LEIPLINE Newsletter - February 2015 The Jacksonville Economy in the Fourth Quarter of 2014

Introduction

This is the thirty-third installment of the LEIPLINE.  Our primary focus here as in the past is 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.  The fourth quarter of 2014 was somewhat disappointing after the very strong second and third quarters.  The first and second estimates of real GDP growth suggest another positive movement in the fourth quarter, but only consistent with or below historical average growth after two quarters of much above average expansion.  Inflation continues to persist at below historical averages despite improving U.S. growth, in large regard related to falling oil and gasoline prices and below average import demand.  The rest of the world is barely growing by comparison to norms but the U.S. economy is expanding more rapidly, which will hopefully pull the rest of the world with us..

 

In this edition of the LEIPLINE, we report our seventh formal numerical forecasts of the data we collect, for the three months of the first quarter of 2015, plus April 2015.

 


THE NATIONAL MACRO ECONOMY

Both the first and second estimates of real GDP for the third quarter of 2014 were well above historical norms at 3.9% and then 5.0% respectively.  The latter estimate surprised many economists who anticipated a revision downward.  On the heels of 4.6% growth in 2014.2, this reflected the best back-to-back growth in real GDP since the third and fourth quarters of 2003!  This sizable growth surge was driven primarily by consumer purchases of durable goods (respectively by 14.1% and 8.7% in the second and third quarters). Fixed investment in equipment of 11.2% and 10.7% respectively contributed significantly along with goods exports of 14.3% and 6.7%, and a deluge of national defense expenditures in 2014.3 of 16%.  In addition, state and local government spending rose by over 4% in aggregate over the two quarters.  The fourth quarter revealed diminished rates of growth in several categories such that the second estimate for 2014.4 was four tenths lower than the mediocre 2.6% growth reported in the preliminary release.  More specifically, growth in the fourth quarter was bolstered by intellectual property investment expansion by almost 11%, combined with moderate growth in all of the investment categories except for equipment.  Consumption of in particular durable consumer goods was also solid at 6% growth.  The negative influences were the result of a surge in imports by over 11% for goods, while exports only expanded by about half that much.  Federal government spending was also off, specifically by 12.4% for national defense.

 

The February 27th release from the BEA indicated that “The increase in real GDP in the fourth quarter reflected positive contributions from personal consumption expenditures (PCE), nonresidential fixed investment, exports, state and local government spending, private inventory investment, and residential fixed investment that were partly offset by a negative contribution from federal government spending.  Imports, which are a subtraction in the calculation of GDP, increased.  The deceleration in real GDP growth in the fourth quarter primarily reflected an upturn in imports, a downturn in federal government spending, and decelerations in nonresidential fixed investment and in exports that were partly offset by an acceleration in PCE, an upturn in private inventory investment, and an acceleration in state and local government spending.” http://bea.gov/newsreleases/national/gdp/gdpnewsrelease.htm

 

When considering the fourth quarter numbers one must always remember that these are seasonally adjusted from the norm that reflects stronger than normal growth in the fourth quarter due to the Christmas season surge.  Each of the last two prior years’ fourth quarters were one to two percent below the third quarters that preceded them (although 2011 did not reflect this change).

 

Fourth quarter inflation continued the third quarter diminution with the overall inflation rate in the quarter at approximately the one half of one percent rate of deflation.  January’s inflation rate was the lowest (most negative) since the end of 2008. Clearly, the reasons for the declines are primarily derived from the significant drop in energy prices in virtually all categories for the entire quarter, which continued through January.  For example, the BLS gasoline prices index was off by over 18% in January on the heels of seven consecutive declines from June through December.  Overall, the inflation rate for the last twelve months has grown by only 1.3%. 

