smaller decrease in state and local government spending that were partly offset by a downturn in nonresidential fixed investment and decelerations in exports and in PCE.” (bea.gov/newsreleases/national/gdp/gdpnewsrelease.htm).
In this quarter’s assessment we do not provide Table 1.1.6 from the BEA that we have provided in the past, but rather look specifically at the four major sub-categories of the expenditure version: personal consumption expenditures (C), gross private domestic investment (I), government purchases of goods and services (G) and net exports (NX), and how they compare in 2012.3 to 2007.3, the quarter before the Great Recession began. Doing so provides definitive evidence of what components are to blame for the continued weakness in the macro economy. Real GDP is about $346 billion larger in 2012.3 than five years before. Of this growth (about 3.8% total across 5 years), $345 billion is reflected in growth in C. Consumers are doing their part to cause the economy to grow, although the rate of growth is significantly below the 11.76% growth during the previous five year period. The second largest component is net exports which has grown $290 billion towards less of a deficit in the same five years. While government purchases of goods and services has grown $53 billion, this masks that state and local government spending has declined by $67 billion Gross private domestic investment, however, has fallen $275 billion or 12.76% in the past five years! Consequently, the blame for the slow growth rests not on the consumers (as many suggest, falling back on excessive growth through unhealthy borrowing from the 1990s to 2007) but rather on businesses and state and local governments. Instead of focusing on government programs to stimulate federal government spending, the Obama administration and the Congress need to produce a climate that encourages business growth and which, through increased state tax revenue derived from business growth, improved funding at the state and local level. This is the engine that can return us to rates of economic growth that will take us out of the doldrums of the last five years.
Inflation accelerated in August and September at the national level by 0.6 each month (over 7% annualized) but fell back to more optimal levels in October (up 0.2). Much of the escalation was due to higher oil and gasoline prices and the impacts of the droughts throughout the country on food and feed prices. Year over year, however, inflation has been about 2.2% through October. Most, both small and big businesses are reluctant to raise prices at the retail level despite rising wholesale costs for fear of losing customers whose purchases are not as robust as firms would like. Until the economy starts to grow more rapidly, inflation is likely to remain mostly muted, despite improvements in housing markets that reflect the largest component of the inflation indices.
Unemployment fell from July to September, but rose slightly in October due to increases in returning discouraged workers and the shift out of part time employment into unemployment as the Xmas season began. As we pointed out each of the last two quarters, much of the decline in employment has been in state and local government jobs combined with some significant layoffs in manufacturing as firms have entered bankruptcy or reduced their labor forces. Christmas hiring appears to be at a slower rate than in years past and has thus, reduced employment among young and lower skilled workers. The employment problems for college graduates has also accelerated, reflecting continued declines in middle management and entry level jobs in financial services, real estate, and other service industries. There is an old joke about the difference between a recession and depression, that a recession is when your neighbor loses his/her job and a depression is when you lose your job! A depression hit Dr. Mason’s household in September, so if any of the readership is looking for a young, motivated physics major with lab and web design experience, let Dr. Mason know at email@example.com.
What Does It All Mean?
Last quarter we placed significant emphasis on the outcome of the presidential election in determining the path of economic growth. 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. It appears that a small majority of American voters endorsed continuation of the path towards European socialism, likely not for economic reasons, but rather to protect social rights and entitlements. The return to more desirable growth is generally assumed to be inevitable, but the Japanese economy has not generated even 3% growth in any year since 1990 (except for 2010). Since their approach to monetary and fiscal policy has mirrored our own, the outlook is unlikely to suggest that the recovery will occur in 2013 or 2014, let alone in 2012.4. The way to enhance growth is for the federal government to reduce uncertainty with definitive and permanent changes to the tax code, improved conditions for the growth of small businesses, reduction of burdensome regulations, and mostly, the removal of political influences from the business world and the economy in general.
