Economic News of the Wiregrass

Roger Peterson Thursday 30 June 2016

We the people of the United States, in order to form a more perfect union, establish justice, insure domestic tranquility, provide for the common defense, promote the general welfare, and secure the blessings of liberty to ourselves and our posterity, do ordain and establish this Constitution for the United States of America.

The uncertainties are sizable, and progress toward our goals and, by implication, the appropriate stance of monetary policy will depend on how these uncertainties evolve.
~ Janet Yellen. Chairman of the Federal Reserve, Speech June 6, 2016

The people of the United States are the sovereign of our great nation, all others are the representatives of the people. The President, Congress, and the Supreme Court are not the sovereign.

This is not the end, this is not even the beginning of the end, this is just perhaps the end of the beginning."
~ Winston Churchill, 1942

The National Scene:

Is the economic measure of Gross Domestic Product (GDP) Flawed? Does It Adequately Measure the Growth in Our Economy?

I was born on June 7, 1929 when the life expectancy of an adult male born in 1929 was 56 years. Today a child born in 2016 can expect to live on the average to age 78. I am now 87 years old and my life expectancy now is to live to age 91. What happened? Why didn't I die at age 56 or at age 78 which is the norm today? First is luck, I didn't get shot down after taking over 400 hits in Vietnam while serving as an aircraft commander and Air Force Major at age 40. An even more important reason could be the environment in which I was brought up, the parental nurturing, the nutrition, the medical care, the physical environment and perhaps my personal life style. What is it worth to live 31 years (87 minus 56) beyond the original statistical forecast? Let's assume a hypothetical case of an individual that earns an average of $60,000 for 31 years or $1.8 million beyond that which was predicted. This same concept applies to every individual born in 1929 and for those born every year thereafter (with of course different results). While the dollar advantage is important, it is the 31 years of additional life that is the really big payoff.

What has this got to do with Gross Domestic Product (GDP)? First GDP does not measure the changes that have occurred in our society since 1929 beyond those elements that are captured in the statistics that make up the GDP – the production of goods and services. It does not measure the cost and time of parental nurturing, it does not measure the advances in nutrition, medical care and the progress in creating a more livable environment.

Thus, when we worry about the slow growth in the economy, are we measuring the right things? Is it possible that our society is advancing in areas yet to be measured that define the present and future of the happiness and well-being of our society? For example, GDP does not measure the value of the enormous advances in information technology much of which is delivered free to the consumer, business or government. Microsoft offers its new Windows 10 free to users of Windows 7. The new version adds 1,800 new features at no cost.

Most of the economists that I have read agree that the GDP is an incomplete measure of the quality of life in our economy – and the pace at which it is advancing. However, they have yet to come up with an alternative. Thus, we are cautioned to use GDP as a rough measure of the advances that are taking place every day in our land within the limits of its scope.

Why Is Economic Growth in the U.S. So Slow?

The current recovery since the downturn in 2008 has been the slowest recovery from any recession since World War II. Furthermore, the rate of recovery is declining and thus raising the specter of moving into negative territory – although most economists don’t believe that will happen yet.

As this author has stated in previous editions of this newsletter, the cause of slow growth is uncertainty over the future course of events. Consumers, businesses and governments are reluctant to make commitments to expand, hire and start new enterprises in the face of the many unknowns present in the economy today. The mixed signals resident in the scores of economic indicators scare off bold moves and signal caution. Even Janet Yellen, Chairman of the Federal Reserve admits that the road ahead is not clear enough for the Fed to change course.

The move by the UK to leave the EU under Brexit is the clearest example of a whole new range of uncertainties for all of the economies across the globe. In the U.S. the stock market dropped over 600 points, the dollar strengthened against the Pound by over 7%, the yield on 10-year U.S. Treasuries dropped to 1.65%, gold and silver shot up – each of which create their own set of uncertainties within their sphere of the economy.

The Way Forward.

China, Japan, Russia, Brazil, among others, are experiencing slowing or negative growth. Brexit will only compound the problem with the need for new and untested trade agreements that will be necessary to recast the world’s trade and financial relationships with the UK.

When measured against other world economies, the U.S. is the strongest and will gain as a global safe haven for nervous foreign money, which will drive up the price of U.S. bonds and thus lowering their yields. The negatives for the U.S. include the loss of confidence in the future performance of U.S. stocks and the dramatic loss in the market. Another negative is the dramatic rise in the value of the dollar which will make U.S. exports costlier. Fortunately, the U.S. has the financial firepower to stay ahead of events. But even that firepower (credit expansion) has its limits.

