LEIPLINE Newsletter - February 2013

The Jacksonville Economy in the Fourth Quarter of 2012

Introduction


This is the twenty-fifth 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.  Some trends are finally appearing in issues related to housing, consumer expenditures, and debt problems internationally.  However, uncertainty still remains regarding Obama care, Social Security, Medicare, welfare, and the tax system.  Internationally, there is uncertainty about the impacts of expanded U.S. oil production, the conflicts in Syria, and other political upheaval like in Korea, Iran, and the potential for disruption in other countries struggling with massive debt and the need to bring their fiscal houses in order. 

The National Macro Economy


The most recent release of quarterly real GDP numbers on February 28th, 2013 (second estimate) revealed that real GDP growth in 2012.4 remained extremely low.  The original estimate was a 0.1 percent decline that was raised upward to a 0.1% increase after revisions.  In a moderate to strong economy RGDP growth should be between 2.5% and 3% quarterly on an annualized basis.  Clearly, the fourth quarter of 2012 was very weak.    The third quarter GDP growth was revised upward to 3.1% which was positive news.  However, for all of 2012 as a whole, RGDP rose by 2.2%.  This number needs to be viewed with caution, however, because it reflects annual growth from the 2011 annual average RGDP to the annual average 2012 RGDP, not December to December. The December to December RGDP numbers revealed growth of only 1.61%.  The U.S. economy faltered in the extremely important fourth quarter due primarily to declines in public sector spending both federal and state and local and continued business malaise.  With the sequester set to take effect, it seems unlikely that improvement will take place in the first quarter of 2013, promoting commentary from many that another recession is imminent.

 

The February release of the 2012.4 data implied that “ The increase in real GDP in the fourth quarter primarily reflected positive contributions from personal consumption expenditures (PCE), nonresidential fixed investment, and residential fixed investment that were partly offset by negative contributions from private inventory investment, federal government spending, exports, and state and local government spending.  Imports, which are a subtraction in the calculation of GDP, decreased.  The deceleration in real GDP in the fourth quarter primarily reflected downturns in private inventory investment, in federal government spending, in exports, and in state and local government spending that were partly offset by an upturn in nonresidential fixed investment, a larger decrease in imports, and an acceleration in PCE.” (http://bea.gov/newsreleases/national/gdp/gdpnewsrelease.htm). 

 

Perusal of Table 1.1.6 that we have included frequently in past LEIPLINEs reveals that personal consumption expenditures are up almost exactly $600 billion from the end of 2007 when the Great Recession began (after adjustment for inflation).  However, gross private domestic investment (domestic business spending) is down just over $200 billion.  Total government spending is up less than $4 billion (state and local down $80 billion while federal spending is up $83 billion).  Net exports actually improved by over $170 billion due to improving exports (up $210 billion) and relatively flat imports (up $34 billion).  Consequently, the weakness in the fourth quarter RGDP numbers is mostly being driven by declines in state and local production and weak business investment, partially counteracted by improving trade balances (which can also be construed to reflect declining demand for foreign goods by Americans beyond the increased U.S. exports) and growing consumer demand.  The outlook for 2013 cannot be viewed at this point as being rosy, with pending federal government spending declines adding to the weakness at the state and local levels and continuing reluctance by corporations to do much more than hold cash.   

   

Inflation accelerated in August and September at the national level by 0.5 each month (over 6% annualized) but fell back to being virtually flat for the rest of 2012 (up 0.2 in October but down by the same amount in November and absolutely flat in December).  However, gasoline prices have escalated dramatically in the last few weeks, driven not by oil prices internationally, but by domestic refinery capacity constraints and profit taking by these important downstream entities.  The December to December inflation rate was a very modest 1.6% for 2012, down from 3% in 2011.   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 remained in the high seven percent range from September until the end of 2012 and it moved slightly upward to 7.9% in January 2013.  Adding to the decline in state and local government jobs earlier in the year, federal employment is now falling and worsening the private sector employment concerns.  If the sequester is allowed to happen, it will generate considerably unemployment issues in March which may remain with us for many months to come.  We should not forget that full employment, prior to the great recession, was around four percent and we are virtually at double that amount.  College graduates are having a very hard time finding employment commensurate with their educational achievement and private sector businesses are still not hiring at historical levels due to uncertainty about taxes and medical costs.  As we hinted when the Great Recession began, there now clearly appears to be a structural shift that has damaged labor markets and which has driven our labor markets towards those dominant in Western Europe for decades.  The federal government does not need to maintain its employment as the media would have us believe.  Rather the federal presence needs to be reduced, curtailing the constraints that having all of those bureaucrats in Washington mandates, so that the private sector and state governments can return to seeking innovative and quality employees with technical and manufacturing skills to restart our sagging employment sector.  

 



What Does It All Mean?


The brightest light in the current economic circumstances is the corner that appears to have been turned in residential real estate.  Naturally, prices are well below 2005 or 2006 peaks in most places in the country, but they are on the rise, providing consumers some recovery of some of their forfeited wealth.  However, obtaining real estate loans continues to be difficult without substantial down payments and considerable bureaucratic procedures.  The very weak real GDP growth in the fourth quarter of 2012 is being blamed on declining federal government expenditures.  But it is very difficult to infer with annual deficits of near two trillion dollars and the federal debt now significantly above one year’s GDP, where this trend is even remotely avoidable.  The negative implications of a smaller federal government that appeared last quarter will be temporary if the cuts that are ultimately made (as opposed to those that are threatened for political and media effects) are in those massive federal programs that mostly interfere with the smooth operations of the private sector and state and municipal government policies.  It would unequivocally help if the cuts are in the entitlements that discourage work effort and dissuade employers and employees from contributing to production instead of just costs.  We desperately need smaller governments that do only what governments can do efficiently: provide for national defense and generate laws that protect private property, period!   

