Friday, June 29, 2012

May Income and Spending Report

This morning, the government released the latest report on income and consumer spending.  The data continues to paint a picture of a sluggish economy with low inflation.  The headline numbers are that real (adjusted for inflation) disposable personal income rose by 0.3% in May while real consumption rose by 0.1%.  Consumption has risen by 1.9% over the last year, but only at an annualized rate of 0.4% in the last 3 months, confirming a slowdown in consumer spending, which will be reflected in the report on economic growth for the second quarter (to be released in late July).  Given that spending rose by less than income in May, the savings rate rose slightly to 3.9%, erasing some of the decline for this year, but still below the rate in January (and all of last year).

On a positive note, consumer inflation was slightly negative in May, led by a decline in energy prices.  Over the last year, inflation has been 1.5% while core inflation (excluding food and energy) was 1.8%.  Many criticize economists for considering core inflation in the short run, thinking that it's a way to downplay inflation.  However, currently inflation is running below core.  Why?  Though food inflation has been 2.3% since May 2011, energy prices have fallen by 3.8% (remember that the price of a gallon of gas was almost $4 a gallon in Spring 2011).  Of course the good news in terms of low inflation is related to the bad news involving sluggish consumer spending; a weak consumer tends to put a lid on price increases.

Wednesday, June 27, 2012

The Economic Performance of Florida & Its Metro Areas

Recently, I published a study based on research presented at the Florida Economic Symposium in April.  I should note that this doesn't involve sophisticated econometrics, but presents an analysis of the performance of the economies of the major metropolitan areas (MSAs) in Florida over the last decade (click here for the complete study).  Here's the abstract:

"From the highs of the housing bubble to the lows of the Great Recession, the Florida economy experienced significant change during the first decade of the twenty first century.  This study explores the performance of the state and its major MSAs both in terms of economic growth and employment.  In order to explore the relative competitiveness of each area, dynamic shift-share analysis was used to isolate the effects of national growth, industrial composition, and regional competitiveness in explaining the performance of each area’s employment growth.  While the industrial structure had a small positive impact on job growth for Florida and its metropolitan areas, regional competitiveness differed noticeably.  Once one removes the effects of industrial structure and national growth, most areas exhibited positive competitive effects, led by Orlando and Jacksonville.  Only Tampa had a negative competitive position.  Though a detailed analysis is beyond the scope of this study, the primary factor found to help explain the relative competitiveness of each area was its skills ratio: the ratio of adults with college degrees to those without a high school diploma, which showed a correlation of 0.61 with competitiveness.  This suggests at least a two-fold strategy for promoting job creation: strengthening efforts to increase high school graduation rates while also increasing the number of college graduates."

Besides the conclusions stated in the abstract, there's interesting information regarding the change in the composition of jobs in each metropolitan area, Florida, and the US.  It's no surprise that the sectors losing the most jobs tended to be manufacturing, construction, and information services, while the big winner was education and health services (employment in "leisure and hospitality" and "professional and business services" experienced rapid growth in certain MSAs).

When it comes to explaining the relative economic performance of the MSAs, several factors were considered, but the one that had the most impact was education, both at the top end (those completing college) and the bottom (those lacking a high school diploma).  Efforts to address educational outcomes at both levels is the key to addressing employment over time.  Of course this is no surprise since if adults have more human capital (based in part on their education), they'll be more employable.  Locations with more adults who are employable will also experience more rapd job creation.  How do we increase high school and college graduation rates?  That's easier said than done.  It involves more than just increasing spending on education.  It's also impacted by the home life of students, how education is delivered, and other factors as well.  Whether one considers a city, state, or nation, in order to generate more jobs, including high quality jobs, it first needs to create a high quality workforce.

Wednesday, June 20, 2012

Fed Policy, June 20, 2012

The Fed announced an extension of Operation Twist, which will continue through the rest of 2012 (was supposed to expire this month).  For those not familiar with Operation Twist, it involves the Fed selling some of its holdings of short-term Treasuries coupled with an equal purchase of longer-term Treasuries (designed to reduce long-term interest rates, which more directly affect the interest rate on most loans).  How did financial markets respond?  A few minutes of volatility followed by little change in market interest rates.  Why?  Normally when the Fed eases policy, it purchases Treasuries, introducing more funds into the financial system (Treasuries are removed from circulation, cash enters the system).  With Operation Twist, it puts some in and takes some out, resulting in no change in funds in the system.  The main purpose is to try to reduce borrowing rates somewhat, though the effect is limited at best.

