The Economic Data Global Express (e-EDGE)
v.4 n.34 Released Aug. 21, 2000
Produced
by the Los Angeles County
Economic Development Corporation as a public service to the global
community.
THE FED TO KEEP INTEREST RATES ON HOLD FOR NOW--BUT LATER?
Monetary policy changes in the advanced industrial
countries like the United States, Japan, the U.K., and the European Union
tend to impact stock, bond, and foreign exchange markets around the world.
Earlier this month, the Monetary Policy Committee (Bank of England) voted
5 to 4 against raising its key interest rate from 6.0%--the closest split
decision in its 3-year history. In the U.S., market consensus and the conventional
wisdom are on the side of the Federal Open Market Committee leaving the
Fed Funds Rate (FFR) unchanged tomorrow.
There are arguments, however, in favor of
raising the FFR now:
* The recent stock market rally seems to be supported by the conviction
on the part of many investors that monetary tightening is over for this
cycle. This belief could set off another round of consumer borrowing and
spending, that would trigger a higher-than-desired rate of GDP expansion
in the 3rd and 4th quarter. The 2nd quarter's 5.2% annual rate of
increase in GDP was not disproportionately dependent on consumer spending
strength. But, it may still be premature to declare that consumers
will hold on to their wallets.
* Although the consumer price index rose by only 0.2% in July, inflation
is running at a 3.5% rate over the past year. The Fed, unlike the
European Central Bank, does not have an announced inflation target, but
the implied rate is 2.5%, the same as the Bank of England's explicit target.
Thus, a 3.5% inflation rate this year is pushing the outside edge of tolerance.
With the national unemployment rate stuck at 4% and global commodity prices
inching up, the possibility of out-of-control inflation still has to worry
Fed officials.
Key factors that would persuade the Fed to
adopt a wait-and-see attitude are:
* Productivity has continued to rise and unit labor cost has actually
fallen, as Greenspan pointed out in his recent Congressional testimony.
If this trend continues, it may mean that while the "safe speed limit"
of the "new economy" is experiencing structural changes, we may be stuck
in an "old economy" mode in our thinking about inflation.
* Since evidence of a sustained slowing of the economy is somewhat
tentative, the Fed may want to wait until later in the year to re-consider
the need to hike rates again.
The futures market is probably right again.
Its implied probability of an increase in the FFR in August is considerably
less than 50%. We expect a decision to hold steady this time, but
accompanied by maintaining the existing policy bias towards tightening
instead of a switch to neutral. (Ken
Ackbarali)
U.S. HOUSING STARTS DOWN BUT NOT OUT
Housing starts slipped to 1.51 million units in
July, down 3.3% from June and 11.3% below July 1999. Both single-
and multiple-family starts dropped last month. The level of housing
permits, which often foreshadow actual homebuilding activity, declined
to 1.50 million units last month. July's housing starts and permits
were at their lowest levels since late 1997.
Some decline in housing construction had been
expected. After all, starts were boosted by better-than-normal weather
last winter, and mortgage rates were rising through much of the first half
of this year. However, conventional mortgage rates have fallen back
of late and are now at or below 8%. Furthermore, homebuilders report
that, after some weakening in June and July, they are seeing more buyer
traffic and sales are picking up. Thus, as long as borrowing conditions
don't become more difficult, housing starts seem likely to stabilize in
upcoming months. (Nancy D.
Sidhu)
PR: http://www.census.gov/const/c20_curr.txt
INDUSTRIAL PRODUCTION UP IN JULY
The Federal Reserve Board reported its industrial
production index increased by 0.4% in July, following a 0.2% increase in
June. July's production level was 5.8% above July 1999. U.S.
manufacturers utilized 81.6% of their capacity last month, well up from
the 79.7% rate registered in July of last year. In addition, manufacturers'
total capacity has increased by 4.2% over the past year. These figures
suggest that, overall, the U.S. industrial sector continues to grow at
a healthy pace.
