Introduction

This is the thirtieth 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.  The news at the national level is decidedly mixed given the extremely weak real GDP numbers, juxtaposed against the strong labor market numbers, improving financial markets, muted inflation, recovering housing markets, and still positive leading indicators. Most pundits are blaming the GDP numbers on the perverse weather in the first quarter virtually everywhere, and we agree to an extent, but the investment numbers are troubling and they continue to tell us that the Federal Reserve policy oriented towards maintenance of very low interest rates is stifling recovery.  It is truly disconcerting that the leadership in Washington continues to remain enslaved to traditional Keynesian economic policy to combat modern economic weaknesses that derive from circumstances that have little to do with traditional sources.

 

In this edition of the LEIPLINE, we report our fourth formal numerical forecasts of the data we collect, for the three months of the second quarter of 2014, plus July 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

The second estimate of real GDP for the first quarter of 2014 was even more shockingly negative than the preliminary release at the end of April.  The initial estimate of 0.1% growth was revised significantly downward to a full one percent decline with the second estimate on May 29th.  Not unexpectedly, the primary culprit was private inventory investment which was down dramatically.  It is normal for inventory investment to fall in the first quarter after the Christmas season (having done so in 2007, 2009, and 2011), but the drop this January through March was major by comparison in part reflecting the weather issues mentioned above, but more likely the lack of business confidence in future demand.  With state and local as well as federal government expenditures falling, consumers still wary of job sustainability and the maintenance of housing values, and the continued emphasis by corporations on making money through financial markets instead of in the real sector, firms are not investing in real assets at normal rates. 

 

More specifically, while personal consumption expenditures (purchases by households) rose by a robust 3.1% in the first quarter, gross private domestic investment fell by 11.7%,  with most of that decline in residential and non-residential structures and equipment. While imports rose slightly (a negative for real GDP growth), exports fell by 6% with that entire decline occurring in the export of goods as opposed to services.  Government sector expenditures fell as well with national defense spending off 2.4% and state and local government spending down 1.8%.  We hope like government officials that the first quarter numbers were an anomaly of bad weather, post-Christmas doldrums, and a lull in the advances in the housing recovery.  However, it will not take much impetus during the second quarter in the same direction to derail the optimism of consumers that is being rekindled, to turn things negative again.

 

While it is far too soon to identify a definitive trend, it is undeniable that inflation has accelerated slightly so far in 2014.  April 2014 revealed the first monthly growth rate of inflation of 3 tenths or more since June 2013, and only the third reading that high since September 2012.  All of the major categories rose in April (food, shelter, and energy), and they did so without a major international stimulus.  Last quarter we indicated that we believe that this would be the year that the FED would have to prevent the massive glut of loanable funds that they created from swamping the financial sector and from causing significant inflation. Just last month the FED began experiments to infer how a process of surplus fund evacuation would work, and what the procedure would be in practice to remove up to 3.5 trillion dollars from its balance sheet.  With oil prices rising in part due to Ukraine and in part due to speculation resulting from that stimulus, with housing demand rising as consumers realize that mortgage rates are still below traditional norms, with labor demand starting to increase, and with diminishing concerns over financial crises abroad, inflation is likely to continue to accelerate; spawning higher interest rates and more money exiting the FED.  We see much higher prices in the second half of 2014 nationwide.

   

The first quarter of 2014 revealed relatively flat unemployment rates that seemed to have plateaued just above where the FED had set its benchmark for enhanced tapering.  However, April revealed a four tenth drop in the seasonally adjusted unemployment rate to 6.3% which was unexpected by most.  Further, this drop was of the desirable kind, with corresponding equivalent four tenth drops in the numbers of discouraged workers, those marginally attached to the labor force, and those employed part time who would rather work full time.  Although there was a small drop in the labor force participation rate (which is at extremely low levels since women entered the labor force in mass in the mid1970s), the drop in unemployment was in those categories that have been stubbornly problematic since the beginning of the Great Recession.  Combining the growth in employment, the decline in unemployment, and the shrinking sizes of both the federal and state and local governments should warm the hearts of libertarians who advocate that the private sector will grow much better and economic conditions will be more desirable when government is brought down to more manageable levels.  


What Does It All Mean?

The bottom line is that the national economy is continuing to recover, but the hindrance on economic growth at this point is corporate and non-corporate investment expansion that is being deterred by interest rate policy at the FED that motivates firms to focus more on their investment portfolios predicated on huge holdings of cash rather than producing products and services and selling to consumers and other businesses.  Labor markets are being constrained particularly in the hiring of young people because baby-boomers are not retiring given that the low interest rates prevent income generation on retirement funds.  Excessive government debt both domestically and abroad to support massive government programs is crowding out private sector investment not because of high interest rates, but because the private sector cannot compete with government in the provision of services like healthcare, subsistence support, energy, and agriculture. The license that the Great Recession has granted Keynesian oriented governments to grow themselves will plague worldwide economic growth for decades to come, despite the ingenuity and entrepreneurial spirit throughout the world to countermand it.  

