LEIPLINE Newsletter - December 2013
The Jacksonville Economy in the Third Quarter of 2013

Introduction


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.   However, the 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, were discontinued.   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.



The National Macro Economy


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).

 

The 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.



What does it all mean?


The bottom line is that the national economy is continuing to recover, and perhaps with some new found momentum.  Government failure in regulation of financial institutions, the debacle of the health care website, the weakness in our trading partners including Europe and China, and the lack of consumer confidence associate with all of these concerns is acting as a drain relative to all attempts to increase the inflow from the spigot of economic stimuli.

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 2013.3 Jacksonville CPI


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 3.7%.   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 housing prices.   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 and September.

 

       

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.  

 

Year  Month actual inflation 
monthly in percent

 

forecast inflation 

monthly in percent

2013

4

5.84

1.79

2013

5

3.77

1.97

2013

6

4.82

2.12

2013

7

-2.65

2.96

2013

8

3.86

1.76

2013

9

-2.30

3.98

2013

10

0.42

3.41

2013      11   3.88
2013 12   4.16
2014 1   3.56

 



Unemployment


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 trends.   

 
 
Year  Month actual unemployment 
rate monthly in percent

 

forecasted unemployment

rate monthly in percent

2013

4

6.51

6.43

2013

5

6.83

6.22

2013

6

6.59

5.92

2013

7

6.64

5.63

2013

8

6.66

6.32

2013

9

6.38

6.04

2013

10

6.2

5.75

2013 11   5.94
2013 12   5.80
2014 1   5.70


Leading Indicator (LEI)


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.

 

Year Month

actual LEI monthly 

(2001.12=100)

forecasted LEI monthly 

(2001.12=100) 

2013

4

111.05

110.65

2013

5

112.30

110.81

2013

6

111.78

111.01

2013

7

112.43

110.96

2013

8

113.47

112.26

2013

9

113.96

112.58

2013

10 

114.09

112.58

2013 11   113.95
2013 12   113.91
2014 1   113.81


Stock Price Index


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.  

 
Year Monthly 

actual stock price index monthly

no change = 100 

forecasted stock price index monthly

no change = 100 

2013

4

101.7

101.45

2013

102

102.5

2013

6

98.2

103.54

2013

7

104.3

102.30

2013

8

95.50

103.41

2013

9

101.70

103.12

2013

10

103.30

102.27

2013 11   103.63
2013 12   102.73
2014 1   101.77


The Bottom Line, Locally


For the most part, the third quarter of 2013 was a growth quarter of superior magnitudes.  With real GDP stronger than it has been since early 2008, unemployment falling both nationally and even more so locally, and the leading indicators consistently positive both locally and nationally, the recovery seems to be gaining momentum.  There are still concerns out there relative to the weakening Chinese economy, the persistent uncertainty associated with Obamacare, and the inability for financial institutions to provide loan packages for large and small businesses alike.  Jacksonville continues to outperform the nation as a whole, which is the way we like it.  Local Jacksonville MSA businesses need to return to a growth mode perspective to improve local employment and consumer confidence.  So much of macroeconomics reflects self-fulfilling prophesies that need a kick in the back side to move in the right direction.  A strong Xmas season will do a lot to improve the psyches of consumers and businesses to continue the forward momentum.