The Jacksonville Economy in the Fourth Quarter of 2013

Introduction


This is the twenty-ninth 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 more positive news regarding the recovery derived from revised estimates for the third quarter output numbers and the first and second estimates for the fourth quarter of 2013 real GDP.  This is despite a lot of hand ringing by retailers.  Unemployment has not fallen very much, but it is still falling; with the larger unemployment categories containing discouraged workers, part-time workers who would prefer to work full time and those marginally attached to the labor force also generating declines in unemployment.  The labor force participation rate even inched up a little in January. Interest rates are still very low but the FED is floating some rhetoric regarding rate increases in the near future as they curtail quantitative easing.   Janet Yellen took over the FED primarily to yawns from financial markets and FED watchers alike and she vowed to continue the course of reducing the expansionary impetus as the economy gains momentum. Obamacare is still failing to meet its enrollment goals and the first signs of the negative impacts it is going to have on the quality and quantity of healthcare are being felt, but at least the numbers of firms dropping health care for their employees has slowed.  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.

 

In this edition of the LEIPLINE, we report our third formal numerical forecasts of the data we collect for the three months of the first quarter of 2014, plus April 2014.  We understand again this quarter that our risk is that we forecast worse than the national prognosticators, but so be it.

The National Macro Economy


There is no doubt that beginning with the third quarter of 2013, real GDP growth started to accelerate.  Traditionally, economists recommend 2.5% - 3% annual growth in real GDP during normal expansionary phases as being optimal.  During the recovery phase, real GDP needs to grow more rapidly. The third and fourth quarter increases suggest that the recovery may finally be gaining steam.  The third quarter growth rate remained at 4.1% after two revisions, suggesting the strongest rate of growth since the fourth quarter of 2011, and before that the first quarter of 2006.  The initial estimate for the fourth quarter growth was 3.2%, but that was revised downward in the first revision to 2.4%.  Both Chairwoman Janet Yellen and your LEIP team believe that part of the slowdown was associated with the frigid winter weather in many parts of the country and the too warm and dry weather in other parts that normally counted on cold and snowy weather for their livelihood. The Christmas season was disappointing in retail stores, but Internet sales were substantially above 2012; and we simply do not capture this shift effectively in the real GDP and retail sales numbers yet.

 

The BLS indicated with the February 28th release that “[T]he increase in real GDP in the fourth quarter primarily reflected positive contributions from PCE, exports, nonresidential fixed investment, and private inventory investment that were partly offset by negative contributions from federal government spending, residential fixed investment, and state and local government spending.  Imports, which are a subtraction in the calculation of GDP, increased. The deceleration in real GDP growth in the fourth quarter reflected a deceleration in private inventory investment, a larger decrease in federal government spending, and downturns in residential fixed investment and in state and local government spending that were partly offset by accelerations in exports, in PCE, and in nonresidential fixed investment and a deceleration in imports.”

 

The astute observer should note that diminution in federal government spending that reflects itself in lower real GDP growth now may pay dividends in the future in terms of slower increases in the federal debt, less interest on that debt, and more credit availability to the business sector.  In addition, to the extent that the federal government reduces spending on social programs that diminish work incentives (e.g., extended unemployment insurance, more pervasive food stamps) more idle workers will need to return to the work force, increasing production and the real GDP pie for all of us.

 

Fourth quarter inflation at the national level continued its slow upward trajectory averaging between one and one and one half percent annualized.  For all of 2013, the CPI rate of inflation was 1.5%.  January 2014, with inflation of one tenth of one percent, implied that inflation has now been positive for nine months in a row at the national level.  Such a movement has not occurred since 2011.  Food and energy prices have been relatively flat despite the western drought and the very difficult winter in the eastern part of the country.  However, this is not likely to last into the remainder of 2014 as diminished crop yields, higher feed prices, growing fuel oil prices, and reduced fruit and vegetable crops motivate higher prices.  With consumer demand accelerating and business investment increasing as business firms gain confidence, the stage is set for higher inflation regardless of what happens with the trillions of dollars of pent up purchasing power presently residing in the vaults of the FED.  We anticipate that 2014 is the year that the FED will earn its keep, not by stimulating the economy, but rather by preventing the massive glut of loanable funds that they created from swamping the financial sector and causing significant inflation.

