Q3 2019 Orlando Economic Update

Conflicting feelings surrounding the national economy create insights about the future of the current economic expansion and the Orlando region.

Not With a Bang But With a Whimper

The year began with heightened fears of recession. However, in the past 10 months those fears have settled-in to generate more economic angst than anything else, even as the United States economy continues to expand. Slow growth and increased uncertainty combined with a strong labor market suggest that the current expansion will not go out with a bang but will instead slowly dwindle into recession over the next year.  

On one hand, a strong labor market and increased housing construction suggests that the economy is stable; signaling that the current expansion will continue. On the other hand, slowing growth combined with uncertainty about the trade war and decreased business spending add to anxieties over the health of the current expansion, currently the longest on record. These competing forces indicate that the U.S. economy will continue to expand for the time being (slow growth is still growth), with increased likelihood of entering a recession in 2020.

The following analysis provides updates on these topics, introduces new metrics to watch for the remainder of 2019 and checks in with the Orlando labor market.

Q3 2019 in Review

This past quarter, President Donald Trump announced tariffs on an additional $300 billion of Chinese imports and China retaliated with an additional $75 billion of U.S. exports on August 23.  A few things to note: this new round of tariffs imposed by President Trump push average tariffs on China above 26 percent and cover all but three percent of American imports from China. These tariffs go into effect on December 15, pushed back from an initial start date of September 1 based on concerns about the impact they would have on the holiday shopping season.  Consumers will feel these tariffs the most as 100 percent of items such as toys, sports equipment, footwear and electronics imported from China are slapped with additional fines. For a full breakdown of this most recent round of tariff action, see the Peterson Institute’s analysis here. Overall, the volatility of this trade war continues to be cited as one source of economic angst, captured in leading indicators such as the yield curve.

The Yield Curve

The spread between the 10-year and three-month treasury bond remains negative, after briefly jumping above zero in late July. Also known as the yield curve, this popular recession indicator has correctly predicted the last seven U.S. recessions. However, the attention surrounding an inverted yield curve that existed in Q2 of this year seems to have quieted for now.

Replacing that news coverage is the idea that the inverted yield-curve creates a self-fulfilling prophecy, whereby consumers and business owners put off spending and investment and further slow the economy. In an interview with Duke University Professor Campbell Harvey, who’s 1986 dissertation first identified the yield curve as a recession indicator, Harvey notes that “the yield curve was put in the spotlight after the successful forecast of the global financial crisis [so] it is possible that the model is now causal.” However, he was also clear to note that the yield curve is a leading indicator and “an elegant way to summarize sentiment in the economy.” Tools that more accurately measure economic sentiment should be used to mitigate risk, not ignored for the sake of avoiding prophecy.  

The Federal Reserve

Since June, the Fed has cut interest rates twice, 25bp each time, citing economic uncertainty caused by political events and slower global growth. Now moving into October, it is unclear if the Fed will cut rates again, needing to see a clearer argument for a rate cut in the data. A tight labor market and rising household spending support a case for holding the course, but overall Fed officials are divided on whether rates should have been cut for a second time this quarter.

What to Watch in Q4 2019

1. The U.S. Housing Market

Housing starts hit a 12-year high this August, strengthened by lower mortgage rates, to reach a 12.3 percent change since July. Building permits also increased at a 7.7 percent rate over the same time frame. Lucia Mutikani for Reuters noted that “the jump in homebuilding activity last month added to strong retail sales data in suggesting the economy continues to grow moderately and is probably not flirting with a recession as has been flagged by financial markets.” The change in housing starts was highest in the Northeast, while also growing in the Midwest and South. Housing starts were flat in the West where the number of new housing permits decreased.

While these numbers are volatile and subject to change, the overall trend seems to be that tight housing supply and lower mortgage rates have increased homebuilding and buying activity. Monthly housing supply in the U.S. is currently 5.5 months, decreasing from a supply of 7.4 months in December 2018. Monthly housing inventory signals the number of months it would take for the current stock of available homes on the market to sell. Low inventory triggers more building and increased home prices. A six-month housing supply is considered a balanced market.

In Orlando, inventory numbers have also been declining. The current supply of homes is 2.3 months and for starter and mid-range homes ranging from $90,000 to $299,000, monthly inventory is below two months of supply.

If housing starts and construction continue to increase in Q4, this economic activity could play a role in helping the U.S. economy avoid a recession.

Monthly Housing Inventory, August 2018 – 2019

2. The GDP Report

U.S. Gross Domestic Product (GDP) increased at an annual rate of 2.0 percent during Q2 of 2019, according to data released by the Bureau of Economic Analysis (BEA) in September. This is down from the first quarter increase of 3.1 percent.

Personal consumption contributed the most to GDP growth, with spending on goods (durable and non) increasing at an 8.6 percent rate for quarter two. Meanwhile private investment decreased 6.3 percent overall, with the largest contribution coming from decreases in nonresidential structure spending. Net exports were negative while government spending was positive. Overall, this all means that strong consumer spending continues to carry the economy throughout this expansion, while businesses are holding off on making big investments, likely due to the trade war and economic uncertainty.

How the economy reacted during Q3 to the activities outlined above will be available from the BEA on October 30.

Orlando Regional Economic Update

Last quarter it looked like the Orlando job market was entering a decline as total employment fell from April through July. However, preliminary job numbers for the month of August show the labor market continuing to grow as the Orlando job market added 17,000 jobs in the last month, bringing total employment above the April 2019 level.

Over the past twelve months (Sept. 2018 to Aug. 2019) the Orlando metro economy generated 52,100 new jobs (24 percent of the jobs created in Florida) with 41 percent of that growth coming from new positions in professional and business services. This is roughly 410 professional and business service jobs being created per week in sectors ranging from engineering services and computer systems design to employment and business maintenance services. Overall, these industries have an average wage of $59,245 in Orlando. See the full change in employment by industry over the past 12 months in the chart below. The monthly jobs report for the state and Orlando can be found here.

Orlando, Employment by Industry, Sept. 2018 – Aug. 2019

Regional rankings and events of note that have taken place during the third quarter of 2019 include:

1. Orlando hosted the Automated Vehicles Symposium, the first time this event has taken place outside of San Francisco. The three-day event hosted companies such as Toyota, Volvo, Nissan and Uber while exposing them to everything Orlando has to offer for testing and developing autonomous vehicles. Also during Q3, the first fully electric, driverless shuttles operating in the Orlando region hit the road in Lake Nona.
2. Multiple companies announced their expansions to Orlando, including Connecticut-based Health PlanOne, financial technology company LSQ, and CardWorks Servicing LLC. Overall, these companies will create more than 800 jobs combined in Central Florida. Read more about companies expanding in Orlando here. 
3. The University of Central Florida and Valencia College Downtown Campus officially opened its doors to 7,000 students based fully downtown. Entire program departments relocated to the Downtown Campus based on how well they integrated with industries located downtown. This places thousands of students within walking distance of jobs and internships.