Economic News of the Wiregrass

Roger Peterson Thursday 15 September 2016

On any given day there are approximately 21,000 Air Force personnel deployed to more than 170 worldwide locations.

~ Source: Military Officer, September 2016 edition.

After 15 years of constant fighting, the U.S. military is a different beast than it used to be . . . How big does it have to be and how nimble, armored with what weapons and training to meet what contingencies [where]?

~ Gideon Rose, Editor Foreign Affairs, September/October 2016 edition.

An Editorial

It is a near certainty that the huge number of military personnel deployed to hundreds of overseas locations comes as a major surprise to the average American. Why are they there? What American security interest is at stake for each deployment? How long will they be there? What does it cost in manpower and budget? Who decides?

These may be just a few of the questions that come to mind to the people of the United States who are the sovereign of our great nation. A solution to these questions could be for the sovereign to direct their elected representatives to conduct a thoughtful and comprehensive analysis of each military commitment, arrive at constructive alternatives and debate the results for a meaningful conclusion. It is the national authorities, answerable to the people, who need to make the decision.

Turning to a personal note for the moment. Sometime in the mid-1970s I appeared as a witness before the Senate Foreign Relations Committees' Subcommittee on Treaties and Agreements with Foreign Powers under the leadership of then Senator Stuart Symington (former Secretary of the Air Force) who asked me:

Symington: Colonel, how many troops do we have in South Korea?
Peterson: Sir, approximately 19,000 (now 29,000).
Symington: How long have we been there?
Peterson: Over 25 years (now 65).
Symington: How much longer will they be there?
Peterson: Sir, so long as the national authorities direct that we remain there.

What does this have to do with the economy of the Wiregrass? The answer is a lot. At the personal level, our sons and daughters meet these foreign deployments while on active duty, in the Reserve or National Guard. On the business side, Fort Rucker and the flight contractor at Dothan Airport make a major impact on the Wiregrass economy.

Thus, the future military commitments of the United States will continue to be of major interest to all of our fellow citizens who will hopefully chose the course of informed and rigorous analysis and debate by the peoples' representatives in Congress.

The National Scene:

GROSS DOMESTIC PRODUCT

On any given business day, one can follow scores of different economic statistics that seek to measure the past performance of a specific segment of the U.S. economy. Chief among these data points is the measure of the rate of economic growth of the overall economy expressed in the Gross Domestic Product (GDP) which is the sum of all the goods and services produced in the U.S. within a given period of time.

While not perfect, most observers use the GDP as an approximate measure of the rate of growth in the economy. During the first quarter of 2016 (2Q16) the economy grew by a very sluggish 0.8% followed by a weak 1.8% in the second quarter (2Q16).

The current forecast for the third quarter (3Q16) is 1.9% and 2.2% for the fourth quarter (4Q16). This should be compared with the original government forecast of 2.7% for the full year 2016 which was later revised a month ago down to 2.4%.

us-gdp

For the past five years, most government forecasts for GDP have been wrong and have been mostly revised downward. It is worrisome that the best economic minds in government can’t do a better job of estimating the future. What is even more worrisome is the rate of decline in GDP growth for the past two years (see chart). Most knowledgeable economist claim that a rate of 3.0% is needed for the economy to get on track back to the historic rate of recovery following the past downturns since WW II. Looking at the chart, it doesn’t take a learned economist to realize that should the downward trend continue, the future does not look bright.

Inflation

The rate of inflation is another statistic that is closely followed as a means to judge the health of the economy. The Federal Reserve has implied that a 2.0% rate of increase (All Items) is their target to encourage business to invest, start new businesses, build plant, buy equipment and create jobs.

The Consumer Price Index for July 2016 reports the following:
All Items:  0.8%
Food at home:  -1.6%
Energy:  -10.6%
All items less food and energy:  +2.2%

The Bureau of Labor Statistics reports inflation two ways: (1) All items which is everything that they measure and (2) All Items less food and energy. They exclude food and energy on the basis that they are too volatile and thus skew the true picture of the economy. Thus you have the conflicting view that overall inflation at 0.8% is well below the Fed target of 2.0% while excluding food and energy shows the remainder of the economy at +2.2% which is above the Fed target.

It is especially interesting that Food at Home index has declined -1.6% which is great for consumers but not good for farmers and grocers. Energy dropped -10.6% for the full year and thus also helped the consumer.

There are some bold economists who believe that an inflation rate of 3.0% to 4.0% would energize the economy from its current stagnant position by encouraging business to jump into the economy with investments in plant and equipment and thus create jobs. The problem the Fed faces is how to contain inflation should it suddenly move upward within a short time – how to keep it within a 4.0% ceiling and not rushing ever upward as it has many times in the past.

Employment Situation:

On 2 September, the Bureau of Labor statistics reported the following:
Nonfarm payrolls M/M change:  +151,000
Unemployment rate:  4.9%
Average Hourly Earnings M/M change:  0.1%
Average Work Week:  34.3 hours.

