The Economic Data Global Express (e-EDGE)

v.5 n.5       Released Jan. 29, 2001
Produced by the Los Angeles County Economic Development Corporation as a public service to the global community.

ANOTHER INTEREST RATE CUT ON WEDNESDAY IS LIKELY

     The surprise reduction in the Fed Funds Rate on January 4th has heightened speculation as to future interest rate reductions.  The decision to cut rates by 50 basis points instead of 25 and to take this action between FOMC meetings underscored the sense of urgency on the part of the Federal Reserve.  Chairman Greenspan's testimony in Congress last week sheds some light on Fed thinking:  (1) Worries about the abrupt slippage in the economy's pace in the 4th quarter of last year--to near-zero growth in the current quarter;  (2) Sagging consumer confidence affected by widespread announcements of worker layoffs;  and (3) Virtual endorsement of a tax cut, which represents a fundamental change in attitude towards uses of the federal budget surplus.
     The outlook for U.S. economic growth now seems to be either a "V" or "U" shaped pattern.  Taking into consideration the lag between interest rate cuts (and tax cuts, if enacted soon) and the impact on investment and spending, it makes sense for the Fed to follow an aggressive easing stance.  Also, if evidence of further deterioration in consumer spending and business investment emerges, Congress should get behind President Bush and Mr. Greenspan by enacting a retroactive tax cut as early as possible. The latter will boost net earnings in workers' paychecks immediately and will be seen later on as the most helpful policy choice in the short term and the least damaging in the long term.
     What should the FOMC do?  Interest rate cuts of another 100 basis points are probably needed in order to re-stimulate borrowing (although one has to raise the issue of lender caution in an environment of credit quality concerns).  However, if there is conviction that a 5.00% Fed Funds Rate is the appropriate level under current conditions, then the FOMC should front-load its policy guns--the case in favor of waiting is practically non-existent.  What will the FOMC do on Wednesday?  Very likely a rate cut of 25 to 50 basis points.  (Ken Ackbarali)
 

DURABLE GOODS ORDERS UP AGAIN IN DECEMBER, BUT . . .

     New orders for durable goods rose by 2.2% in December compared to an increase of 1.8% in November and a plunge of 6.6% in October.  However, last month's strength was narrowly based.  Only the civilian aircraft and electronic equipment industries, whose orders are quite volatile month-to-month, reported increases in December.  Declining orders were reported by manufacturers of defense capital goods, industrial machinery including computers--down for the 5th consecutive month--non-aircraft transportation equipment (primarily the automotive industry), and primary metals, down for the 5th time in the last 6 months.
     The orders picture for all of 2000 looked considerably brighter.  Total durable goods orders increased by 6.7%.  Leading industries for the year were civilian aircraft, up by 27%, defense capital goods, rising by 21.3%, electronic equipment, up by 12.6%, and industrial machinery, which increased by 12.0%.  Orders for primary metals lagged, rising by only 3.5%, while it appears that orders for non-aero transportation equipment declined outright (we'll know more later this week).
     More important than the actual numbers is the pronounced decline in momentum experienced by the durable goods manufacturing industries during the 4th quarter of 2000.  The damage was widespread.  Orders for both transportation equipment and primary metals rose on a year-over-year basis during the 1st three quarters, for example, but declined during the 4th quarter.  Orders for electronic equipment surged by 17% during the 1st nine months but increased by only 0.6% during the last 3 months, and the growth rate for industrial equipment orders was cut almost in half.  All this gloomy news on durables orders during the 4th quarter means bad news on the production/shipment front early in 2001, and is a primary contributor to the current slowdown in the general economy.  How long will the problems in manufacturing continue?  Stay tuned.  Future orders will tell the tale.  (Nancy D. Sidhu)
PR: http://www.census.gov/indicator/www/m3/index.htm
 