   

The end of 2013 and beginning of 2014 revealed continued slow declines in unemployment towards 6.5%, the predetermined cutoff that the FED set for itself for changing its policy stance (which they have since said they would ignore).  As we have encouraged you to do several times in the past, consultation of Table A-15 at the BLS (http://www.bls.gov/news.release/empsit.t15.htm) reveals that a major change took place in January in U-6, the measure of unemployment that ostensibly measures those employed part time who would rather work full time.  There was a  four tenths of one percent drop, suggesting that either many of these individuals left the labor force (which is doubtful since the labor force participation rate rose in January) or they found full time jobs.  This news makes the relatively moderate drop in the U-3 headline unemployment rate from 6.7% to 6.6% look considerably better.  



What Does It All Mean?


The bottom line is that the national economy is continuing to recover, and perhaps with some new found momentum.  Those who are prone to provide kudos to government programs when the economy improves would argue that fiscal and monetary stimuli have finally generated the desired outcomes after over five years of intensive intervention.  We make no such contention!  Rather, despite the ineffectual government fiscal and monetary policy initiatives of the last five years, the economy is starting to improve more rapidly; delayed by the red tape, changes in health care, burdensome regulatory increases, and general pessimism that businesses have generated having to deal with such a climate.  Let’s hope that as the economy improves, government officials continue to claim victory and stay out of the way so that the private sector has the autonomy to complete the task.

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 2013.4 Jacksonville CPI


Local inflation was up over 2.3% during the last quarter of 2013 generating an overall inflation rate for the year of 3.06%. This outcome is far and away the largest rate of inflation we have experienced in Jacksonville in the twelve years we have been collecting LEIP CPI data.   The primary driver of the higher prices during 2013 was definitely the housing sector, which grew over 24%.   We measure our housing index as a weighted average of the prices and sales of single family homes, condos, manufactured homes, and apartment rents, based on the increases in these components relative to the base amount of housing.   This is not the way the BLS computes their housing component, but we do not have the resources to replicate their survey methodology to request owner perceptions of their rental equivalents for their properties.   Among the other factors driving prices up were used cars and trucks, renter’s insurance, food away from home and lodging away from home.   Those factors that helped mitigate inflationary pressures were dairy and related products, sugars and sweets, motor vehicle fees and fuel oil.   If the local economy remains strong, we can anticipate a continuation of inflation rates of the same magnitude as last year in 2014, however, the January inflation numbers were negative, so the year started out with somewhat lower prices due to the cold winter and diminished expenditures as a result.      

 

 

Below is a chart that reveals the actual (annualized) inflation rates for the third and fourth quarters of 2013 in black (extended to January 2014), with our forecasts through April 2014 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 beginning of the year and April suggest acceleration in inflation to continue.  Clearly, the January 2014 value had little impact and much of the influence is derived from the greater than average price inflation in 2013.  For this outcome to come to pass, expect housing to heat up again with the pent up loanable funds currently sitting in the vaults of the FED driving increased lending and monetary growth both locally and nationally.  

 

Year  Month actual inflation 
monthly in percent

 

forecast inflation 

monthly in percent

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

4.83

3.88

2013

12

2.82

4.16

2014

1

-3.75

3.56

2014      2   2.61
2014 3   2.31
2014 4   3.38


Unemployment


The unemployment rate in the Jacksonville MSA fell below 6% at the end of the fourth quarter of 2013 for the first time since July of 2008.  That puts us eight tenths of one percent below the national average.  Virtually universally during the last few months of 2013 the number of workers employed rose along with the work force while the number unemployed fell; thus all movements were positive.  This is a very positive sign.  Looking at historical evidence for Jacksonville versus the nation as a whole, we would contend that the full employment level locally is generally lower than at the national level given that our local economy generates less structural (technological change) unemployment than at the national level given our small manufacturing sector.  Consequently, although our unemployment is lower than at the national level, we may not be any closer to full employment, which is likely still one to two percent of the work force away from where we currently reside.

