The Economic Data Global Express (e-EDGE)

v.4 n.39       Released Sept. 25, 2000 
Produced by the Los Angeles County Economic Development Corporation as a public service to the global community.

U.S. SHEDS ANTI-INTERVENTION POLICY; HELPS BOOST THE EURO

     Last Friday, the Federal Reserve Board, the Bank of Japan, and the Bank of England joined the European Central Bank (ECB) in a massive intervention move to prop up the sagging euro.  This unexpected action raised the currency more than 6%, from its all-time low of $0.844/euro on Wednesday to $0.900/euro near the close of trading in London and Frankfurt on Friday.  Before the intervention by the consortium of central banks, the euro had fallen by 28% since its initial January 1999 value of $1.170/euro.  The urgency of the move to support the euro is underscored by its timing--the Group of Seven (G-7) industrialized nations are scheduled to meet in Prague this weekend and the plight of the euro would undoubtedly be on the agenda.
     It appears on the surface that the euro's weakness somehow represents a disconnect from the economic fundamentals of the 11-nation European Union.  GDP growth in the EU is forecast to be 3.0%-3.5% this year and next year.  The ECB has raised interest rates 6 times in recent months in order to contain inflation close to 1.5%. Yet, the EU has experienced a massive outflow of capital last year ($123 billion) and another $44 billion in the first half of this year.  Much of this is estimated to have come to the United States, in the form of acquisition of businesses (foreign direct investment) as well as stock purchases (portfolio investment).  Obviously, the attractive American economy and financial markets have been the bane of the EU.
     While we concede that the ECB has to be wary of the effects of additional monetary tightening on the EU economy, it is quite surprising that the central bank opted for intervention in foreign exchange (FX) markets.  Even more shocking and puzzling is that the Fed joined in, since U.S. policymakers (Treasury and Fed) categorically oppose tinkering with FX markets.  In fact, U.S. officials firmly endorse the belief that the impact of intervention is at best cosmetic and that long-lasting effects must come from the market's perception of economic fundamentals.  The daily trading volume in global FX markets is so large that the central banks cannot reverse trends for more than a few days.  In this context, Mr. Greenspan and Mr. Summers (Treasury chief) must have agonized long and hard over their response to the ECB.  Let's not get carried away and assume that the euro's troubles are over.  (Ken Ackbarali)
 

U.S. HOUSING STARTS STABILIZED IN AUGUST

     Housing starts edged up to 1.531 million dwelling units in August from 1.526 million in July, a welcome change of pace after three months of decline.  [All figures in this paragraph are seasonally adjusted.]  Still, starts remained 7.6% below August 1999.  Single family starts rose by 4.6% to 1.26 million units from 1.21 million in July.  However, construction of multiple family homes, which tends to be volatile from month-to-month, dropped by 15.9% to 270,000 units from 327,000 units last month.  Looking at August's performance by region, total housing starts rose by 6.4% in the southern U.S. and by only 1.4% in the Northeast while the Midwest and the West both registered declines of 5.6%.
     For the first 8 months of 2000, housing starts fell off by 2.9% compared to the same period in 1999.  [Figures in this paragraph are actuals, not seasonally adjusted.]  Single family starts declined by 3.9% year-to-date while multiple family construction barely increased by 0.9%.  Mortgage rates were about one percentage point higher this year; so the decline in housing activity to date was not unexpected.  However, fixed rate mortgages dropped back below 8% in September.  If rates stay put near the current level, as we expect, housing starts also should continue stable (allowing for the ups and downs of apartment building) for the rest of the year.  (Nancy D. Sidhu)
PR: http://www.census.gov/indicator/www/housing.html
 

AUGUST CONTAINER TRAFFIC STRONG

     The port of Long Beach reported solid gains in container traffic in August.  The number of loaded inbound containers moved ahead 10.4% to 236,969, while loaded outbound containers advanced 6.7% to 86,012.  Total container traffic at the San Pedro Bay ports in August was awesome.  The number of loaded inbound containers was up 19.5% to 472,498, while loaded outbound containers moved ahead 16.0% to 173,350.  Total containers moved during August at the 2 ports came in at 898,785, up 20.3%.  Year-to-date, the ports have moved 6.2 million containers, up 17.5% over last year.  (Jack Kyser)
 

