LEIPLINE Newsletter - May 2013

The Jacksonville Economy in the First Quarter of 2013

Introduction


This is the twenty-sixth 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, yet again, with a brief discussion of the national macro economy.  As we have been mentioning in recent reports in the Florida Times-Union, both the national and local economies are beginning to move more rapidly positive in some of the indicators.  To warm the hearts of Jacksonville area residents and business people, this trend appears to be stronger locally than nationally.  The first quarter of 2013 may have been the beginning of the positive acceleration locally, but naturally it is too early to tell for sure.  The biggest clouds that still linger over the national recover are Obamacare, tax reform, the Federal debt, and the European recession.

The National Macro Economy


The most recent release of quarterly real GDP numbers on May 30th, 2013 (second estimate) revealed that real GDP growth in 2013.1 was much stronger than in the fourth quarter of 2012.  The initial estimate of 2.5% growth was revised downward, however, to 2.4% with the May announcement.  The final estimate of annual growth in real GDP for 2012 was 2.2%, better than the 1.8% in 2011, but below the 2.5 - 3% normally construed to be the long term optimal trend. 

The May release of the 2013.1 data implied that “[t]he increase in real GDP in the first quarter primarily reflected positive contributions from personal consumption expenditures (PCE), private inventory investment, residential fixed investment,  nonresidential fixed investment, and exports 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 first quarter primarily reflected an upturn in private inventory investment, an acceleration in PCE, a smaller decrease in federal government spending, and an upturn in exports that were partly offset by an upturn in imports and a deceleration in nonresidential fixed investment.” (http://bea.gov/newsreleases/national/gdp/gdpnewsrelease.htm). 

Perusal of Table 1.1.1 that we have included frequently in past LEIPLINEs reveals that personal consumption expenditures were up by 2.4% over the third quarter, but that after rising only 1.3% from the second to third quarter, gross private domestic investment (domestic business spending) was up 9% from the third to the fourth.  As mentioned above in the quote, government spending is the lagging component, with a total decline of 4.9%, the largest share of it coming from defense, federal spending.   While it is not possible to determine a positive correlation between either growing government spending or falling government spending and positive real GDP growth, it is quite definitive that greater business investment is positively correlated with expansion, and vice-versa. Our government officials might consider paying more attention to that.   

If one pays careful attention to the national CPI-U values (for all urban consumers) going back 20 months to July 2011, relative to the most recent data for April 2013, the aggregate total rate of inflation has been 2.5%!  Put into perspective, the average rate of inflation for the stable period from 1986-2005 identified as the “Great Moderation” was just over 3% PER YEAR, or more than double the more recent 20 months on an annual basis.  In fact, since September 2012, the total amount of inflation has been less than one tenth of one percent.  There are two types of economies that can generate such low rates of inflation – very strong economies, or those that are on the weak side.  Noting that RGDP growth has been so slow, and despite massive quantitative easing by the Federal Reserve, the recent slow recovery has been even slower than generally believed by historical norms at the national level.  Those monthly swings in prices that have occurred in the last nine months have almost exclusively been associated with oil prices, gasoline prices, and gasoline refinery prices.  These outcomes are despite the return of increasing housing and housing related prices in most regions of the United States.  Producers seem to have little opportunity to pass on higher costs to consumers, but at the same time, reduced labor costs due to limited hiring are keeping producer costs down.  It is unlikely that this latter trend can continue at the national level when consumer demand increases, if for no other reason, due to replacement costs for depreciating durables.

The national official unemployment rate continued its very slow downward trend during the first quarter of 2013, that began in July 2011.  By April, the U-3 official rate fell to 7.5%, the lowest it has been since December 2008.  Inspection of the data reveals that the decline in unemployment is not, as the media has been emphasizing extensively lately, due entirely to the reduction in the labor force participation rate.  That portion that is arising due to this factor is being fed by some natural retirements from the baby-boom generation, some parents leaving the workforce to remain home with young children, and some young adults returning to school full time.  The part the media is ignoring is that many more workers are getting jobs, many of those marginally attached to the labor force are getting full time jobs, and some of the discouraged workers are coming back and getting jobs.  It is crucial to note that these accomplishments on the positive side are being made DESPITE contraction in federal and state government employment that has been in force for several months.  At a minimum we are still 2.5%, or about four million workers away from full employment, but the trend is in the positive direction.  The “help wanted” signs are returning to store windows and classified advertising is up in employment sectiors, particularly in higher skilled occupations in construction, health, and services.

Ordinarily we do not talk much about interest rates in the LEIPLINE because we only collect such data for a small purpose within the LEI.  However, increasingly, what the FED chooses to do with interest rates is becoming the fundamental driver of whether the economy continues to recover very slowly, accelerates its recovery, or heads in the opposite direction like the European Union.  Contrary to what appears to be the dominant opinion at the FED currently (although not as dominant as a year ago), more economists are calling for slowing or elimination of quantitative easing to allow interest rates to begin to rise.  In speeches to local groups, Dr. Mason has called for elimination of quantitative easing to raise bank spreads and motivate lending so that banks begin to allow some of those additional funds derived from the quantitative easing to actually circulate in the economy instead of sitting in the vaults at the FED as excess reserves.  William T. Gavin of the St. Louis Federal Reserve Bank (http://www.stlouisfed.org/publications/pub_assets/pdf/re/2013/b/low_interest_rates.pdf) recommends the same thing but for an interestingly different reason.  We encourage you to read this brief commentary to formulate your own opinion.



