This is the twenty-seventh 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.
The recovery continues to be weak with GDP
growth lower than desirable during longstanding expansions, let alone the even greater
growth necessary to accelerate from a recession.
Inflation continues to be historically low,
but much of that outcome is associated with weakness and housing markets that
are well below 2006 levels despite recent improvements.
Unemployment is stubbornly at least 2.5
percent above full employment, but even this is somewhat misleading on the
optimistic sign as large numbers of discouraged workers and those working less
than full time without wanting to are not counted in this standard U-3
Interest rates remain
far lower than what provides optimal spreads for banking institutions to want
to loan money extensively; and the FED continues to keep rates at unprecedented
levels primarily to facilitate government borrowing costs that are not too
onerous (which in itself has the wrong incentives).
Despite all of these less than optimal
realities, the economy domestically is improving and Jacksonville is
outperforming the national averages.
New with this edition
of the LEIPLINE, and for what we anticipate will be from here on out, we report
our first formal numerical forecasts of the data we collect for the individual three
months of the second and third quarter of 2013.
We understand the risks that such a process leaves us open for; but
quite frankly, how much worse can we do than the national prognosticators? (sic)
The most recent release of quarterly real GDP numbers on August 29, 2013 (second estimate) revealed that real GDP growth in 2013.2 was much stronger than in the first quarter of 2013 at 2.5%. However, the reader should exercise caution because as has become typical in terms of its lack of fanfare, the first quarter real GDP growth numbers were originally reported at 2.5% growth, then revised downward to 2.4% with the May announcement, and now were lowered to 1.1% with the August release. Although we do not anticipate that the revisions for the second quarter will be as substantial (there is historical precedent for the revisions to be largest in the first quarter of many years), one should not assume that the 2.5%, which would be right on the historical trend for real GDP growth, is necessarily the final word.
The August release of the 2013.2 data implied that "[t]he increase in real GDP in the second quarter primarily reflected positive contributions from personal consumption expenditures (PCE), exports, private inventory investment, nonresidential fixed investment, and residential fixed investment that were partly offset by a negative contribution from federal government spending. Imports, which are a subtraction in the calculation of GDP, increased. The acceleration in real GDP in the second quarter primarily reflected upturns in exports and in nonresidential fixed investment and a smaller decrease in federal government spending that were partly offset by an acceleration in imports and decelerations in private inventory investment and in PCE." (http://bea.gov/newsreleases/national/gdp/gdpnewsrelease.htm).
The significant good news in this release is the increases positive movement in all three of the major investment categories. As we have indicated in the past, the aftermath of the great recession has revealed substantial lags in the recovery of business investment. Since investment spending generates the accumulation of productive capital, which in turn creates new output to satisfy consumer demand, the economic engine depends on investment spending and the risk taking strategies that it implies. The decline in federal government spending is neither surprising nor depressing. Simply recognizing the winding down of two wars should generate this trend. We believe that an even larger decline in the size and spending of the federal government would be an engine for economic growth, despite the Keynesian perspective on economic stimulation.
Below is a chart identifying the monthly percent changes in inflation for 2003.1 through 2013.2. The reader should note the relative volatility of the monthly inflation numbers that occurred through the middle of 2009, which then flattened with little volatility through the end of 2012. However, while it might be premature to perceive a trend based on six months, there seems to have been a return to greater volatility beginning with the start of 2013. So far this year inflation has been at a 0.9% rate through July (roughly 1.5% annualized) which still seems relatively low. But with February at an annualized growth rate of over 8% and June over 6%, just a few more large numbers during the rest of the year could signal a return to more normal rates of inflation. The housing markets have returned to at least more normal growth virtually everywhere and automobile sales are permitting higher prices for new cars in a number of locales. The significant potential for greater inflation still derives from greater employment and growth, uncertainty in world politics, and of course oil. It is interesting to note that with the Chinese economy growing more slowly, U.S. dependence on foreign oil falling dramatically, U.S. oil production booming, and Europe still mired in significant recession, it is interesting that oil prices have not fallen by sizable amounts. The specter of anticompetitive climates is still causing oil to be priced way above what supply and demand would dictate, further exacerbating tepid growth.
Below this paragraph is a chart of the national U-3 unemployment rate for the same time period as above. It is interesting to note that subsequent to the great recession (beginning in 2009.3) the slope of the decline in unemployment seems nearly identical to the slope of the decline in unemployment from the second quarter of 2003 until 2007.2. Ordinarily, one would expect unemployment to fall more rapidly after a recession that during a period of virtual full employment. This is despite all of the fiscal stimuli, bailouts, and make-work programs of the Obama administration and the Congress; plus the seemingly endless monetary easing of the Federal Reserve. In lieu of small employee cutbacks at the federal government level and the even larger declines at the state and local levels, it should be apparent that the private sector is virtually exclusively responsibility for the decline in U-3. It is a shame that the fiscal and monetary authorities did not allow, or generated policies that interfered with, the private sector regenerating new jobs four years ago, which may have produced unemployment levels much closer to full employment than the 2.5% that we are away from that level as of this writing.