 

The unemployment rates for the fourth quarter and January were flat within a one tenth range of the average of 5.7%.  The January rate of 5.7% was nine tenths lower than the 6.6% unemployment rate in January 2014.  The implication of the most recent data is however, that 9 million people remain unemployed, 2.8 million who have been unemployed for 27 weeks or longer or 31% of those who are unemployed.  The civilian labor force participation rate remained very low compared to the last forty years at 62.9%, reflecting departures from the labor force and particularly unfortunately, very slow assimilation of new entrants recently graduated from high school and college.  The largest component of the reported unemployment rates, U-6 is still 11.3% reflecting those marginally connected to the labor force plus those working part time that would prefer to work full time.  As we indicated last quarter, the biggest drag on our economy’s growth right now is underemployment driven by baby boomers who cannot acquire suitable employment, young people who are having trouble breaking into the labor market due to the elimination of many entry level programs, and those boomers who cannot retire, thus who are standing in the way of the young people because interest rates are so low that the earnings on their retirement income are insufficient to allow them to depart.  To put things in perspective, the unemployment rate for those in the over age 55 category is 4.1% (plus many discouraged workers) while those in 16-19 age bracket are unemployed at the 18.8% level.   The trend in unemployment is definitively in the right direction, but way too slowly for substantial enhancement of standards of living.

Last quarter we told you that the average yield on three year treasury bonds (an intermediate term, virtually riskless asset) for the period identified as the “Great Moderation,” i.e. 1986-2005 was 5.69%.  This period was after the intervention of Paul Volker as Chairman of the Federal Reserve Board of Governors, but reflective of the time frame when inflation rates moderated and growth was relatively strong.  The October three year rate was 0.97% and it had not been above even 1% since April of 2011.  Fast forward to February 6, 2015 and the same rate was 0.88%.  It is perhaps an indicator of a trend that the 2/13/2015 rate and that for the 20th were 1.04% and 1.06%, respectively.  Since financial markets often precede FED policy shifts, the much needed increases in interest rate may have just begun this month.


What Does It All Mean?

The fourth quarter of 2014 was moderately below desired levels for RGDP growth.  We reiterate this quarter that many economists have concluded that oil and gasoline prices are not as important as they once were, but it is difficult not to recognize that the acceleration of growth over the last seven months has corresponded to declining energy prices with significant correlations, and that more recent growth may have slowed in anticipation of the gasoline price increases that we have seen over the last few weeks predicated on consumer beliefs that the gasoline gravy train was screeching to a halt.  This evidence suggests just how crucial the maintenance of competitive markets in fuel continues to be.  It is long past time that world governments work collectively to prevent OPEC, oil speculators, and gasoline refiners from manipulating fuel prices given their anticompetitive advantages, for the betterment of world economic growth..

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 2014.4 Jacksonville CPI

The LEIP CPI ultimately ended down for four consecutive months (August through November) and down five of the last six months of 2014 prior to December.  However, December and January generated small and moderate price gains respectively, due to housing recoveries and escalations in used cars and trucks prices.  The overall inflation rate in the fourth quarter was definitively negative, with the annualized rate for the entire year of only 0.15%. This is well below the 1.3% national rate.  Like has been the case for most of the existence of LEIP, the local inflation rate is well below the national average, partly because we believe that inflation tends to be lower in Jacksonville relative to many other cities, but also due to the downward bias in our methodology compared to the BLS procedures.  However, since the economics literature implies that the national CPI is biased upward by around one percent, we perceive that our calculations may to spot on.

 

Below is a chart that reveals the actual (annualized) inflation rates for the quarters of 2014 (plus January 2015), with our forecasts through April 2015 reported in bolded 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 first quarter of the year and April suggest inflation about twice the average which actually arose in the fourth quarter, implying  1.1%.  Whether this continues and 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 or rather, they maintain the status quo.  Clearly our forecasts suspect the latter. If the recent spike in gasoline prices continues and accelerates, we likely under forecasted inflation.  It should be quite clear however, that for all of 2014 we very significantly over forecasted inflation quite substantially.

 

 


   

actual

Forecast

   

inflation

Inflation

   

monthly

Monthly

Year

Month

in percent

in percent

       

2014

1

-3.33

2.61

2014

2

3.81

2.31

2014

3

2.35

3.38

2014

4

3.86

3.03

2014

5

1.42

2.49

2014

6

-3.54

3.41

2014

7

1.33

3.36

2014

8

-0.74

3.04

2014

9

-3.16

3.21

2014

10

1.66

2.66

2014

11

-2.56

5.39

2014

12

0.7

2.39

2015

1

3.23

1.23

2015

2

                        

0.8

2015

3

 

0.84

2015

4

   

1.7

 


Unemployment

The Jacksonville unemployment rate has fallen below the national rate again after rising above the national rate slightly in September and October.  The end of 2014 and the beginning of 2015 look quite positive for movements below 5% by the middle of the year.  Like the national outcomes part of the movement is positive associated with increased employment opportunities locally.  However, the discouraged worker issue and the numbers of individuals leaving the work force is evident locally too.  Through the fall the local workforce grew by a few thousand workers, but near the end of the year, while the numbers employed rose and those unemployed fell, the work force also fell.