Nonfarm payrolls rose a lower than expected 151,000 in August with revisions to July and June that net minus 1,000. The unemployment rate holds at 4.9 percent with modest increases on both the employment and unemployment side of this reading. Earnings are very soft in this report, up only 0.1 percent in the month for a year-over-year plus 2.4 percent which is down a sizable 3 tenths from July and isn't pointing to any wage hike flashpoint. And the workweek is down, at 34.3 hours with July revised 1 tenth lower to 34.4. Goods producing payrolls are down across the board reflecting weakness in mining, construction and manufacturing. But service sector jobs are once again strong and include further gains for professional & business services as well as a 25,000 increase in government jobs. There are definitely weak spots in this report though the headline payroll gains of 151,000 is respectable but isn't high enough to give the hawks the advantage at this month's FOMC where a rate hike in September is thus not likely.

What It All Means:

Interpreting the statistics overall suggest that the economic continues to grow but at an ever declining rate of growth. Will it go negative? The leading economic observers conclude that the answer is no -- yet.

As has been stated several times in this newsletter, the answer for this slowing growth is “uncertainty” in the market place. It is the uncertainty of world events, rapidly changing international trade patterns, a blizzard of new domestic regulations, the competing claims for the outcome of the Presidential election, a sagging inflation rate, the dilly dallying Fed as to the future cost of money (interest rates), among others that make life difficult for those that must reach out to commit capital for expansion, establish new enterprises that create jobs and put cash into the hands of the consumer.

Some knowledgeable analysts claim that there is nine to ten trillion dollars sitting on the sideline as cash or cash equivalents waiting for the fog of uncertainty to clear sufficiently for the entrepreneurs to estimate the risks more clearly and thus move forward with constructive actions for growth.

This hoarding of cash is the reason behind the financial markets until recently zooming to new historic highs at the very time the economy continues to disappoint all by failing to live up to the predictions for growth for the past seven years. With uncertainty as to the future so compelling, investors are holding back expansion of plant and equipment and instead seeking some form of return in the financial markets (stocks and bonds), increasing the demand and thus bidding up the prices of these instruments. The huge liquidity created by the Fed (quantitative easing) to encourage investment has instead ended up in the financial markets not investing in the building of new physical plants and thus creating jobs and income as originally intended. Using surplus cash to increase dividends or stock buy backs (to elevate the value of the company’s shares) does not build plants, buy machinery or create jobs and increase individual income it is merely sloshing money around instead of investing in productive enterprise.

The answer clearly is to focus on the various causes of the uncertainty and come up with a plan for penetrating the fog and arrive at concrete actions at the Fed, government and private levels to reduce the unknowns. For example, if the Fed were to state when and how much they are going to raise rates and stick to it, it would go a long way toward erasing the uncertainty surrounding the future cost of money so that businessmen can nail down the cost of loans and the future value of profits.

The government could take a hard look at the blizzard of existing and future regulations involving the engineering of the environment and society and therefore determine the cost to near term economic growth versus long term improvements to society. In other words, get the economy growing which would then earn more taxes from the increased income and thus may pay for all the future social engineering. Perhaps the executive branch could declare a moratorium on new regulations for a stated period – like three to four years.

Private enterprise can do a lot. With the improved ability to analyze huge quantities of data from their own firms operating history together with an ever increasing number of organizations publishing free economic data, private companies now have the capacity to estimate future risks with improved clarity given all of the domestic and foreign headwinds that are resident in any global economy at any given time. With a better understanding of risks and opportunities, they should be able to move forward with constructive plans that put the surplus cash to the use for which it was originally intended.

What will it take to make all of this happen? Leadership – thoughtful and enlightened leadership that has the courage to listen carefully to the mood and thoughts of the people (the people are the sovereign of this great country not the legislative, executive, supreme court or industry moguls). Will it happen? Not until you the people demand it. Perhaps the place to start is an open and frank debate within the Congress with participation from all sides and factions. The current debate now underway in the Congress over the revision and simplification of the tax code may be a good place to begin this dialogue by the representatives of the people.

Be careful with these thoughts. Remember they were made up by a simple country boy from Santa Monica sitting at the knee of scholars while atending UCLA, Colorado, Harvard and CalTech.

Economic Outlook for Alabama:

Forecast:

Every three months the University of Alabama’s Culverhouse College of Commerce Center for Business and Economic Research produces an Index known as the Alabama Business Confidence Index™ (ABCI) which reports the views of a panel consisting of scores of Alabama business leaders (including the author of this newsletter) as to their perception of the economic outlook for the forthcoming quarter.

The latest edition of the index states that the outlook for the third quarter drops to 52.4 from the outlook for the previous quarter or 55.1 or down -2.8 points. Survey participants forecast a dim outlook for the national economy with a score of 49.0 which is down -1.9 points. Other scores include:

  Score Change from Q2
Alabama economy 52.8 -3.6 points
Industry Sales 54.9 -4.9
Industry Profit 53.0 -3.3
Industry Hiring 51.3 -3.2
Capital Expenditures 53.4 +0.4

Note that an index value above 50 indicates a positive outlook.