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 2014.1 Jacksonville CPI

The year began with a moderate decline in prices but the three months since have more than made up for the slow start.  Of late, gasoline prices have risen as the result of the Ukrainian crisis and the lack of refinery capacity that is constraining gasoline availability much more so than any other factor.  Food prices have not risen very much except that meat prices rose over five percent on an annualized basis in April.  Interestingly, flying in the face of the claims of the Affordable Care Act, hospital prices grew over 23% on an annualized basis in April as well.  So far in 2014, prices are not rising at the rate they did in 2013 (over three percent), but they are rising at almost 2.5% annualized, with housing leading the way, particularly in April.  

 

Below is a chart that reveals the actual (annualized) inflation rates for the third and fourth quarters of 2013 and the first quarter of 2014 in black (extended to April 2014), with our forecasts through July 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 second quarter of the year and July suggest that the acceleration in inflation will continue.  Our forecasts are recommending that inflation will be much higher in 2014 than it has been in the past ten years locally, but on par with the outcome for 2013 at about 3% for the year.  It is perhaps somewhat reassuring that our methodology seems to mostly overstate inflation (with only two exceptions in August 2013 and November 2013), so perhaps the price growth will not be as steep as suggested.  However, the potential influences of $3.5 trillion dollars of loanable funds sitting in the vaults of the FED should not be ignored if Chairwoman Yellen and her board cannot prevent a mass exodus in the coming months. 

 

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 1.13 2.61
2014 3 1.45 2.31
2014 4 2.41 3.38
2014 5   3.03
2014 6   2.49
2014 7   3.36
 

Unemployment

As indicated in February, 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.  As of April, 2014 we are presently seven tenths of one percent below the national average, and likely within one to one and one-half percent of full employment in the local MSA.  New claims for unemployment insurance in the Jacksonville MSA fell below three thousand per month for both February and March, a level that had not been seen since February 2006, but they rose slightly to over the three thousand level in April.  While during the first quarter and April the workforce fell by a small amount in both the MSA and Duval County, the largest county in the MSA; the number employed rose by a much larger amount and the number of workers unemployed fell.  The job market locally continues to improve at a rate in excess of the national recovery, definitively good news for our area.   

 

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 second quarter plus July.  If our estimates are correct, the local MSA unemployment rate is headed towards the low 5% range by the middle of the year. It appears that our forecast for April 2014 was our most accurate yet, so hopefully we are on track for the next three months.  

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 6.01 5.66
2014 3 6.18 5.62
2014 4 5.67 5.62
2014 5   5.48
2014 6   5.34
2014 7   5.17

Leading Indicator (LEI)

The LEI for the beginning of 2014 is the one indicator that is not recommending positive news if one looks at the numbers of months that are positive and negative, but February was so strong that it overwhelms the other three months.  Local stocks have not performed as well as national stocks during the financial market escalation thus far this year and the combination of stagnant consumer confidence and fluctuating new claims for unemployment insurance have driven the LEI in opposite directions in February versus March and April.  The data for April is still preliminary relative to building permits and some of the national indicators, so we will reserve judgment regarding the significance of the last two months of data on the LEI.  However, if the March and April LEI numbers are the beginning of a trend, caution is indicated for the fall of 2014.

 

The chart below reveals our forecasts for the leading indicator.  We seemed to accurately predict the level in April after understating the LEI earlier in the year.  May through July is forecasted to reveal a rebound in the LEI starting with a big jump in May, likely due to acceleration in housing related influences.  

 

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 2 116.57 115.25
2014 3 116.23 115.29
2014 4 115.46 115.37
2014 5   116.13
2014 6   116.04
2014 7   116.30

Stock Price Index

Local stocks have generally followed the national trend, but they fell quite a bit further during the Great Recession so they have a more sizable recovery to make as a consequence.  Local Headquarters stocks have made gains relative to the DOW since the end of 2013 but the local presence stocks have lost further ground. 

 

The final chart below presents the forecasts for the stock price index through the end of the second 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 and by a significant amount. By looking at the actually local stock index performance values, it should be clear that we routinely over predict the performance of local stocks, however. Let’s hope that the predictions are accurate because local stock improvement would help local labor markets and ultimately all facets of local economic growth.

 

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 2 102.3 102.80
2014 3 103.9 101.94
2014 4 98.7 100.00
2014 5   104.02
2014 6   102.11
2014 7   101.60

The Bottom Line, Locally

Despite the potential red flags of the last two months of the LEI, we remain optimistic for continued improvement in the local economic conditions.  Improving labor markets combined with potential strengthening of financial conditions for local companies and improving outlooks for housing and consumer expenditures suggest that the Jacksonville economy is still on the mend at a rate better than the United States as a whole.  Unlike a year ago, concerns that are most prevalent today are primarily domestic, e.g., the slow rate of growth of business investment, the potential inflationary pressures from surplus loanable funds sitting in the vaults of the Federal Reserve Banks and in corporate coffers, and the continued emphasis in Washington on government programs to resolve our problems instead of private sector solutions. At this point we prefer to emphasize the positives over the negatives until we see what arises next quarter.