This is the thirty-fifth 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, yet
again, with a brief discussion of the national macro economy. The first quarter of 2015 was disappointing, but
with further revisions, not as bad as reported in the last LEIPLINE based on
the second release of the data. The
first two estimates for the second quarter are closer to historical norms, with
the second estimate actually robust. Inflation continues to persist at below
historical averages despite improving U.S. growth, but there has been some
increase in inflation in durable goods areas and food prices. The rest of the world is accelerating their
expansionary monetary policy movements because of slow or declining rates of
growth. Of course, as of this writing,
world equity markets are trying to recover from a week long free fall, blaming
the movements on the weakening Chinese economy, but more likely concealing
their concern for rate hikes by the FED.
In this edition of
the LEIPLINE, we report our ninth formal numerical forecasts of the data we
collect, for the three months of the third quarter of 2015, plus October and
While the first estimate for real GDP growth in 2015.1 was
0.2 percent growth, the revised data released on May 29th suggested
that the movement was actually substantially negative at 0.7%. However, the third report in July reversed
itself again and ended at positive 0.7% growth.
This outcome, which is likely to be close to final (although the
revisions can occur for up to three years), is less than a third of the
preferred growth, but positive growth is far superior to the alternative both
in terms of actual implications and its impact on consumer expectations. While there is no systematic measure of world
real GDP growth that is consistent across countries, a combination of slower
growth in the big three outside of the United States (China, Japan, and India)
and weak U.S. growth is not advantageous for future expansions in consumer and
The first estimate for the second quarter was much closer to
the desirable level of growth at 2.3% but the revised estimate was excellent at
3.7%. Last quarter we analyzed the last
few years of first quarter growth and noted general relative weakness. Since the end of the Great Recession, Second
quarter growth has averaged just over 2.7%, smack in the middle of the range
that economists argue is optimal for annual real GDP growth.
Specifically, the second quarter report implied that “[t]he
increase in real GDP in the second quarter reflected positive contributions
from personal consumption expenditures (PCE), exports, state and local
government spending, nonresidential fixed investment, residential fixed
investment, and private inventory investment.
Imports, which are a subtraction in the calculation of GDP, increased.
The acceleration in real GDP in the second quarter reflected
an upturn in exports, an acceleration in PCE, a deceleration in imports, an
upturn in state and local government spending, and an acceleration in
nonresidential fixed investment that were partly offset by decelerations in
private inventory investment, in federal government spending, and in
residential fixed investment.” http://bea.gov/newsreleases/national/gdp/gdpnewsrelease.htm Ultimately, the second quarter of 2015
reflected a return to more normal growth in the traditional areas with very
positive news relative to exports, symbolizing a more robust Europe and
improved U.S. trade elsewhere as well.
Second quarter inflation averaged between 2.5% and 3% for
the second quarter. The last time
inflation was that high in the April to June time period was 2011, and before
that one has to go back to 2008 and 2006.
The July inflation rate fell by tenth of a percent, but this was due to
the beginning of the major drop in oil and gasoline prices. That trend has continued through August with
oil landing below $40 per barrel and gasoline averaging in the $2.30 range. Naturally, the decline in oil prices is the
result of increased U.S. production, Saudi Arabia’s willingness to circumvent
OPEC restrictions, and the improvement in the value of the dollar (the oil
market base currency). However, reflection
on prior declines in oil to the $40 per barrel level reveals gasoline prices
below $2, not the $2.30 level currently.
A more global economic perspective leads to the realization that oil
prices have found their level in a far more competitive marketplace than during
the OPEC domination, and even the attempts by speculators and refiners to boost
prices has not been very successful.
If inflation is going to increase between now and the end of
the year it will be on the back of improving labor markets. New job creation is ratcheting upward and
initial claims for unemployment insurance are moderating. The California drought and the impacts on
fruit, feed, and grain prices is raising beef and chicken prices and eventually
these markets will be more successful in passing on these higher costs to
consumers. We still believe that
inflation will be higher in 2015 than any time since 2007, and we have
mentioned several times before, justification for the FED to raise interest
The unemployment rates for the second quarter and July
continued their downward trend which has taken them to 5.3% for both June and
July. The July rate was nine tenths lower
than the 6.2% unemployment rate in July 2014.