Alabama Home Sales:

  2Q 2016

Percent Change

Year-over-year

Percent Change

5 Yr Avg

Total homes listed 171,583 +7.7% +12.0%
Total home sales 15,381 +11.4% +27.2%
Median Sales Price $ 144,637 + 5.9% + 11.4%
Average Sales Price $ 171,583 + 4.0% + 12.0%
Average Days on the Market 144 - 5.7% - 7.9%
 

Home sales are up statewide +7.7% (Y/Y) with median prices up +5.9% suggesting that sellers may be willing to concede on price to make the sale. Home sales sale are up +7.7% and the days on the market (turnover) is down -5.7% which suggests that the market is clearing inventory faster. Taken together, the statistics suggest that the Alabama housing market is strengthening. The percent change over the five-year average has been added to providesa general view of the pace of recovery over the past five years.

Alabama Unemployment Rate:

Alabama Department of Labor announced recently that Alabama’s, seasonally adjusted July unemployment rate is 5.7 which is down from 6.0%, June’s rate of 6.0%, and below the July 2015’s rate of 6.1. This is indeed good news for Alabama as more jobs have been created to absorb the new entrants and still bring more of the unemployed onto the payroll.

Conclusion:

Scanning the statistics for Alabama one can conclude the state is on the mend, but at a slow pace of recovery.

The Economic Outlook for the Wiregrass: Dothan Home Sales:

  2Q 2016

Percent Change

Year-over-year

Percent Change

5 Yr Avg

Total homes listed 1,131 - 11.1% - 9.3%
Total home sales 417 + 27.4% + 45.2%
Median Sales Price $ 147,833 + 2.7% + 5.8%
Average Sales Price $ 161,702 - 2.9% + 1.4%
Average Days on the Market 150 - 3.2% - 8.1%

Comment: The spectacular increase in home sales in Dothan (+27.4 year-over-year for the Second Quarter (2Q) 2016 appears to come from the lower end of the market as represented by the decrease in average home prices. Apparently, sellers are willing to hold prices down in order to make the sale. Consequently, the average days on the market (-3.2%) shows that sales are occurring faster but at a slowing rate when compared with the five-year average (-8.1%).

With inventory declining (Total Homes Listed -11.1%), it would appear that the Dothan housing market could be moving toward a balance between supply and demand and thus may be poised for a future of growth.

Unemployment Rates for the Wiregrass:

July 2016: 5.6%
June 2016: 6.4%
July 2015: 6.9%

As compared to Alabama 5.7% and U.S. 4.9%.

The unemployment rate for the Wiregrass shows significant improvement month-over-month and year-over-year. The future looks bright as more new jobs are planned for the expanded poultry plant and the new facilities for Army fixed wing training at Dothan Airport.

Dothan Sales Tax Collections:

Overall, the city has collected more sales tax for each month in 2016 fiscal year with the exception of last November. Dothan has collected $2.254 million or 3.98% over 2015 and is $4.470 million or 8.22% ahead of conservative budget projections.

This is exciting news indeed as sales tax receipts can be considered a proxy for the level of retail business activity in the city. Since retail sales make up 70% of GDP, one can conclude that retail sales for Dothan and the local GDP is strong and growing.

Lodging tax collections, which are gathered separately, recently reported an outstanding 4.65% increase year over year. The lodging industry under the leadership of the Dothan Area Convention and Visitors Bureau has done a great job attracting major events that have brought an outsized number of visitors and consumers.

What does it mean for Dothan?

Taken collectively, the economic statistics for Dothan appear to be outperforming the similar state and national numbers. What makes Dothan special? The answer may be the result of the combined efforts of the Dothan Area Chamber of Commerce and all of the ancillary programs associated with Chamber that are dedicated to growing existing businesses and recruiting entirely new ones.

It important to note that the growth statistics cited above are real number in the sense that they outpace the current rate of inflation by a significant amount. This means that the growth taking place in the Wiregrass is real and deserves the applause of the citizens.

For a Smile:

f you want to teach a parrot to be an economist, all you have to do is teach him two words -- supply and demand.

Even if two economists have diabolically opposite views, they are both right.

~ Praveen Raj

The Reader Is King and Queen: This piece is written with you in mind therefore, I would be grateful for your reaction, comments or suggestions to further improve the value of this newsletter to you.

 

Roger Peterson sbcrpeterson@outlook.com -- V 2.0 – Thursday 15 September 2016

The Economic News of the Wiregrass is offered free of charge as a public service to the community and does not represent the views of SunSouth Bank or its employees. It is produced by the author using a wide variety of media sources including: The Wall Street Journal, the Financial Times, Bloomberg.com, Econoday, Capital Economics, U.S. Bureau of Labor Statistics, Federal Deposit Insurance Corporation, U. S. Federal Reserve, Market Watch, CNBC News, the Dothan Eagle, Barron’s, Fortune, The Economist among others without attribution. The views and comments expressed are solely those of the author. There is no intention to offer investment or tax advice and readers should consult a professional advisor of their choice. There is no claim for the complete accuracy of the information and any errors or omissions are unintentional.


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