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 2012.4 Jacksonville CPI


Inflation rates in the fourth quarter of 2012 locally, for one of the rare four month periods since we began LEIP were higher than the national average.  While December and January were flat at the national level, each month revealed a three tenths increase in the local CPI.  The data seem to suggest that housing prices for both single family homes and condos have risen more locally than the average nationally.  Gasoline prices have also risen more locally than the national numbers imply.  Used car prices fell by a sizable amount in January which often is correlated with rising new car prices, but the latter were relatively flat.  Food prices were both inconsistent month to month and across categories.  Prices were up in cereals and bakery products and other miscellaneous food while dairy prices fell significantly.  Apparel prices were volatile like usual.  The biggest shifts in prices upward for 2012 were in fuels; owner’s rent of primary residence, and food away from home.  These changes reflect an economy whereby consumers are seemingly willing and able to spend money, but one tempered by limits associated with unemployment and underemployment. 

 

The outlook for the first quarter of 2013 will very much depend on whether consumers with continue to be optimistic about recovery even though businesses do not appear to concur.  Consumers opened their wallets for Christmas and Valentine’s Day despite escalations in contributions to Social Security, but those unemployed and underemployed will see their benefits cut and their expenses rise in 2013 due to higher taxes, expiring unemployment compensation and diminishing government sponsored extras.  Our expectations are that inflation will be closer to 3% than 2% in the early part of 2013 and potentially escalate from there as housing continues to recover and gasoline prices grow despite increased oil production domestically.  The one potential driver of inflation that we have not yet referenced is if bank lending grows generating sizable increases in the money supply.  There is still about $1.5 trillion in excess reserves sitting in the Federal Reserve System, owned by banks, insurance companies, and other financial institutions.  If this money floods out of the FED, then inflation is inevitable. However, such a movement does not appear on the horizon and the FED officials will try to prevent a mass exodus.  There is little concern immediately for accelerating inflation, but the “fuel” exists.   



Unemployment


Locally, the fourth quarter of 2012 revealed that all three months were basically at or below the national average for unemployment in the MSA.  While new claims for unemployment insurance rose in January 2013, the increase was so small that it likely does not suggest a worsening of unemployment in January (local unemployment rates are not announced until March 18th).  Contrary to most of the time periods since 2001, Duval County unemployment was substantially below the MSA for January as Duval improved more dramatically than the rest of the MSA.  Consequently, at the end of 2012, the Duval unemployment rate adjusted for seasonality gained almost one full percent relative to the MSA as a whole.  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 Duval County fell by three tenths, but the seasonally adjusted effect was over one percent. 

 

The outlook for the first quarter of 2013 for unemployment is consistent with what we expected for the previous two quarters. 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.  Universities and state colleges will likely have to make due even if the governor’s plan of providing back the $300 million cut from last year’s budget becomes law, because the maintenance of tuition at current levels will mean that any extra money will have to be allocated to higher costs without the influx of additional dollars from students.  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 fourth quarter of 2012 was not a good one for the LEI as the net effect on the index was a decline of 1.2 points.  January’s small increase was not nearly enough to offset the downturn at the end of the year.  However, for all of 2012, the LEI was up just over two full points.  Building permits are now running at triple what they were at the depth of the recession, but still are one third of the peak monthly new construction from before the recession.  Interest rate spreads fell at the end of 2012 and again in January as loan demand continues to be weak despite very low interest rates.   

 

The biggest influences on the LEI are from interest rate spreads, new claims for unemployment insurance, 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 first quarter of 2013.  Whereas the budget deal was crucial to whatever moderate growth derives for the first quarter, the outcome of the sequester will dramatically affect the local growth for the early quarters of 2013 and potentially well beyond.  A major reduction in the military presence locally will reduce product and service demand, loan demand, and financial service demand.  Entitlement reductions will also affect the unemployed, the disabled, and retiree demand.  However, federal government spending has to fall, so we will pay for the excesses of the last two presidential administrations either soon, or eventually later.  The LEI will reflect these changes in building permits, interest rate spreads, vendor deliveries and consumer and capital investment. 



Stock Price Index


Local stocks did quite well during the fourth quarter, actually outperforming the DOW for the third quarter in a row.  Local headquarters stocks did better than the local presence stocks, but both outperformed the DOW in January.  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 January.  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 fourth quarter of 2012.  That the local economy outperforming the national averages in housing, unemployment and stock prices is a good sign, but the uncertainties that persist in healthcare, taxes, and business investment curtail the optimism.  Housing was the primary driver of economic growth from 2002 through 2006.  While we anticipate that nobody believes that housing will or should grow like it did during the earlier 2000’s, if steady housing price growth combined with improved climate for new construction continues, the economy may surprise us and grow at more desirable levels.  However, higher rates of unemployment will persist and growth will lag well below full employment norms until the federal government can make itself smaller and less burdensome on private sector performance.  This is a viable prescription for both national and local expansion, but the next boom period in macroeconomic growth is still a long way off.