This is the twenty-eighth 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 this
installment with a brief discussion of the national macro economy.
There is some positive news regarding the
recovery, from estimates for the third quarter output numbers, as well as continuing
declines in unemployment.
concern about the large numbers of discouraged workers and those working less
than full time without wanting to tempers the positive news.
Interest rates remain below traditional
levels, but they have crept up in recent months despite the continuation of QE3.
With the change of leadership at the FED
coming in late January, it would be nice if the policy of pumping in liquidity
that simply returns to the vaults of the FED in the form of excess reserves,
However, Janet Yellen
appears to be more of a monetary policy dove than Bernanke and likely to
continue to peg short term rates at very low levels. The continuing saga of
Obamacare looms over the entirety of business concerns and is continuing to
limit investment decisions and hiring at more sizable magnitudes.
Once again, despite all of these less than
optimal structural concerns, the economy domestically is improving and
Jacksonville continues to outperform the national averages in most categories.
Continuing with this
edition of the LEIPLINE, we report our second formal numerical forecasts of the
data we collect for the four months of the fourth quarter of 2013, plus January
2014. We understand again this quarter
that our risk is that we forecast worse than the national prognosticators, but
that simply means we are in good company.
Because of the government shutdown in October, the second
estimates for third quarter real GDP growth was delayed until December 5th. Therefore, we have no choice but to discuss the
preliminary estimates and speculation about the revisions. The first estimate for quarterly real GDP
numbers on November 7, 2013 revealed that real GDP growth in 2013.3 was significantly
stronger than in the first quarter, and equivalent to the second quarter at 2.5%. Pundits are speculating that the third
quarter estimate will be revised upward to perhaps as much as 3.2%. This is closer to the type of growth that
would signal acceleration in expansion in the economy. Unfortunately, virtually all analysts
recognize that the fourth quarter real GDP growth will likely be meager based
on the two weeks of reduced government operations in October. Despite the realization that federal
government workers were paid for their forced vacation, the loss of revenue
from government operations during the two week hiatus, combined with the
diminished peripheral effects on the private sector, will bias the fourth
quarter downward from what it might have been.
“The increase in
real GDP in the third quarter primarily reflected positive contributions from personal
consumption expenditures (PCE), private inventory investment, exports,
residential fixed investment, nonresidential fixed investment, and state and
local government spending 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 growth in the third quarter primarily reflected a
deceleration in imports and accelerations in private inventory investment and
in state and local government spending that were partly offset by decelerations
in exports, in nonresidential fixed investment, and in PCE.” (http://bea.gov/newsreleases/national/gdp/gdpnewsrelease.htm).
biggest component of GDP is personal consumption expenditures. Its growth was meager despite the positive
implications overall. PCE only rose by 1.5% in the third quarter after rising
by 2.3% and 1.8% in the first two quarters of the year. Once again, the better news was that Gross
Private Domestic Investment grew by another healthy 9.5% in 2013.3 following
9.2% in 2013.2 and 4.7% in 2013.1. While
much of this growth was in private inventories (14.6%), a component which often
ratchets up in the third quarter in preparation for the Xmas season, 12.3%
growth in nonresidential structures also contributed positively. Federal government spending fell again in the
third quarter before the shutdown, but state and local government spending rose
for the second quarter in a row.
Third quarter inflation at the national level was quite
moderate, averaging below 2 tenths of one percent per month. The recently released October estimate was
negative one tenth of one percent, suggestive of deflation. For the year ending in October, the CPI was
only up one percent at the national level, moderated by mostly declining
gasoline prices in virtually all months except February and June. We believe that fuel prices that are falling
will stimulate aggregate supply and be advantageous for stronger growth. Quite frankly, with the expansion of fracking
and the increased energy independence that the United States is starting to
enjoy, gasoline prices are higher than they would be if it were not for oil
speculators and capricious oil refinery operations. It is seemingly consensus within the
economics profession that oil and gasoline are not nearly as important as commodities
in the 2010s as they were in the 1970s, but the influences of oil and gasoline
on inflation shifts is undeniable. Food
prices have definitely been subdued and producers continue to be reluctant to
promote price increases in a weak consumption climate. Even the brief acceleration in housing prices
in the spring has not done much to raise inflation to even normal levels. The
FED keeps pumping in money without generating inflation, but once again this is
due to banks unwillingness to lend.
