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.
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
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.
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.
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.
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.
monthly in percent
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.
rate monthly in percent
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
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.
actual LEI monthly
forecasted LEI monthly
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.
actual stock price index monthly
no change = 100
forecasted stock price index monthly
Both the local and national economies are finally showing
signs of strong growth.
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.
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
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
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!
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