 

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 first quarter plus April.  If our estimates are correct, the local MSA unemployment rate is headed towards below 5% by perhaps May. We were overly optimistic the last two months of 2014 and January, but are numbers are just low, not misrepresentative of the trend.  


 

 

 

actual

Forecasted

   

unemployment

unemployment

   

rate monthly

rate monthly

Year

Month

in percent

in percent

       

2014

1

5.78

5.75

2014

2

6.16

5.94

2014

        3

6.33

5.80

2014

4

5.80

5.70

2014

5

6.11

5.66

2014

6

5.75

5.62

2014

     7

6.26

5.62

2014

      8

6.54

5.40

2014

    9

5.79

5.26

2014

 10

5.79

5.73

2014

    11

5.47

5.11

2014

    12

      5.38

5.32

2015

          1

5.29

5.12

2015

          2

 

5.31 

2015

         3

 

5.21

2015

          4

   

5.08


Leading Indicator (LEI)

The LEI was down in December, but up significantly for the year overall. Building permits have been pretty stagnant in recent months but help wanted advertisements have accelerated to the 2,500 range per month as consumer confidence has risen along with vendor deliveries and purchases of consumer goods.  Local stock prices are still way below the DOW in both categories, but initial claims for unemployment insurance are also down, despite still averaging between 3,000 and 4,000 per month.

The chart below reveals our forecasts for the leading indicator.  After consistently under forecasting the LEI earlier in the year, we over estimated what the LEI would achieve in the third quarter. The fourth quarter forecasts were our best so far so if we have reached an effective methodology, things look quite good for the early spring.

 

 

Year

Month

Actual LEI Monthly

(2001.12=100)

Forecasted LEI Monthly

(2001.12 = 100

2014

1

114.6

113.58

2014

2

116.57

114.95

2014

3

116.28

114.91

2014

4

116.27

114.81

2014

5

116.53

115.25

2014

6

115.76

115.29

2014

7

115.68

115.37

2014

8

115.31

116.56

2014

9

116.34

116.83

2014

10

116.59

117.02

2014

11

117.29

116.66

2014

12

116.63

117.17

2015

1

117.25

117.36

2015

2

          

117.69

2015

3

 

118.2

2015

4

   

118.59


Stock Price Index

The local stock index implies that local stocks have been generally on an upward trajectory, but perhaps not as much so as the DOW.  More specifically, since weak July and August numbers, the local stocks have generated gains in two of the last three months. 

The final chart below presents the forecasts for the stock price index through the end of the first quarter of 2015, plus April 2015. Our forecasts for the end of 2014 and January 2015 were on the high side, but we anticipate coincident stock movements with the DOW for the first part of the spring of 2015.

 

Year

Month

Actual Stock Price Index Monthly no change = 100

Forecasted stock price index monthly no change = 100

2014

1

96.6

101.77

2014

2

102.3

102.8

2014

3

103.9

101.94

2014

4

98.7

100

2014

5

100.2

104.02

2014

6

101.7

102.11

2014

7

98.2

101.6

2014

8

91.1

101.17

2014

9

112.9

101.38

2014

10

101.8

101.78

2014

11

102.3

99.3

2014

12

101.3

102.9

2015

1

97.6

102.5

2015

2

        

100.2

2015

3

 

101.32

2015

4

   

100.94


The Bottom Line, Locally

The declining oil and gasoline prices through the end of 2014 and into February of this year have helped keep prices down in general and likely bolstered consumer confidence in the state and locally.  Stock prices, however, have been stagnant and unemployment has fallen, but more slowly than would be optimal to return us succinctly to full employment.  However, most trends are in the desirable direction as 2015 is getting started and outside of concerns over international turmoil and weakness, the U.S. economy and the Jacksonville economy both seem to be advancing nicely.