Economic News of the Wiregrass

Roger Peterson Thursday 17 November 2016

Normal: A state of mind widely regarded as the norm or standard for individual or community behavior or action within a society.

~ Source: Webster's Collegiate Dictionary

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 common for individuals within every corner of the American economy to discuss what they consider the “normal” state of the economy compared with what they now perceive as the current state.

The discussions are often fun and more often they are taken very seriously with numbers and elements tossed around with great abandon. Seldom do all the participants come to a common view or an agreed universal conclusion. The trouble begins with the lack of a common understanding of what constitutes the “normal” state of the economy. There is no universal agreement either officially or independently of what is means to describe any element within the economy as “normal.”.

Everything is not lost however, if one is willing to accept the messiness of some official description of “normal” mixed with the perceived opinions of the pundits and revered experts sitting in their towers of wisdom at Stanford or Harvard [my alma mater]. With an abundance of courage, some chutz-pah and a lot of reading; this author seeks of describe the “normal” state of the economy in contrast to what is currently viewed as the current state. The reader is advised to use this information with great caution as it is but one man’s opinion of the state of the world. Thousands of students of the U.S. economy could make the case for wildly different numbers.

Anyway, here is my shot for whatever value it may have for you: (all data Year over year).

  "Normal" Current
Gross Domestic Product 3.0% 2.9%
Inflation Rate 2.0% 1.5%
Unemployment Rate 5.4% 4.9%
Productivity Growth 2.5% 0.0%
Real wage increase 3.4% 2.8%

The Rate of Productivity Growth:

The most disappointing number is the 0.0% growth in the rate of increase in productivity. This author believes that the number is not collected correctly. For the first time in history the service sector the has overtaken the manufacturing sector in the U.S. economy. It is the opinion of this writer, that the productivity statistic focuses on manufacturing and does not properly measure the gains in the service sector. Thus, the reader needs to take this statistic with a grain of salt. Unquestionable, productivity gains are critical for the future growth of wages and the economy and therefor the data gatherers need to revise how they collect and report this information.

GDP Growth Hits Two-Year High of 2.9%:

Here is what contributed to third quarter GDP growth in percentage points that add up (or subtract from) the 2.9% gain:

Consumer spending on services0.99 percentage points added. Net foreign trade 0.63
Consumer spending on durables (e.g. cars)0.69
Change in business inventories 0.61
Federal government spending 0.17
Business investment 0.16
Investment in structures 0.14
State and local government spending -0.08 percentage points subtracted.
Bus investment in equipment -0.16
Consumer spending of food and clothing. -0.21
Residential investment (housing) -0.24

Employment Situation:

On 4 November, the Bureau of Labor statistics reported the following:
Nonfarm payrolls M/M change+161,000
Unemployment rate 4.9%
Average Hourly Earnings M/M change 0.4%
Average Hourly Earnings Year-over-year 2.8%
Average Work Week 34.4 hours.

It should be noted that the increase in Nonfarm Payrolls increased 191,000 in the prior month and the market had forecast an increase of 178,000. Thus 161,000 increase for November is a weak number. Most knowledgeable economists believe that is takes a monthly increase of about 300,000 for the economy to reach a pace of recovery typical of all past recoveries since WW II. The only joy in the numbers is the surprising increase in the Average Hourly Earnings to an annual rate of 2.8% which is the highest since the beginning of the recession.

What Does It All Mean?

Taken at a glance, the economy continues to stumble forward at an agonizing slow pace of recovery from the worst recession since World War II. Of special concern is the -0.16% decline in business investment in equipment which suggests that business is concerned about the uncertainty they face going forward. As has been mentioned in this newsletter in the past; it is this uncertainty in health care, environmental regulations, future course of the economy under a new President, among others; that have slowed the decision by business to invest, grow and create jobs.

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 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 merge companies, 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 thus 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 (now 89,000 pages waiting to be implemented) which involve engineering the environment and society and therefore add to the cost of near term economic growth versus long term improvements to society. In other words, the task is to 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 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 (maybe this is what the results of the election is telling us). 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 attending 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 fourth quarter rises to 52.6 from the outlook for the previous quarter or 52.4 or up 0.2 points. Survey participants forecast a dim outlook for the national economy with a score of 49.0 which is down -1.9 points from previous estimates. Other scores for Alabama include:

  Score Change from Q3
Alabama Economy 52.6 +0.2 points
Industry Sales 56.6 +1.7
Industry Profit 53.9 +0.9
Industry Hiring 51.9 +0.6
Capital Expenditures 52.0 -1.4

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

The most disappointing number is the decline in Capital Expenditures (-1.4) which suggests a future decline in productivity and potential sag in the overall economy going forward.

Alabama Home Sales:

  3Q 2016 Percent Change Year-over-year Percent Change 5 Yr Avg
Total homes listed 30,121 + 3.7% - 13.2%
Total home sales 15,032 + 3.7% + 24.4%
Median Sales Price $ 140,293 + 6.2% + 11.4%
Average Sales Price $ 165,466 + 3.7% + 10.2%
Average Days on the Market 144 - 5.3% - 12.2%
 

Home sales are up statewide +3.7% (Y/Y) with median prices up +6.2% and the days on the market (turnover) is down -5.3% which suggests that the market is clearing inventory somewhat faster. Taken together, the statistics indicates that the Alabama housing market may be strengthening. The percent change over the five-year average has been added to this table so as to provide a general view of the pace of recovery over a broader time horizon.

Alabama Unemployment Rate:

Alabama Department of Labor announced recently that Alabama’s, seasonally adjusted September 2016 unemployment rate is 5.4% which is down from June’s rate of 6.0%, and below the September 2015 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 nagging slow pace of recovery.

The Economic Outlook for the Wiregrass: Dothan Home Sales:

  3Q 2016 Percent Change Year-over-year Percent Change 5 Yr Avg
Total homes listed 1,142 -7.5% -8.9%
Total home sales 338 -5.1% +16.2%
Median Sales Price $144,917 +7.9 % +10.3%
Average Sales Price $164,561 15.8% +14.2%
Average Days on the Market 144 -4.0% -10.4%

Comment: The decline in 3Q16 home sales (-5,1%) comes as a surprise as home sales in the previous quarter 2Q16 rose a spectacular +27.4% Year-over-year. The rise in the Median Sales Price +7.9% may suggest that sales are down in te current quarter because of sellers holding firmly to sales price at the cost of quick sales. Evidence of this thought may be shown with the weak decline in Average Days on the Market (-4.0%) compared with the five-year average decline of -10.4%.

With inventory declining (Total Homes Listed -7.5%), it would appear that the Dothan housing market could be moving toward a balance between supply and demand and thus may be poised for future growth.

Unemployment Rates for the Wiregrass:

Sept 2016: 5.6%
Aug 2016: 5.6%
July 2015: 6.9%

As compared to Alabama 5.4% and U.S. 4.9%.

The unemployment rate for the Wiregrass remains steady month-over-month and lower 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, except for 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 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.

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 17 November 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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