LEIPLINE Newsletter - August 2014 The Jacksonville Economy in the Second Quarter 2014

Introduction

This is the thirty-first 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, like the others, with a brief discussion of the national macro economy.  There is general consensus that the macro economy is continuing to improve despite a slight uptick in unemployment last month.  The first and second estimates of real GDP growth suggest a rebound in the second quarter to above average levels.  Inflation is still below historical averages despite continued very low interest rates and improving growth.  While the strife in the Middle East and continued concerns about Russia and the Ukraine weigh on the financial markets, Main Street is proceeding towards expansion, albeit much too slowly for most people’s tastes.

 

In this edition of the LEIPLINE, we report our fifth formal numerical forecasts of the data we collect, for the three months of the third quarter of 2014, plus October 2014. 


The National Macro Economy

The third (and likely close to final) estimate of real GDP for the first quarter of 2014 was even more shockingly negative than the preliminary releases at the end of April and May.  The initial estimate of 0.1% growth was revised significantly downward to a full one percent decline with the second estimate on May 29th, but then settled down 2.1% at the end of June.  It seems like first quarters routinely have greater variation from the first to later estimates, but despite the weather excuses, the first quarter was very poor.  It is worth noting that the drivers of the weakness were also those that portend the worst for future production – namely that investment was off nearly seven percent, with exports of goods off just under 12%, coupled with a 4% decline in national defense spending (an outcome that is not necessarily universally bad, but one that has adverse effects on many communities, including Jacksonville).

 

However, the second quarter numbers reflect a major turnaround. Gross private domestic investment turned a 6.9% decline from the first quarter into 17.5% growth.  Exports of goods rose 12.9% in the second quarter, and although government spending fell overall by 0.8%, it was the nondefense side that drove it with defense spending rebounding by 0.9%.  It is also worth noting that residential investment rose by 7.2% in the second quarter compared to a 5.3% decline in the first quarter.  Contrary to what we feared last quarter, the second quarter was definitively better, promoting the optimism that is guiding the FED’s continued tapering and promoting increased hiring and wage growth.

 

The August 28th release from the BEA indicated that “[t]he increase in real GDP in the second quarter primarily reflected positive contributions from personal consumption expenditures (PCE), private inventory investment, exports, nonresidential fixed investment, state and local government spending, and residential fixed investment.  Imports, which are a subtraction in the calculation of GDP, increased.  Real GDP increased 4.2 percent in the second quarter after decreasing 2.1 percent in the first.  This upturn in the percent change in real GDP primarily reflected upturns in exports and in private inventory investment, accelerations in PCE and in nonresidential fixed investment, and upturns in state and local government spending and in residential fixed investment that were partly offset by an acceleration in imports.”

 

While inflation averaged less than 2% in the first quarter of 2014, it accelerated to between 2.5% and 3% in the second quarter.  July dropped down to the one percent level, but that was driven almost exclusively by moderating energy prices and despite slight increases in food prices and bigger jumps in housing prices.  We continue to believe that inflation will accelerate in the second half of the year, but what seems to be missing in 2014 relative to prior similar time frames are the consumer expectations of inflation that are a major driver in consumer behavior, that promotes and at the same time accepts, higher prices.  National consumer expectations in general are relatively weak, although they are at their highest levels in Florida since April 2007.

   

The second quarter unemployment rates were lower than the first by between 4 and 5 tenths, a major drop.  However, July rose slightly from 6.1% to 6.2%.  The reader should be cautious about this, however, since the seasonality within the numbers is most unstable during the summer due to the influx of students and recent graduates into the labor force.  The labor force participation rate rebounded slightly, which also may have promoted the July increase in those unemployed.  There has been a considerable decline in both talk about, and the numbers of, discouraged workers, but the unemployment among workers between ages 45 and 65 is troubling given the long careers and employment histories that these workers possess.  Combing this trend with the low interest rates that are preventing many from retiring has led to more applications for Social Security Disability and more early departures from the labor force.  As one Federal Reserve Bank President remarked the other day, “we are a long way from full employment, but the signs are positive for movement in that direction.”


What Does It All Mean?

The second quarter of 2014 promoted improved optimism that the U.S. economy is moving in the right direction. However, during the quarter there was more discussion of the weakness in Europe and the declining growth in India and particularly China that has generated drags working against world recovery.  The financial markets have temporarily rallied due to the slowing tensions in between Israel and Hamas and the softening of the concern over Russia and Ukraine, but the low interest rates continue to distort the allocations between stock and bond markets and the holdings of corporate cash that result in less investment in plant and equipment, less hiring, and greater investment in profit making through financial investment which promotes financial markets; but not real growth.  We once again encourage the Federal Reserve to focus on maintaining their inflation target instead of using antiquated and ineffective tools to try to manipulate the macro economy.

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

So far through July, inflation has not accelerated locally despite large increases in February and April.  A drop of over three tenths in June is the primary reason as gasoline prices moderated and several other categories of prices fell as well.  The annualized inflation rate is just over 1.25% which is low relative to historical national inflation but quite normal for what the LEIP CPI has recommended over the last 12-plus years.  With local housing prices rising dramatically virtually every month this year, the moderation in overall inflation is interesting.  Every month it seems to be a different category that reveals declining prices.  Used cars and trucks as well as six other categories declined in July, but in the second quarter price declines occurred in tuition and childcare along with several categories of apparel, utility prices, and those on professional services.  Medical care prices rose early in the quarter then fell in June and July.