The way forward will take time and a lot of patience on the part of investors, consumers, businesses and governments. It is not at all clear how all of this will work itself out. On the local level, it may well be that the state, county and city may well be able to forge ahead when focused on meeting the economic needs of its citizens and drawing on the benefit of ultra-low interest rates, cheap oil and foreign goods.

Success at the local level versus the drag of the state and national economic statistics brings up a whole new subject which will be discussed in future editions of this newsletter – stay tuned.

U.S. Unemployment Rate:

The unemployment rate declined by 0.3 p.p. to 4.7 percent in May 2016 from 5 percent in April, beating market expectations of 4.9 percent. It was the lowest reading since November 2007, as the number of unemployed persons declined by 484,000 to 7.4 million and the labor force participation rate fell for the second month in a row. Unemployment Rate in the United States averaged 5.82 percent from 1948 until 2016, reaching an all-time high of 10.80 percent in November of 1982 and a record low of 2.50 percent in May of 1953. Unemployment Rate in the United States is reported by the U.S. Bureau of Labor Statistics.

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 IndexTM (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 Business confidence rose to 55.1 on the second quarter 2016. The index increased 2.1 points and closed at its highest level in three quarters. That said, panelists are now less optimistic than a year ago when the ABCI registered 57.6. Note that an index value above 50 indicates a positive outlook.

Panelists continue to see expansion in the Alabama economy, but are less optimistic about the national economy. The outlook for the state economy rose, while the national economy index remained near the neutral mark at a slightly positive 50.9.

Alabama Home Sales:

    May 2016   Percent Change Year-over-year
Total homes listed   30,515   - 8.3%
Total home sales   5,279   + 11.4%
Median Sales Price   $ 145,838   + 3.2%
Average Sales Price   $ 164,995   - 2.0%
Average Days on the Market   138   - 11.4%
 

Home sales are up statewide (+11.4%) with prices remaining about level suggesting that sellers are willing to concede on price to make the sale. The inventory of homes for sale is down (-8.3%) and the inventory is turning over faster (Days-on-the-market down -11.4%) all of which would suggest that the Alabama housing market is strengthening.

Alabama Unemployment Rate:

The Alabama unemployment rate for the month of May 2016 is steady at 6.1 percent while the U.S. rate is now 4.7 % from a previous report of 4.9.

The Economic Outlook for the Wiregrass: Dothan Home Sales:

  May 2016 Percent Change Year-over-year
Total homes listed 1,137 -11.0%
Total home sales 151 +57.3%
Median Sales Price $ 128,000 -15.7%
Average Sales Price $ 141,021 -18.9%
Average Days on the Market 150 -13.8%

Comment: The spectacular increase in home sales in Dothan (+57.3%) year-over-year for May 2016 appears to come from the lower end of the market with the decrease in home prices. Apparently, sellers are willing to hold prices down in order to make the sale. Consequently, the average days on the market (-13.8%) shows that sales are occurring faster.

With inventory declining (Total Homes Listed -11.0%), it would appear that the Dothan housing market is moving toward a balance between supply and demand and is likely to be poised for a future of growth.

Houston County Unemployment Rate:

The May 2016 Unemployment Rate for Houston County is now 5.7% which is much improved from the same month last year where it stood at 6.4%. There is, however, the promise of higher employment for the Wiregrass at large with the potential arrival of new businesses in the Wiregrass that offer the promise of even more new jobs.

Dothan Sales Tax Collections:

Sales tax collections in May outpaced those from May of 2015 by $330,000, or 6.73 percent. The city collected $5.234 million in sales tax revenue during May, which reflects transactions made in April.

Overall, the city has collected more sales tax for each of the months in the 2016 fiscal year with the exception of last November. Dothan has collected $1.678 million more in sales tax than it did during the first eight months of the 2015 fiscal year and is $3.483 million 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 make up to 70% of the GDP, and therefore the GDP for Dothan is strong.

Lodging tax collections, which are gathered separately, recently reported an outstanding 14.6% 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 -- congratulations to all.

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? More on this subject in future editions – stay tuned.

For a Smile:

As an avid cigar smoker, I have always enjoyed this report of an interview by Barbara Walters with comedian George Burns:
Walters: Congratulation on your 94th birthday. I understand you still smoke cigars. How many do you smoke every day?
Burns: I smoke about four cigars a day.
Walters: Wow, you smoke four cigars a day at age 94. What does your doctor say about that?
Burns: I don’t know – he is dead.

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 1.0 – Thursday 30 June 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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