 

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 fourth quarter plus January.  If our estimates are correct, the local MSA unemployment rate is headed towards the mid 5% range by the end of the year. The reader should note that we forecast a slight increase in unemployment from in February relative to the actual January estimate, but this too is predicated on prior trends. 

Year  Month actual unemployment 
rate monthly in percent

 

forecasted unemployment

rate monthly in percent

2013

7

6.64

5.63

2013

8

6.66

6.32

2013

9

6.38

6.04

2013

10

6.3

5.75

2013

11

6.06

5.94

2013

12

5.86

5.80

2014

1

5.63

5.70

2014 2   5.66
2014 3   5.62
2014 4   5.62


Leading Indicator (LEI)


The LEI for the second half of 2013 was exclusively positive, an unprecedented stretch since we began collecting LEIP data.   Originally, December data were negative, but revisions reversed the small decline and generated a moderate increase.   We need to be cautious with these conclusions, however, since the Office of Economic Opportunity at the state level has not published initial claims for unemployment insurance data since September and we have had to forecast this component using statewide data. The first estimates for January did not continue the trend, but revisions may occur again when the data are finalized in February.   Building permits are holding steady in the 600+ range per month, consumer confidence is in the high seventy range, and help wanted advertising is growing.   Local stocks are still underperforming the national DOW, but not by as much as during the weakness of the Great Recession.   

 

 

The chart below reveals our forecasts for the leading indicator.  Our expectations for February through April suggest that the LEI will moderate some in February, but then rise again in March and April. The outlook for the middle to later part of 2014 is solid, but not spectacular with growth not as rapid as the end of 2013 based on the LEI. 

 

Year Month

actual LEI monthly 

(2001.12=100)

forecasted LEI monthly 

(2001.12=100) 

2013

7

112.43

111.96

2013

8

113.47

113.26

2013

9

113.96

113.58

2013

10

114.44

113.58

2013

11

115.32

114.95

2013

12

115.92

114.91

2014

115.62

114.81

2014 2   115.25
2014 3   115.29
2014 4   115.37


Stock Price Index


The fourth quarter of 2013 saw both local presence and local headquarter stocks make big gains, consistent with the general trend in the financial markets at the national level.  In particular, the local presence stocks gained over six hundred points during the quarter, although primarily during October and November.   So far in 2014, the local stocks are treading water like the national stocks.

 

The final chart below presents the forecasts for the stock price index through the end of the first quarter of 2014, plus April.  Since each of the forecasted index numbers is over 100, the local stock index is expected to outperform the DOW, but only marginally. By looking at the actually local stock index performance values for August, December, and January, it should be clear that we routinely over predict the performance of local stocks, however. 

 

Year Monthly 

actual stock price index monthly

no change = 100 

forecasted stock price index monthly

no change = 100 

2013

7

104.3

102.3

2013

95.50

103.41

2013

9

101.70

103.12

2013

10

103.30

102.27

2013

11

103.50

103.63

2013

12

99.90

102.73

2014

1

96.60

101.77

2014 2   102.80
2014 3   101.94
2014 4   100.00


The Botton Line, Locally


Both the local and national economies are finally showing signs of strong growth.   Evidence inherent in the LEI and the rising price levels in the CPI except for January, along with the improving local stocks and falling unemployment rates suggest that the recovery is gaining the momentum that we would certainly have hoped would have come some three years ago.   There does not seem to be anything immediately evident that will stand in the way of continued growth, but there are several uncertainties that could become problematic.   It seems almost inevitable that when economies recover, governments decide they need to raise taxes.   The great depression would have ended four years earlier except for such activities in 1938, and there is plenty of historical evidence of premature fiscal shifts in the Johnson, Clinton, Bush I, and Bush II administrations.   It seems unlikely that president Obama will be more constrained in this regard, so the improvement can still be curtailed, but our local officials need to also heed the experiences of history and not stall economic growth with excessive tax increases locally and at the state level just as we are seeing the light at the end of a way too long tunnel!