 

Below is a chart that reveals the actual (annualized) inflation rates for the fourth quarters of 2013 and the first and second quarters of 2014 in black (extended to July 2014), with our forecasts through October 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 third quarter of the year and October suggest inflation in the 2.5% - 3% range.  Whether this comes to fruition will depend on whether the FED raises its target interest rate and whether doing so causes improved use of funds and bank loans that promote growth.  Most pundits do not believe that the FED will raise rates until the middle of 2015, but we believe that the FED is already at least a year overdue to generate the best outcomes for the macro economy. 

 


Year

Month

Actual Inflation   
Monthly in percent
Forecast Inflation   
Monthly in Percent
2013 10 2.78 3.88
2013 11 3.04  4.16
2013 12 3.05  3.56
2014 1 -3.77  2.61
2014 2 1.13  2.31
2014 3 1.45  3.38
2014 4 2.41  3.03
2014 5 2.26  2.49
2014 6 1.13  3.41
2014 7 1.25  3.36
2014 8    3.04
2014 9    3.21
2014 10    2.66

Unemployment

June of 2014 revealed a seasonally adjusted unemployment rate in the Jacksonville MSA below 6% for the third month in a row.  However, the July index reported a jump to 6.17% due largely to the influx of students and new graduates.  New claims for unemployment insurance in the Jacksonville MSA were up and down during the second quarter between 2,600 and 3,500; which are still sizable, but well below the 4,500 to 5,500 from the second quarter of 2013.  The workforce continued to grow through July, with employment doing likewise, but in July the numbers of employed workers did not grow by as much as the workforce, leading to a small uptick in unemployment.  With the early return to school for high school and college students this fall, we expect the August numbers to suggest less unemployment, with a return to the downward trend that has been going on pretty consistently since 2011. 

 

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 low 5% range by the latter part of the year. It appears that our forecast for the second quarter of 2014 was our most accurate yet, so hopefully we are on track for the third quarter as well.   

 

Year

 

Month

 

Actual Unemployment Rate  Monthly In Percent

    

Forecasted Unemployment Rate  Monthly In Percent  

 
2013 10 6.44 5.63
2013 11 6.19 6.32
2013 12 6.01 6.04
2014 1 5.70 5.75
2014 2 6.07 5.94
2014 3 6.24 5.80
2014 4 5.72 5.70
2014 5 6.02 5.66
2014 6 5.67 5.62
2014 7 6.17 5.62
2014 8   5.40
2014 9   5.26
2014 10        5.13

 


Leading Indicator

The LEI rollercoaster actually became more consistent as the second quarter concluded.  Every other month so far this year has generated a different sign (although April’s non-change is technically an outlier) with January, March, April, and June negative and the rest positive.   The factors that had the biggest influence in the second quarter and July were new claims for unemployment insurance, the stock price index, and the real M2 money supply.  The latter was positive each month revealing the continued easing by the FED, but the other two were volatile.  It is disconcerting for us that the Department of Economic Opportunity has once again taken down their initial claims data as of July, suggesting their uncertainty about the numbers.  They did this for a large portion of 2013, making our job more difficult and our estimates less accurate.  The LEI remains up for the year, but by less than one point.  June was down and the preliminary estimates for July are not strong, though positive, but the LEI numbers recommend caution for the rest of the year.

 

 

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.  Our forecasts are also on the low side for the remainder of the year so far.  If this trend continues, look for the LEI to perform much better between now and the next LEIPLINE.

 

Year

Month

 Actual LEI Monthly 

(2001.12=100)  

 Forecasted LEI Monthly 

 (2001.12=100)

2013 10 113.844 111.96
2013 11 115.62 113.26
2013 12 115.01 113.58
2014 1 114.58 113.58
2014 2 116.55 114.95
2014 3 116.26 114.91
2014 4 116.25 114.81
2014 5 116.53 115.25
2014 6 115.72 115.29
2014 7 115.87 115.37
2014 8   116.56
2014 9   116.83
2014 10   117.02


Stock Price Index

Local stocks have not performed well this year collectively and the second quarter continued that trend.  Local headquarters stocks are now over 5,000 below the DOW on a comparable basis and local presence stocks are closer to half of the value relative to the DOW.  So far this year the local headquarters stocks and local presence stocks have both underperformed the DOW in three of the seven months and met or exceeded the DOW for four.  Despite this outcome the local stocks have fallen further behind the DOW by over 1,000 points each since the second quarter of 2013.

 

The final chart below presents the forecasts for the stock price index through the end of the third quarter of 2014, plus October. Since each of the forecasted index numbers is over 100, the local stock index is still 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

Month

Actual Stock Price Index Monthly
No Change = 100

Forecasted Stock Price Index Monthly
No Change = 100

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 5 100.2 104.02
2014 6 101.7 102.11
2014 7 98.2 101.60
2014 8   101.17
2014 9   101.38
2014 10   101.78

 


The Bottom Line, Locally

The local data from LEIP for the months of April through July is decidedly mixed.  The LEI continues to imply uncertainty while the CPI is showing some reason for optimism and the July unemployment numbers suggested reason to pause.  The stock data suggest that local firms are not performing as well as the major national stocks, but it would be somewhat imprudent to expect otherwise given that the Jacksonville firms are much smaller and less influential than the national firms in the DOW.  As we conclude this LEIPLINE we are less optimistic than three months ago, but also less confident in what we see.  Both domestic and foreign concerns are making it difficult to determine if the recovery will continue along its weak path, accelerate due to improved political and economic conditions, or take us back to the first quarter and the inherent weakness that greeted the New Year.  It is frustrating, however, to realize that we are now five full years out from the end of the Great Recession, and yet not entranced in a rapid expansion.