The most recent number is also 3.5% lower than in July 2009. Clearly,
labor markets are considerably better off today than six years ago, but the
labor force participation rate is extremely low which makes the headline
unemployment rate look better than it would appear on an apples-to-apples
basis. Some economists believe that we
have returned to full employment, but it is very clear that even given present
propensities to not participate in the labor market by older workers and young
people, we are not back to full employment as it occurred before 2007, and the
evidence is overwhelming that we do not feel like the economy is healthy even
if the data suggest that it is relatively so.
After hitting bottom in May of 2014, one year Treasury bill
rates have rebounded by 30 basis points to 0.39%. This level is still exceptionally low, but
the trend is upward despite FED idleness.
Three year Treasuries have now been over 1% for eleven of the last
twelve weeks after hitting bottom at 0.53% in October 2010. Thirty year
Treasuries were in the low 3% range in June and July, but have fallen into the
high 2% range since. The reality is that
rates are still very low, but an increase in inflation, or a sense by the FED
that it is time to quell monetary easing will likely push both short term and
long term rates up, but the former more so than the latter. Pundits and those active in equity markets
are dreading such a move (witness the over 2,000 point drop in the DOW last
week), but interest rate normalcy is in our opinion the golden goose to
stimulate growth, not the continuation of impotent quantitative easing that has
been unsuccessful in the U.S. over the last six years, in Japan over the last
25 years, and just as unsuccessful as such policies will be in China and the EU
in the near future.
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 2015.2 Jacksonville
Although there was some retrenchment in July, unlike prior
second quarters, the inflation rate remained high in the April through June
quarter. Prices increased very
significantly in June due primarily to a major escalation in housing prices and
sales by over 19% annualized. The annualized
average inflation rate projected for all of 2015 based on January through July
was 3.75%. However, July revealed a
small decline in the inflation rate due to slower housing growth and some
diminutions in used car and truck prices and a few of the food price
categories. Overall, the outlook is for
more inflation than Jacksonville has experienced since before the great
recession, an indicator of improving economic conditions.
Below is a chart that
reveals the actual (annualized) inflation rates for the quarters of 2014 (plus January
through July, 2015), with our past forecasts and those from August through November
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 third quarter of the year through November suggest inflation diminishing
relative to the actual events in the second quarter but at least twice what we
have seen on average in past years. The
outlook for inflation is higher than normal, although we have to admit that we
have not been particularly accurate predicting monthly inflation up to this
point. More specifically, we have over
predicted inflation by double in aggregated since the beginning of 2014 (2.64%
The Jacksonville unemployment rate has bounced around on
either side of the national average so far this year, with four months above
the national number and two below. However,
three of months in excess were collectively higher by only one tenth of a
percent and overall for the six months of 2015 collectively Jacksonville is
slightly lower than the national average.
The summer so far has revealed an escalation in the size of the local
labor force compared to prior summers with greater employment percentages as
well. We are not back to full employment
but we are moving in the correct direction with improved employment not just in
lower skilled jobs but better paying jobs as well.
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 most
of 2015. We forecast less unemployment in August
through November. If our estimates are
correct, the local MSA unemployment rate is headed towards below 5% by October.
Summer is always tricky relative to
unemployment with the flow of high school and college students into the labor
market temporarily, and graduates in more permanent positions. However, the evidence is pretty conclusive
that employment and the labor force are both expanding with only small changes
in the unemployment rate in the right direction.
Despite negative implications for February and April, the
LEI has been up for the year overall, and eight of the last ten months. The local LEI is still not advancing as much
as at the national level but it is up almost three points since December.
Building permits jumped in June to over 1,000 for the months with local stocks
following the national waves and initial claims for unemployment insurance in
the 2,500 to 3,000 range as opposed to over 10,000 in the depths of the
recession. Consumer confidence is now
around 90, which is far better than six years ago as well.
The chart below reveals our forecasts for the leading
indicators. It should be evident that
the forecasts are for continued slow growth in the LEI. Since the LEIP LEI seems to forecast best 2-3
months out, we see a strong early fall season setting us up for a solid
Christmas selling period.
After two of the first four months this year generated
performances below the DOW, we are forecasting better growth in the next four
months (with the possible exception of November. Because our local companies are generally
smaller than those in the DOW, it perhaps is not surprising that in a climate
whereby bigger is viewed to be better, local stocks are being outperformed.
The final chart below presents the forecasts for the stock
price index through the end of the third quarter of 2015, plus October and
November. Let’s hope that we are right about the forecasts for local stocks for
the benefits of those companies, their stockholders, and the local economy. Given the events of last week, we are
optimistic despite the sell-off.
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