Last quarter we presented an analysis of the minority side of the quantitative easing puzzle. We include the web address again below, in part because there seems to be some movement in the direction of eliminating or curtailing the $85 per month bond buying extravaganza, perhaps by the end of the year. U.S. citizens need to call the FED on their motives. Quantitative easing is primarily designed to maintain low interest rates to reduce the cost of federal government borrowing. This stance was called the FED-Treasury Accord between 1941 and 1952. World War II was a good reason for such a stance then and the boom in the U.S. economy resulted primarily from tapping an entirely new labor force (women), in a climate without excess demand for goods and services due to rationing. The 2010s are not the same conditions at all. It is long past time that government officials recognize that the market can operate nicely without their interference (as long as there is an effective regulatory and anti-trust structure in place), and let the private sector recover.
There is another facet of the effects of easing that seems never to be discussed. Low interest rates are preventing U.S. households from accumulating purchasing power for retirement just as employers are systematically reducing pension plans and allocations to 401k programs. The oldest of the baby-boomers are already in retirement and the rest of the generation is close enough to be considering giving way to the younger generations. However, boomers are not going because they cannot expect the return on their diminished retirement funds to sustain them. If nobody ever left the labor force due to death or retirement, the unemployment rate would be closer to 90% of younger people than the excess 15% we have now. Quantitative easing is generating unemployment by not allowing the baby-boomers to retire. This is a structural reality that would also be mitigated by elimination of the bond buys!
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 no more easing. We encourage you to read this brief commentary to formulate your own opinion.
Local inflation continued its upward track through the end of the second quarter in June. Beginning with December 2012, the Jacksonville MSA generated seven consecutive months of higher prices each month. July 2013 stopped the streak with a 3% annualized decline. Despite the July implications, the local inflation rate is moving towards 4% inflation for the year; much higher than anything we have seen since the beginning of LEIP in 2002. The primary reason for higher price growth in Jacksonville than the nation as a whole has been the housing recovery. While May and June were not as strong as April, both newly built homes and existing homes are selling in larger numbers, and for higher prices. Seasonality will likely slow this movement in the fall, but the combination of still historically low mortgage rates and pent up demand will likely continue the more normal growth. Other prices in the MSA revealed typical volatility. Costs of government goods and services (e.g., trash, utilities, and taxable services) contributed to higher prices, while apparel and automobile prices fluctuated with seasonal demand and supply. Gasoline prices also revealed sizable movements both higher in May and June then falling off somewhat in July.
Below is a chart that reveals the actual (annualized) inflation rates for the second quarter of 2013 in black, with our forecasts produced in April for the second quarter and this month for the third quarter plus October reflected in red. The procedure employed to produce these forecasts is called vector auto regression or VAR. It employs two periods of lags of past values of the variable being forecasted to estimate the future values. Although on the surface the forecasts appear to understate the actual inflation, they seem to be validated relative to future trends by the negative inflation rate in July. The forecasts for inflation for the third quarter and October suggest that inflation will return to substantial price increases for the next three months.
monthly in percent
Taken as a whole for the second quarter, the promise of a declining unemployment trend for pretty much every month from August 2012 until April 2013, did not materialize. Before seasonal adjustments the unemployment rate rose in May, June, and July. Even accounting for seasonality, the unemployment rate for July was virtually identical with that for March. As of July, 2013, the local unemployment rate was eight tenths of a percent below the national average (having been below the national number since October 2012). As indicated here many times, seasonally adjusted unemployment rates are the only ones that readers should consider when comparing monthly data. The June and July values below the not-seasonally-adjusted numbers reflect the influx of students into the labor market.
In the chart below, our forecasts for the seasonally adjusted unemployment rates are statistically superior to those for inflation, but are biased towards a more optimistic view relative to the second quarter plus July. If our estimates are correct, the local MSA unemployment rate may fall below the 6% level. Obviously this would be a welcome outcome, and long overdue, but the lessons from past values of unemployment may overstate the rate of improvement in the employment markets locally. We can certainly hope!
rate monthly in percent
The LEI for July 2013 is almost exactly two points higher than what it was at the end of 2012, but four tenths lower than what it was in April. May and June were weak months with new claims for unemployment insurance rising and weakening consumer confidence and bank spreads. July suggests a rebound with lower new claims, and improving local stocks. Building permits were very strong in April, but they returned to around the 500 per month number for May through July.
The chart below reveals our forecasts for the leading indicator. While our expectations for April through July were on the low side, the forecasts for August through October are more consistent with the actual July value. The forecasts recommend a small increase in the leading indicator for the third quarter and into October which bodes reasonably well for the Christmas season.
actual LEI monthly
forecasted LEI monthly
The national stock markets boomed during 2013.2 and so did local stocks. The string of gains relative to the DOW stopped in 2013.2 after four quarters in a row, however. Local headquarters stocks did better than the local presence stocks again, but by a shrinking margin. July was a particularly good month for the local presence stocks.
The final chart below presents the forecasts for the stock price index through October. The last four months have been good ones for local stocks and our estimates suggest that the growth will continue. Since a value of 100 means that local stocks were unchanged from the month before, we forecast that the local stocks in both categories will increase in the fall. However, the demise of quantitative easing, however perversely the stock markets react to what is ostensibly good news (that the FED believes that the economy no longer needs the stimulus) may not mean positive news at least for a while for the general movement of stocks, and escalation in Syria is a big question mark that may radically alter these outcomes.
actual stock price index monthly
no change = 100
forecasted stock price index monthly
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