What Does It All Mean?


As we pointed out last quarter, the brightest light in the current economic upturn is the improvement in residential real estate.  Real estate drove the U.S. economy from 2002-2006, but of course it ended with a burst bubble.  Some forward thinking individuals are already concerned about a repeat performance due to extensive investments by hedge funds and other financial entities in residential real estate.  However, as long as the mortgage industry maintains (or is forced to comply with) constraints on down payments and credit worthiness then the market forces should work this time.  Some markets are temporarily booming for the short term because housing prices have fallen so far below historical ratios (housing values to income).  When these ratios rise further based on enhanced demand, more people will put their houses on the market, mitigating the excess demand, moderating the price acceleration.  However, in the interim, expect the lull in inflation to end with improving economic conditions, but thankfully, expect the downward trend in unemployment to continue as well.



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 2013.1 Jacksonville CPI


Inflation rates in the first quarter of 2013 locally, for the second quarter in a row, were significantly higher than the national average.  While the national inflation rate annualized for the four months through April would translate to 0.28%, for the Jacksonville MSA, the equivalent inflation rate would be 3.4%. While both the national and local numbers revealed similar swings associated with first escalating then falling oil prices (which have started to rise again in May), the Jacksonville housing market has improved far more than the nation as a whole in the last four months (particularly in April).  Apparel prices were volatile throughout the first quarter, but automobile prices were relatively stable during the first quarter.  It is also worth noting that the rates of inflation locally accelerated from February to March to April.  While inflation eats away at the purchasing power of one’s income, it also generally signals a strengthening economy.  Inflation derived from housing, which much of what is occurring locally is, is not as pervasive a negative since it only impacts those who are buying.

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The outlook for the second quarter of 2013 in terms of local inflation is more rising prices as the Jacksonville economy continues to strengthen.  As we move towards the summer months and the spring shopping and beach seasons affect consumer purchases, look for prices locally to continue to rise in food, apparel, transportation, and energy.  Transportation within and through the area should also generate opportunities for price increases for local merchants.  Whether the rate of inflation continues to accelerate, or moderates to more normal levels will depend on how willing consumers are to translate improved confidence into expenditures.   



Unemployment


It is evident from the unemployment data for the Jacksonville MSA in total, and Duval County in particular that the acceleration in inflation discussed above is being accompanied by the traditional quickening decline in the unemployment rate.  Just as inflation is rising faster locally than nationally, unemployment is falling faster as well.  Whereas in August of 2012 the Jacksonville unemployment rate was over 5 tenths higher than the national rate (8.63% versus 8.1% on a seasonally adjusted basis), as of April 2013, the Jacksonville rate has fallen to 6.5% with the national rate as discussed above still at a full percent higher.  In particular, the improvement arose in March and April, even after seasonal adjustment, with the labor force and employment both rising, while the number of workers unemployed and the unemployment rate fell.  It has been truly rare that all of these positive attributes have arisen in even one month in the last five years, let alone in two consecutive months.  To make things better, these outcomes were also true for Duval County, the dominant county in the MSA.

The outlook for the second quarter of 2013 for unemployment looks strong.  As we approach the season when college and high school students get out for the summer and look for temporary employment, the help wanted signs are materializing.  Builders are lamenting the lack of availability of skilled construction labor and after five years of diminished hiring of college graduates, that market has turned around in several sectors locally as well.  We perceive that the downward trend in unemployment locally will continue to be sufficiently sizable to override the seasonal influences of the swelling labor force in the summer.  We are not projected a decline below 6% any time soon, but the low 6% range seems reasonable.



Leading Indicator (LEI)


The first quarter of 2013 LEI was pretty flat, although the preliminary April number showed more positive signs.  Interest rate spreads continue to be a problem for the LEI, as financial institutions find it difficult to identify credit worthy commercial loan customers for loans with interest rates so low.  Initial claims for unemployment insurance are still higher than desirable, but at far lower levels than in the depth of the recession.  During the first quarter of 2013 the initial claims averaged 4,700 per month, down from around 10,000 per month in 2009.  Despite some issues, the LEI is 0.86 higher at the end of April than it was at the end of December 2012.   Building permits are now consistently running around 600 per month reinforcing the strong data on housing from elsewhere.  Consumer confidence in the state is also on the rise at a rate in excess of the national level.. 

 

Hopefully, the LEI in the second quarter of 2013 will reveal positive momentum for the entire quarter for the first time in a long time.  If the unemployment and employment numbers continue on track then new claims for unemployment insurance should continue to fall.  This combined with rising consumer confidence, improving vendor deliveries, consumer and capital goods production, building permits, and interest rate spreads should drive the LEI higher, signally better growth for the fall.



Stock Price Index


Local stocks continued to gain on the DOW during the first quarter, actually outperforming the DOW for the fourth quarter in a row.  Local headquarters stocks did better than the local presence stocks, but both outperformed the DOW in all four months this year.  Our local stocks underperformed the entire market for the three years preceeding the most recent time period, so it was a welcome change that revealed itself.  This too is an indicator that Jacksonville is back to outperforming the U.S. economy as a whole.



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.  We believe that the turnaround took place in 2013.1, at least locally.  With prices rising, particularly in housing; unemployment falling at significantly faster rates than elsewhere, the LEI on the positive side, and local stocks outperforming the DOW, Jacksonville is in a stronger position than it has been in quite some time. Let’s hope that the momentum continues into the second quarter of 2013 and well beyond.