On a related note, the Fed released its new economic forecast.  It now expects even more modest economic growth and little change in the unemployment rate through the end of 2012 (ending the year between 8% and 8.2%; the current unemployment rate is 8.2%).  Inflation is expected to be less than its target (target is 2%, inflation is expected to be between 1.2 and 1.7% due to lower energy prices).  2013 is expected to continue to be a continuation of the modest recovery, with small declines in unemployment and low inflation.  In fact, unemployment is expected to remain above 7% through at least the end of 2014.

What about QE3?  The bar is set pretty high.  In order to implement a new round of quantitative easing, there needs to be a perception of possible deflation (as in 2008 (QE1) and 2010 (QE2)), recession (declining GDP/significant increases in unemployment), and/or financial contagion from Europe (financial markets freezing similar to 2008-2009).  A continuation of a modest recovery would only result in minor attempts at easing (reinvesting interest earned on its bond holdings, continuation of Operation Twist, etc.).  Other than preventing another collapse as in 2008, monetary policy can only have a limited effect on today's economy (given record low interest rates and banks holding over $1 trillion in excess reserves).

Saturday, June 16, 2012

May Employment Report: Florida and Orlando

The latest figures for the Florida and Orlando job market show that the there's still a modest recovery taking place.  The state added 5300 jobs for the month and 53,800 over the last year.  Orlando's numbers, which are not seasonally adjusted, show a loss of 400 jobs in May but a gain of 4400 in the last 12 months.  This indicates a 0.7% rate of growth in employment for Florida and 0.4% for Orlando, both lagging the nation, which had a growth rate of 1.2%.  Despite that, the state and local unemployment rates have declined much more quickly than that of the nation.  How did that happen?  Though many have heard about the declining labor force participation rate nationally, it has fallen even more locally.  In 2007, prior to the recession, the labor force participation rate in Florida was about 64%.  As of May 2012, it has fallen to 60.1%.  This compares to a decline from 66% to 63.8% nationally.  Thus, Florida is experiencing a modest recovery in terms of employment, but the unemployment rate has declined by 2 full percentage points in the last year due in part to fewer people being in the job market.

Which industries are doing well?  Construction and manufacturing both reported significant gains in employment statewide in May, along with wholesale trade and leisure/hospitality.  As expected, state government showed the largest loss in jobs, but private education also had a significant loss (remember, the data are seasonally adjusted).  What about Central Florida?  The big winner locally was construction, which added 1600 jobs (nearly a 4% gain for the month).  As a result, for the first time since 2006, construction has not lost jobs over the previous 12 months.

What's the main message of this report?  Some of the same trends nationally are being seen locally.  Jobs are being added, but at a very modest pace (more slowly than the rest of the country).  The decline in the unemployment rate locally is being impacted by a significant decline in the labor force participation rate, which is falling more quickly than elsewhere.  It's still a recovery, but a modest one at best.

Friday, June 15, 2012

The Greek Election and the Role of Transparency

As most readers of this blog already know, there's a big election in Greece on Sunday.  The perception is that if Syriza wins, financial markets will panic, causing a flight to safety (lower bond yields in the US, Germany, and other safe havens combined with a large decline in stock prices).  At the same time, many think that if things get out of control, central banks around the world will inject liquidity to stabilize the global financial system.  Does that mean if New Democracy wins instead (the center-right party), the Greek situation will improve?  Unfortunately not.  As discussed in previous posts, there's no easy solution to the Greek problem.  To reassure financial markets, it must get its deficit under control, primarily through budget cuts.  However, budget cuts hurt the economy in the short run (and Greek unemployment already exceeds 22%) and the weaker economy that results could actually increase the deficit.  Does that mean it should engage in stimulus (whether through tax cuts or spending increases)?  Unfortunately, it's hands are tied since markets are already unwilling to purchase Greek bonds and finance deficit spending.

