This is the thirty-seventh 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 with a discussion of the national macro economy. The second estimate of fourth quarter growth was a little stronger than the initial estimate which came in at 0.8% growth, settling at 1.0%. For all of 2015 real GDP growth came in at 2.4%, just below the 2.5% - 3.0% growth that economists often cite as optimal. The third quarter revealed 2.0% growth, with the second quarter reflecting the strongest performance at 3.9% growth. While we would prefer that growth was closer to 3.0% on an annual basis, the real GDP reflection of the strength of Main Street is still quite positive despite the negative ramifications in financial markets. However, the reader should not lose sight of the reality of the U.S. economy in the modern era: that more and more of our economy is service oriented with particular emphasis in financial asset manipulation, producing additional concern for what is happening in financial markets.
The national inflation rate in January 2016 was absolutely flat employing the CPI-U (for urban residents) with the annual increase for January, 2015 through January, 2016 at only 1.2% total. However, the annual data that runs from July through July reflects even much slower inflation at 0.11 percent in total. It should be obvious to most that while prices in some areas have increased, the overall inflation rate was driven to extremely low levels by the dramatic decline in fuel, energy, and gasoline prices due to the decline in the international price of oil.
The average national unemployment rate fell below 5% for the first time since November 2007 in January 2016 at 4.9%. However, as we mentioned last quarter, the continuing declines in the labor force participation rate conceals the true ramifications of the reduction in the unemployment rate, implying substantial numbers of people leaving the workforce (or not entering). A disproportionate number of these individuals are dropping out from the ranks of the unemployed, generating the perception that the labor market is improving considerably when it only appears that way. As a consequence, the positive news relative to unemployment is accompanied by undesirable reductions in production and output capacity.
In this edition of the LEIPLINE, we report our eleventh formal numerical forecasts of the data we collect, for the three months of the first quarter of 2016, plus April.
Real GDP growth is the cornerstone of how we measure the health of the macro economy. It is a broad-based index that takes into account the production and provision of a diverse offering of goods and services. Its growth rate is fundamental to how we perceive that the economy is doing in producing sufficient output to satisfy consumers. However, its growth needs to be assessed in the context of realizing that GDP reflects many goods and services that never accrue to households. In this regard there are subcomponents of GDP, like per-capita disposable income that better reflect our standard of living. If the growth rate of the latter does not match the former, then we are not as well off (badly off) as the real GDP numbers reflect. This outcome has been quite consistent over particularly the last decade as growth in household income has been at lower rates than real GDP growth, particularly in other than the top two deciles of disposable income. As a consequence, while real GDP growth is just below the desirable range, the growth of household income has lagged behind, explaining why we do not feel like the economy is progressing as we desire. Keep this in mind when you interpret macroeconomic data changes. With this in mind, the real GDP data are as follows.
Specifically, “[t]he increase in real GDP in the fourth quarter reflected positive contributions from personal consumption expenditures (PCE), residential fixed investment, and federal government spending that were partly offset by negative contributions from exports, nonresidential fixed investment, state and local government spending, and private inventory investment. Imports, which are a subtraction in the calculation of GDP, decreased. The deceleration in real GDP in the fourth quarter primarily reflected a deceleration in PCE and downturns in nonresidential fixed investment, in state and local government spending, and in exports that were partly offset by a smaller decrease in private inventory investment, a downturn in imports, and an acceleration in federal government spending.” http://www.bea.gov/newsreleases/national/gdp/gdpnewsrelease.htming.
Fourth quarter inflation was actually at an annualized rate of just over 1% with December registering a downturn of 0.1%. The fundamental deflationary driver was once again oil and gasoline prices. As of this writing, oil prices are right around $30 per barrel and gasoline is averaging in the low $1.70 range. The current market for oil and gasoline is unconstrained by collusive forces (OPEC) for the first time since 1986 and the results are obvious – producers continue to pump and supply oil to the world markets and prices are below 1974 levels. However, do not ignore the impact of the appreciating dollar since oil prices are quoted and traded in dollars. Part of the decline in prices reflects this reality. While the deflationary effects of lower oil prices are out in the open along with the impacts on employment and unemployment in oil related industries, the positive influences associated with lower fuel prices are hidden and difficult to infer. Also concealed are the inflationary influences like rising housing prices, increased costs for fruits and vegetables, and other influences that are masked because the overall rate is falling due to energy. Ultimately, energy’s dominance in the market baskets of households is keeping inflation in check as long as oil producers operate semi-independently, refiners do not generate extra profits, and OPEC cannot agree on quota limits.
The headline unemployment rates for the fourth quarter and January have now hit their lowest levels since November 2007. However, perhaps even more positively, the U-6 unemployment rate (total unemployed, plus all persons marginally attached to the labor force, plus total employed part time for economic reasons, as a percent of the civilian labor force plus all persons marginally attached to the labor force) has now been below double digits since October 2015 at 9.9%. While this is still above historic norms for strong economic conditions, it reflects that fewer workers are working part-time who would prefer full time employment and fewer workers are working only sporadically. However, this does not account for the continuation of the decline in the labor force participation rate that has the economy at levels not seen since the mid-1970s. The reality is that some of this phenomenon is the result of the baby-boom generation beginning to reach traditional retirement ages; and still more is a reduction in the participation of both males and females who have small children. However, the negative side of this reality is that many younger workers are still under-employed or unemployed resulting from a lack of entry-level options, in particular, for college graduates.