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 2012.3 Jacksonville CPI
The local third quarter CPI numbers suggested continuing very slow growth in prices in aggregate. However, we did not encounter the seven percent annualized increases in August and September locally like at the national level. Part of the reason was the slowing of housing re-sales in both quantities and prices during those two months, locally. Apparel prices were up dramatically in October after being relatively stable during the late summer. Used car prices fell near the end of the quarter and into October. Gasoline prices rose considerably in the beginning part of the third quarter but have fallen off quite significantly since. Food prices (particularly sweets and dairy) fell by sizable amounts in October as well.
The outlook for the fourth quarter of 2012, as it routinely does, will depend on the amount of discounting that retailers need to engage in and the stability of oil prices. We are hopeful that the Christmas season will be strong from a growth standpoint which will generate the side effects of escalation in prices. We also hope that that growth will be moderate. Conditions suggest that this will be the case as of today’s Black Friday writing. We also believe that inflationary increases will likely be driven most by the deal that is struck relative to the fiscal cliff that is anticipated by the end of the year. Our economy both locally and nationally will react dramatically to the deal, with greater certainty from the deal producing larger price increases by businesses, and vice-versa. Failure to come to a desirable deal will be extremely adverse to all facets of the economy with the potential for deflation a real possibility locally as well as nationally.
The third quarter of 2012 unemployment numbers jumped higher in July and August even after seasonal adjustment for typical summer time increases in the labor force, but fell slightly more dramatically in September and October. As of October, the unemployment rate fell below 8% (to 7.93%) for the first time in 2012. This appears to be good news, but it must be viewed with caution in lieu of the decline in the workforce in October than virtually matched the decline in unemployment and the sizable increase in new claims for unemployment insurance in October. The last month of data suggests that discouraged or exiting workers from the MSA were behind much of the improvement. Duval County unemployment fell to 8.35% in October, following a very similar pattern to the MSA numbers in the third quarter. Thus, the aggregate unemployment rate for the MSA is about four tenths of one percent lower than the Duval County values. 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 October was 7.7%, but the seasonality adjustment implied that the level was not quite that low.
The outlook for the fourth quarter of 2012 unemployment is consistent with what we expected for the third quarter. 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. This is particularly true for college graduates and teenagers.
Leading Indicator (LEI)
The third quarter plus October movement in the LEI was resolutely positive in aggregate, but it reflected two positive months and two negative ones. Perhaps the biggest movement in the local components of the LEI was in building permits. While building permits were up in April and May to around 500 new units, then fell off in the June and July, they doubled from around 550 to 1,100 in August and then grow by over 1,250 in September. Consumer confidence rebounded in September and stayed relatively constant in October, with money growth increasing along with vendor deliveries. Interest rate spreads improved slightly by the end of the quarter, but they are still well below historical norms. So far in 2012, the LEI is up over four points, suggesting dramatic improvement, however substantial growth has simply not been forthcoming except perhaps in the housing market.
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 picked up only marginally, so it is unlikely that the LEI will reveal a major improvement for the fourth quarter. Once again, however, the budget deal will be crucial. Also fundamental will be the depth of the European recessions and whether or not the Chinese economy begins to grow rapidly again. We are hopeful for a strong Christmas season to provide some degree of confidence for local businesses to grow again, but we are wary. Greater business confidence will mean more business investment, more hiring, and a better economic climate for the local region.
Stock Price Index
Local stocks did relatively well during the third quarter, actually outperforming the DOW for the second quarter in a row. There was no August swoon locally, and both the local presence and local headquarters stock index numbers were closer to the DOW by the end of October. 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 October. 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 third quarter of 2012. The local economy outperforming the national averages in housing, unemployment and stock prices is a good sign, but the uncertainties in Europe, China, and in business investment present difficulties in being entirely optimistic. In as much as the Great Recession was the longest and deepest recession since the 1979-81, it is not surprising that the recovery has been so slow and fitful. Major improvements in flow through the port, increased employment in both the private sector (particularly financial services) and most importantly, improved business confidence would go a long way in generating improved indicators that become definitive in the positive direction.