Beneath the surface, however, industry trends
show substantial divergence. A drop in motor vehicle output is the
primary factor behind the slower pace of consumer goods production, which
has risen by only 1.0% compared with the same month last year. And
production of defense equipment was off by 3.6% over the year, no surprise
to Southern California. While construction activity has slowed somewhat,
production of construction supplies has continued to increase, up by 2.9%
over the past year. However, the real "juice" in the industrial sector
is in high tech. Output of semiconductors and related electronic
components soared by a whopping 77% over the past 12 months. These
are needed to support surging U.S. production of computers and office equipment,
which has surged by over 43%, as well as increased output of business and
consumer electronic equipment manufactured abroad. (Nancy
D. Sidhu)
PR: http://www.bog.frb.fed.us/releases/G17/Current/
INFLATION UNDER CONTROL?
The U.S. Consumer Price Index (CPI) rose 0.2%
last month after a 0.6% surge in June. Energy prices rose 0.1% while
food prices jumped 0.5%. Transportation costs declined by 0.3% thanks
to a small reprieve from sky-high gasoline prices in June, but they were
still 7.1% above the year-ago level. Airline fares have risen 9.7%
so far this year. Household fuel and utility costs rose 1.6% after
a 2.2% increase in June. The core CPI rose by 0.2% also. The
CPI for July was 3.5% above the year-ago level.
The Los Angeles area CPI rose 0.5% in July.
Local CPIs are not seasonally adjusted. The energy index rose 3.0%.
Gasoline prices rose 4.0% and were 21.7% higher than a year ago.
Gas prices have declined recently, thank God. The natural gas utility
index jumped 5.3% and was 28.8% higher from a year ago. Food prices
rose 0.6% after a 0.9% increase in June. The core CPI rose by 0.2%.
The L.A. CPI was 3.6% above the year-ago level, up from the 2.3% increase
between July, 1998, and July, 1999.
It is still unclear how much of the rise in
energy costs firms have been passing onto consumers. While the heavily
energy-dependent transportation industries have done so explicitly, other
industries are also under the same pressure and would very much like to
raise their prices if they cannot economize on their energy use and raise
productivity. (George Huang)
US PR: http://www.bls.gov/news.release/cpi.nr0.htm
LA PR: http://www.bls.gov/special.requests/sanfrancisco/ro9cpila.htm
HEAVY LIFTING AT THE PORTS IN JULY
July is the start of the "peak" shipping season,
and activity at the ports of Long Beach and Los Angeles was quite strong.
A total of 850,710 containers were moved, a new monthly record. At
Long Beach, the number of loaded import containers was up over the year
by 19.2%, while Los Angeles posted a 31.9% gain. Hefty gains
were also recorded in loaded export containers, with Long Beach up 17.2%
and Los Angeles ahead 20.8%. The total number of containers moved
(including empties) at Long Beach during the month was up 17.8% to 409,979,
while Los Angeles recorded a 33.5% increase to 440,731. These were
monthly records for both ports. So far, traffic is moving smoothly
at the ports, but let's knock on wood just to be safe. (Jack
Kyser)
QUICK STATS:
* BLS: US Consumer Price Index for 7/00: +0.2% (6/00: +0.6%)
* BLS: LA Area Consumer Price Index for 7/00: +0.5% (6/00: -0.1%)
* Census: US exports for 6/00: +4.6% to $90.6 billion (5/00: -0.0%
to $86.6bil.)
* Census: US imports for 6/00: +3.7% to $121.2bil. (5/00: -0.2% to
$116.9)
* Census: US trade deficit for 6/00: $30.6bil. (5/00: $30.3bil.)
* Census: US housing starts for 7/00: -3.3% to 1.51 million annualized
units (6/00: -1.8% to 1.56mil.a.u.)
* Census: US business sales for 6/00: +0.9% (5/00: +1.1%)
* Census: US business inventories for 6/00: +0.9% (5/00: +0.9%)
* Fed: US industrial production for 7/00: +0.4% (6/00: +0.2%)
* Fed: US production capacity utilization rate for 7/00: 82.3% (6/00:
82.2%)
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