Interest rates are still tremendously below historical norms. After the Federal Reserve’s December move to boost interest rates generated a small movement upward, rates have fallen backward again in particularly on the longer maturities. The weakness in financial markets is providing incentives to forestall further interest rate increases, and the media justifies this stance because inflation also seems to be in check. However, it is instructive to realize that the FED predominantly focuses on core inflation as opposed to the headline rate, and core inflation rose by just under 2% in 2015, not 0.1%, and it was up despite a further decline in oil prices, by 2.2% in January 2016. Consequently, inflation measured this way is right at the high point of the FED’s target range, continuing to suggest that further rate increases are warranted. One should not lose sight of the reality that financial markets, and particularly stock markets tend to improve when interest rates are low. Given the major role that financial markets play in the U.S. economic climate, and the media’s fixation on daily swings in the DOW and other stock index numbers, there has been too much emphasis on keeping rates low as they relate to Main Street. An article in a recent FED publication discussing the monetary policy of the last seven years indicates that the FED does not really have a good handle on how effective the expansionary policy of low interest rates has been (or even if it provided any stimulus what so ever), but maximizing stock prices should not be a goal for fiscal or monetary policy independent of the influences on macroeconomic conditions.
What Does It All Mean?
Macroeconomic indicators are continuing to be upbeat with growth just below the desirable range, inflation very low or close to non-existent, unemployment bordering on full employment, and despite interest rates that are way lower than they should be to promote normalcy in financial and credit markets. Those who are politically oriented may give credit to federal government policy and the effectiveness of the fiscal and monetary policy groups. However, the evidence of the positive impact of either is difficult if not impossible to infer and we believe that the resilience of the U.S. private sector continues to produce improvements despite government intervention imposed without the tools to know the likely outcomes. Those outside the realm of economics can point to the continued weakness in the EU, the impact of terrorism throughout the world, the rise of yet another medical pandemic with the Zika virus, the threats associated with North Korea and the Syrian Civil War, and other political and social ills; but as of February 2016, the U.S. economy is gaining steam and the threat of recession and possible worse outcomes seem unlikely at this point.
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 2015.4 Jacksonville CPI
The fourth quarter of 2015 plus January reflected an overall decline in prices by about one tenth of a percent. Only the November about one-half of one percent increase broke seven consecutive months of declining prices. However, the annualized average inflation rate for all of 2015 based on January through December was still higher than most years since LEIP began in 2002, at 1.74%. The year was unusual in several regards, not the least of which was that the first half of the year was exclusively inflationary while the second half was almost all deflationary. Naturally, like at the national level, the cause for the latter year declines was fuel, and oil and gas. The overall inflation rate being as high as it was suggested that the fuel declines were not large enough to override the increases in other categories, the largest of which was housing. The combination of various kinds of housing sales and prices was up over 37% in 2015. Higher food prices were anticipated early in the year, but they did not pan out. Despite improvements in the labor markets and leading indicators which suggest that the local economy is improving, prices have been falling in aggregate virtually exclusively since July 2015. January 2016 continued the process, but we anticipate a reversal later in 2016 as competition in oil and gas diminishes and consumers continue to increase spending. This perspective is derived from the forecasts below.
Below is a chart that reveals the actual (annualized) inflation rates for the quarters of 2014, 2015, and January 2016) with our past forecasts, and those from February through April 2016 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 through April suggest inflation returning throughout the three months, but at moderate rates. It is encouraging that our forecasts hit January 2016 right on the nose.
The Jacksonville unemployment rate fell below the five percent level in November for the first time since April of 2008. The downward trend has been consistent since August 2015 and we forecast a continuation of the trend with one slight blip in February. Ignoring the very real caution related to the labor force participation rate discussed above, the trend is definitively in the right direction, suggested improved conditions both in the labor market and thus production as a consequence. However, baby boomers retiring in larger numbers and vacating the labor market would be very helpful to the LEIP students and their undergraduate and graduate colleagues as they break into the labor market, post degree.
December 2015 was a real damper on the LEI, but there were only two downturns in the measure after April 2015. The January value of the index was back up moderately as new claims for unemployment insurance took an atypical dip. The LEI was up only just over one point for the year overall, but thirteen of the last sixteen months have been up. Unfortunately, while building permits are at levels three times what they were during the Great Recession, they have not grown beyond about 600 per month, which is well below pre-recession peaks of over 2000. 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 is a definitive positive. Consumer confidence is now above 90 again, although only slightly, which is far better than six years ago as well. The LEI suggests that the beginning of 2016 will be strong, and our forecasts suggest an even better climate for the rest of the year.
The chart below reveals our forecasts for the leading indicators. It should be evident that the forecasts are for continued growth in the LEI.
Since the LEIP LEI seems to forecast best 2-3 months out, we see a strong early fall season, 2016.
The stock price index is not recommending positive outcomes for 2016. Although the last four months of 2015 were previously forecasted to be strong, September and October did not turn out to be and the forecasts for the first four months of 2016 are dismal at this point. This should not be surprising given the recent declines in financial markets throughout the country, however. Certainty relative to interest rates would go a long way to stabilizing financial markets both locally and nationally.
The final chart below presents the forecasts for the stock price index through the end of April 2016. Unfortunately, our past forecasts exceeded the actual outcomes by month, more often than not.
The news for the local economy as we move into 2016 is generally positive. Inflation is muted, unemployment is declining towards optimal levels, and local stocks while not performing well, are no worse than in national markets. In addition, the LEI was mostly strong throughout 2015 and beyond. There is no hint of a return to recessionary conditions in the local economy and indicators of the what the presidential and congressional elections portend is still many months off. Jacksonville resident and visitors should enjoy the improving weather and economic conditions as we move towards the summer months. Hopefully the economy will continue to heat up, but the temperature will not!
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