MORE EXPORTS TO CHINA

     The Senate passed H.R. 4444 which grants China Permanent Normal Trade Relations (PNTR) status with the U.S., ending the annual battle over China's trade status after 20 years.  The U.S. will therefore be able to take advantage of China's trade concessions, which are part of its WTO membership requirements.  China will substantially open up its markets to foreign firms, both in terms of importing and allowing foreign operations in China.  This policy will bring benefits to many U.S. industries, most notably agriculture, financial services, and telecommunications.  Proponents of PNTR for China cited economic gains to the U.S., while opponents expressed concerns over giving up a leverage to influence China on issues relating to human rights, nuclear weapons proliferation, the environment, and religious persecution.  This debate is really over whether economic policies should be used to effect sociopolitical changes in China.  History has shown that authoritarian governments tend to fall in the face of rising prosperity and globalization.  Optimists hope that democracy, environmentalism, and the respect for human rights will be among the exports we send across the Pacific. (George Huang)
 

TAPPING THE SPR--PURE POLITICS AND BAD ECONOMICS

     Al Gore "urged" and President Clinton agreed to withdraw 30 million barrels of crude oil from the Strategic Petroleum Reserve (SPR), claiming this action would reduce prices for home heating oil this winter.  Most analysts agree that it's a purely political maneuver, but many economists go as bold as to decry it as a malignant move economically.  First, it won't do much for the consumers who are hurting.  30 million barrels is about 1.5 days of U.S. consumption.  Right now high prices for petroleum products are the result of tight oil supply and strong demand.  Domestic refineries are running near their full capacity; so any additional crude oil won't make much of a difference in increasing retail fuel supply and won't force retail prices down significantly.  Second, any price movements that do occur will be temporary since this is a relatively small, one-time withdrawal.  Third, the real gainers will be the oil companies, not consumers.  The proposal is highly favorable to the oil companies, the same companies taking the heat recently for supposedly making "excessive profits."  They can borrow crude oil now and re-stock later with additional oil when prices are presumably lower.  There's no requirement that they must produce more heating oil or gasoline (they couldn't anyway--the refineries are running at near capacity).  Basically there is no real economic sense in this decision.
     The SPR is also like our nuclear weapons--good for deterrence but best not used .  By using it during a non-crisis time, we risk setting a precedent for future energy policies and complicating our efforts to get OPEC to increase production.  To really force prices down and get OPEC to cooperate, we'll need ongoing, alternative supply sources rather than tapping into our limited stockpile.  Once our stockpile gets smaller, we become even more vulnerable to a supply shock or higher prices.  Unfortunately, there are no good alternatives now to change the near-term market fundamentals.  Years of complacency brought on by relatively low oil prices and a lack of a credible energy policy have brought us to this current dilemma.
     Our advice from previous weeks still stands--pray for a mild winter and stock up on your heating fuels or sweaters.  As for those of us living in L.A., be prepared for more winter guests than usual...  (George Huang)
DOE PR: http://www.doe.gov/news/releases00/seppr/pr00244.htm
Oil industry profits: http://www.api.org/consumer/profittruth.htm
Note: We wrote about this same issue last October (e-EDGE v.3 n.41, 10/12/99), but did anyone notice?  

QUICK STATS:

* Census: US housing starts for 8/00: +0.3% (7/00: -2.9%)
* Census/BEA: US exports for 7/00: -1.5% (6/00: +4.8%)
* Census/BEA: US imports for 7/00: +0.6% (6/00: +3.6%)
* Census/BEA: US trade deficit for 7/00: $31.9 billion (6/00: $29.8bil.)
* Natl Assn of Realtors: US existing home sales for 8/00: +9.3% to 5.27 million annualized units (7/00: -9.2% to 4.82mil.a.u.)
 

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