EMPLOYMENT COST INCREASES MODERATE

     The Employment Cost Index (ECI) rose by 0.8% during 4Q00, and was 4.1% higher than a year ago.  This was the largest annual increase since 1991 when the current economic expansion began.  For private industry, the quarterly increase was 0.7% and the annual increase was 4.4%.  Wage & salaries rose 0.7% in 4Q00 and were 3.9% above the 4Q99 level.  Benefit costs, which have been rising faster than cash compensation, rose by 0.9% and were 5.6% higher than a year ago.  Yet these figures do not tell us much about the recent trend.  The good news is that inflationary pressures seem to be lessening.  The 4Q00 increase is the third consecutive downtick since reaching its peak in 1Q00 (+1.5%).  It was also the smallest quarterly increase since 1Q99 (+0.4%).  Private sector wage & salaries followed a similar down trend (4Q00: +0.7%).  Private sector benefits costs rose by 0.9%--its first sub-1.0% gain since 1Q99.  Much of the annual increase in benefits costs actually came from 1Q00 when it rose by 2.3% in a single quarter, the largest increase since 1Q88.  Interestingly, the ECI for union workers (+4.0% for the year) actually rose less than the ECI for nonunion workers (+4.4%), which is quite contrary to public perception given some high-profile labor disputes last year.
     With the ECI looking less threatening now, the Fed less reasons to be concerned about inflation.  The main concern now is the sharp slowdown of the U.S. economy.  The 4Q00 GDP data, to be released this Wednesday, should show substantial weakness in economic activity.  (George Huang)
PR: http://www.bls.gov/news.release/eci.nr0.htm
 

RESALE HOUSING MARKET SOFT IN DECEMBER

     According to the California Association of Realtors (CAR), the state's resale housing market softened somewhat in December.  Causative factors included the weakening economy, the emerging energy crisis, and further deflation of the dot.com bubble.  Unit sales in California in December were down from both the previous month and over the year (by 5.4%).  However, the median price continued its advance, up by 10.7% over the year to $249,370.
     In Southern California, San Diego County was the exception with unit sales in December up by 3.6% over the year, while its median price advanced 16.8% to $278,910.  Elsewhere in the region, unit sales were down and prices up from the like 1999 month.  Los Angeles County saw sales drop by 4.4%, while the median price advanced 11.2% to $220,620.  In Orange County, unit sales declined by 4.8% over the year, while the median price moved ahead 14.9% to $326,060.  There was a modest decline in unit sales in the Riverside-San Bernardino area, down by 1.4%, while the median price rose 11.9% to $143,400.  Ventura County saw unit sales drop 6.6%, but the median price move by 14.0% to $298,450.
     December sales and price trends were rather dramatic in the Bay Area.  In San Francisco Bay (San Francisco and Oakland), unit sales plunged by 25.1%, while the median price charged ahead 27.1% to $469,970.  In Santa Clara County, unit sales dropped by 21.4%, while the median price jumped 26.4% to a state-leading $540,000.  Are more units falling out of escrow?  Could be. (Jack Kyser)
PR: http://www.car.org/newsstand/news/jan01-4.html
 

QUICK STATS:

* BLS: US Employment Cost Index for 4Q00: +0.8% (3Q00: +0.9%)
* Census: US new durable goods orders for 12/00: +2.2% (11/00: +1.8%)
* Census: US durable goods shipments for 12/00: -0.5% (11/00: -1.1%)
* Census: US unfilled durable goods orders for 12/00: +1.4% (11/00: +0.4%)
* Conference Board: US Help-Wanted Advertising Index for 12/00: 79 (11/00: 75)
* Census: US homeownership rate for 4Q00: 67.6% (3Q00: 67.5%)
* Census: US homeowner vacancy rate for 4Q00: 1.6% (3Q00: 1.6%)
* Census: US rental vacancy rate for 4Q00: 7.8% (3Q00: 8.2%)
* Natl Assn of Realtors: US existing home sales for 12/00: -7.4% to 4.87mil. annual units (11/00: +5.2% to 5.26mil.a.u.)

The Economic Data Global Express (e-EDGE) is a free service of the Los Angeles County Economic Development Corporation (LAEDC). Permission to quote any proprietary part of this release is granted given proper credit. Distribution is allowed provided that no modifications are made to the original content. Sponsors of this service do not necessarily endorse all opinions stated herein. For more information, please e-mail to research@laedc.org. To contact LAEDC, please call 213-622-4300.

Subscribe to e-EDGE and receive current economic news and major developments.  Your e-mail address will not be disclosed to any outside party (including e-EDGE sponsors) under any circumstances.

To send us comments regarding e-EDGE, please e-mail to research@laedc.org.