On a related note, what role does transparency play in crises?  Though some question the transparency of many governments, two countries stand out in recent years in terms of not being upfront about their financial conditions.  Many are aware that Greece "misrepresented" the size of its 2009 budget deficit (for example, click here).  That devastated its credibility and set it on the road to its current crisis.  What other country "misrepresented" its financial condition (for the answer, click here)?  Back in 2009, this country had just experienced a collapse in housing prices, but maintained that its banks were unaffected. Which country am I talking about?  Spain. This week, Spanish banks received a promise of a 100 billion euro bailout (I guess they really weren't in good shape after all).  Thus, the two countries currently bringing the most fear to global financial markets and policymakers are those that didn't face up to reality and instead tried to cover up the severity of their problems.  Lack of credibility gets punished in the form of higher interest rates (to compensate for higher perceived risk).

Unfortunately, we're not close to the end of this story.

Tuesday, June 5, 2012

A First Look at State GDP

This morning, the government released its first look at state-level GDP for 2011.  To no one's surprise, the fastest growing state was North Dakota, as it benefits from the oil boom (grew by 7.6% in 2011 after growing 9% in 2010).  You may surprised to hear that Oregon was the second fastest growing state followed by West Virginia.  Which state came in last?  After growing while the rest of the country was in recession, Wyoming has now experienced back-to-back years of decline.  Mississippi and Alabama came in 49th and 48th, respectively.  In all, the economies of 6 states shrank in 2011 (add New Jersey, Maine, and Hawaii to the three already listed).

Perhaps more importantly, what has happened to state economies since the start of the Great Recession?  Between 2007 and 2011, US GDP was essentially flat (growth was 0.001%).  However, there has been great divergence when its comes to the performance of state economies.  Which states suffered the most from the Great Recession and its aftermath?  No surprises this time.

Largest Declines in GDP, 2007-2011
  1. Nevada, -9.0%
  2. Michigan, -8.2%
  3. Florida, -7.4%
  4. Arizona, -7.0%
  5. Ohio, -4.9%
Of course three out of the top four states with the weakest economies (Nevada, Florida, and Arizona) were epicenters for the bursting of the housing bubble.  On a more positive note, which ones have experienced the most rapid growth?

Largest Increases in GDP, 2007-2011
  1. North Dakota, +29.8%
  2. Oregon, +14.4%
  3. Louisiana, +10.3%
  4. Alaska, +9.8%
  5. Texas, +7.3%
This time, the most common theme is energy, which had a sizeable impact on four out of the top five performing states (all but Oregon).  In case you were wondering, Washington, D.C. grew by 7.4%.  Though the overall US economy has been stagnant over the last several years, there's been significant differences in regard to the economic performance of the states.

Friday, June 1, 2012

May Employment Report - yikes!

There's no way to spin it any other way.  The May employment report was very weak.  In addition to the weak job growth in May, April's numbers were revised down significantly.  Looking at the numbers, the weakness was evident in several sectors, but two stand out.  Professional and business services added between 70,000-90,000 jobs per month in late 2011 and early 2012, but was flat in May.  Leisure/Hospitality, which had been adding 30,000-45,000 jobs, lost jobs last month.  Together, they represent between a 100,000 and 135,000 decline in the amount of job growth.

Digging further, the index of aggregate hours worked declined and is down at a 1.24% annualized rate over the last 3 months, suggesting that economic growth will be very weak at best in the second quarter.  The household survery shows both an increase in the unemployment rate to 8.2% and an increase in the U6 broad measure of unemployment to 14.8%.  Perhaps more importantly, estimates of full-time employment declined by over 1 million workers in the last 2 months while those working part-time rose (including a 400,000 increase in those working part-time for economic reasons over the last 2 months).  Add it up and it shows a weakening economy.  As discussed previously, the data from earlier in the year were distorted somewhat by seasonal adjustments and weather, but the size of the decline in job growth indicates that it's not just payback from overestimates in December-February, but a weakening economy.

Looking forward, the economy faces considerable pressure in the coming months.  Financial markets are reflecting the most stress since the end of the recession in the summer of 2009 (see previous post).  Does this mean that the US is heading into another recession?  At this point, it still looks like a weak expansion, but as the global economy slows (India, China, Brazil, Europe, ...) and risks of financial contagion from Europe increase, the recovery is likely to become more fragile.  Add to this uncertainty in terms of tax policy (expiration of many tax cuts at the end of this year) and the economy will continue to struggle through at least early 2013.

I know some readers are probably wondering if there's any good news?  Gas prices are going to continue to decline (wholesale price is $2.65 as of this writing, down 65 cents from its recent high in March).  In addition, both inflation and interest rates are likely to remain low as economic weakness persists.