Unemployment has continued its slow decline that started in
November 2009 at 9.9% (down from 10.0%), with only two blips up of 0.1% in
October 2012 and October 2013. The
latter was likely driven by the government shutdown so it is not likely
reflective of a trend. The October
unemployment rate was 7.3% after 7.2% in September. However, full employment is likely somewhere
between 5% and 6% of the labor force unemployed, so we still have a long way to
go to return to the desired employed portion of the workforce. It is also sobering to note that some of the
decline is due to discouraged workers leaving the labor force and the
continuing trend, driven by health care costs and uncertainty, to reduce the
number of full time jobs in favor of poorly paid and benefit-less part time employment. We continue to believe that removing employer
health care all together, replacing it with a private sector market similar to
life and car insurance is the real solution to both the health care mess and
the preference for part time workers over full time employees.
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.
Local inflation was actually down slightly during the third
quarter of 2013 and absolutely flat from July to October.
This is a significant departure from the much
higher inflation during the first six months of the year which annualizes to
Overall, inflation through October
would imply 2.79% for the year if annualized.
This amount is much higher than normal for Jacksonville, but if the slow
price growth from July through October continues in November and December, the
actual annual inflation may be much closer to the 1-1.5% that has been
commonplace since LEIP began in 2002.
The moderation of fuel prices is behind the declining rate of inflation
for the last four months, along with stable food prices and less volatility in
The April and May mini
boom in local housing prices and sales was stifled by the rising mortgage rates
in June and July, with housing prices rising only slowly since.
The typically volatile consumer products like
apparel and car prices were less so during the July to October period,
excepting the back to school period and the new model releases between August
Below is a chart that reveals the actual (annualized) inflation
rates for the second and third quarters of 2013 in black (extended to October),
with our forecasts produced in April and November for the second quarter, third
quarter and through the end of the year reported 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. The forecasts for the end of the
year and January suggest acceleration in inflation for the end of 2013 and the
beginning of next year. In part this is
based on historical November through January inflation rates, so 2013 as a
whole may still end up being the highest inflation year since we began LEIP in
2002. Naturally, whether this occurs or
not will depend on less discounting during the Xmas season than we have seen in
the last five years.
monthly in percent
Although the July unemployment rate after seasonable
adjustment rose slightly relative to June, the last three months through
October continued the decline that has been consistently steady since October
2009. As of October, 2013, the local
unemployment rate was 1.3% 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 decline from July through October was one
full percentage point while the national unemployment rate fell only one tenth
of a percent. While Jacksonville is
clearly doing better relative to the nation as a whole, and the state of
Florida in total, it is important to recognize that like both of the other
categories, Jacksonville is also seeing its labor force decline as workers are
leaving the labor pool; which tends to apply downward pressure on unemployment
and its rate of change.
In the chart below,
our forecasts for the seasonally adjusted unemployment rates are once again statistically
superior to those for inflation, but are still biased towards a more optimistic
view relative to the third quarter plus October. If our estimates are
correct, the local MSA unemployment rate is headed towards the high 5% range by
the end of the year. The reader should note that we forecast an increase in
unemployment from October to November, but this too is predicated on prior
rate monthly in percent
The LEI for July through October 2013 is over four points
higher than what it was at the end of 2012.
Since the end of the second quarter the LEI is up 2.25 points. Much of the gain is the result of declines in
new claims for unemployment insurance and the continuing growth of the real M2
money supply. Vendor deliveries were
also strong during the third quarter in preparation for the holiday season.
The chart below reveals our forecasts for the leading
indicator. Our expectations for April
through October are on the low side compared to the actual LEI values for
August 2013 through October.
Consequently, our forecasts for November through January are likely low
as well. However, investigation of the
individual months suggests than November should continue the now five month
rise in the LEI, but that December and January will begin a downward trend.
actual LEI monthly
forecasted LEI monthly
The national stock markets actually leveled off during 2013.3
and so did local stocks. The local
headquarter stocks are still 4,000 points below the entire DOW with the local
presence stocks 7,000 points below on comparable grounds. However, October was a very good month for
the local presence stocks. The boom in
the stock markets during November will be interesting to compare with the local
outcomes in the next LEIPLINE.
The final chart below presents the forecasts for the stock
price index through the end of the year plus January. The October performance of local stocks
exceeded forecasts after two down months in August and September. Our forecast
for November suggests another strong month, but December and January do not
appear to be as rosy. It is unlikely
given our methodology that these outcomes are a forecast of the impacts of
diminution of quantitative easing, but we have confidence that local stocks
will not fare as well at the end of the year and the beginning of 2014 as the
FED eases up on the injection of monetary reserves.
actual stock price index monthly
no change = 100
forecasted stock price index monthly
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