The Economic Data Global Express (e-EDGE)

v.5 n.7       Released Feb. 12, 2001
Produced by the Los Angeles County Economic Development Corporation as a public service to the global community.

BUSH TAX CUT PROPOSAL--IS THIS WHAT WE NEED NOW?

     The tax cut proposal submitted to Congress by President Bush last week represents a  complicated, broad-based, and long-term reform of the nation's tax structure.  Some of the key elements are: (a) replacing the current 5 income tax brackets with 4 and lowering the top rate to 33% from 39.6%; (b) gradually phasing out of the estate tax; (c) increasing the tax credit for child care; and (d) eliminating the marriage penalty tax.
     Some critics have focused on the size of the $1.6 trillion tax cut over 10 years, pointing out that it is too big and would undermine the goals of repaying the national debt and  strengthening the Social Security fund. Others have fired shots at the "fairness issue", contending that too large a share of benefits would go to the highest income taxpayers and minimal benefits to the lowest income taxpayers.  If history is any guide, the debate in Congress over the President's tax proposal will rage for at least 4 to 5 months.
     While it is high-minded, noble, and even good public policy to consider changing the tax structure in such a comprehensive manner, the current economic situation calls for a different strategy.  If the national economy is about to fall off a cliff (aka "recession"), as many believe, counter-cyclical fiscal policy would argue for an immediate cut in personal income tax rates concentrated in the low- to middle-income category--so that virtually all of the windfall will be spent.  A simple tax cut like this will administer a direct dose of medicine to combat the malady of falling consumer confidence.  Completely revamping our arcane and somewhat Byzantine tax code can be tackled later.  Let's see how well our checks-and-balances system works on this issue!  (Ken Ackbarali)
 

BANK LOAN OFFICERS TIGHTEN LENDING STANDARDS

     The Federal Reserve Board just released its Senior Loan Officer Opinion Survey of Bank Lending Practices for January 2001.  Loan officers at 57 large domestic banks and 24 U.S. branches/agencies of foreign-owned banks took part in the survey.  These senior officials are responsible for setting lending policies at their respective institutions.  The survey results suggest that (1) many banks have raised standards on loans, and (2) demand for new loans in January was noticeably softer than was reported in surveys taken in January 2000.
     To be specific, about 60% of loan officers reported they have tightened the standards required to grant new credit to large and mid-sized commercial and industrial customers, compared to 44% in November 2000 and only 11% last January.  Small business customers are also feeling the change: about 44% of loan officers raised standards recently for small business customers compared to 27% in November and only 9% in January 2000.  The figures for commercial real estate are almost the same as for small business.  Some bankers, fewer than 20%, reported stricter standards for issuing new consumer loans as well.  Why this change in lending standards?  Bank loan officers cited several causes.  The most important were: (1) uncertainty about the economic outlook; (2) a worsening of industry-specific problems (including a number of new asbestos-related bankruptcies and growing financial distress in the movie theater, steel, and retail industries); and (3) a reduced tolerance for risk in general.
     Several of the senior loan officers also reported that demand for new loans has weakened over the past three months.  About 50% of bankers saw declining demand from their larger commercial and industrial customers and about 30% from their small business customers.  Lower demand for commercial real estate loans was reported by 29% of officers, while 36% reported reduced demand for consumer loans.  All of these figures are at least twice as high as in the November 2000 survey.  The picture for mortgage demand was much more varied, with about 30% of loan officers reporting higher demand, another 30% reporting lower demand, and the remainder reporting no change.
     The survey results are a matter of some concern to the economic outlook.  Lower loan demand usually reflects reduced spending plans on the part of business firms and consumers and is an indicator of weakness in current economic conditions.  Stricter bank lending standards, on the other hand, make it more difficult for would-be borrowers to obtain credit so they can implement new spending plans.  Therefore, the new, tougher standards work against the Federal Reserve's current monetary policy, which aims to increase borrowing by reducing rates.  (Nancy D. Sidhu)
PR: http://www.federalreserve.gov/boarddocs/snloansurvey/200102/default.htm
 

LABOR PRODUCTIVITY GROWTH SLOWS IN FOURTH QUARTER

     US nonfarm labor productivity grew by 2.4% (annualized rate) during the 4th quarter.  The weak growth was expected as the economy has slipped into a deceleration mode.  Labor productivity traditionally has been procyclical--it tends to grow faster when the economy is expanding rapidly and vice versa.  Output grew by a 1.2%, the smallest increase since 2Q95.  The number of hours worked continued its decline from 3Q00, dropping by 1.1% (3Q00: -0.7%).  What alarmed some analysts was the large increase in hourly compensation (+6.6%).  It has now scored 6%+ increases for three consecutive quarters (3Q00: +6.2%, 2Q00: +6.0%).  Continued increases in hourly compensation despite declines in hours worked are a signal that labor cost pressures are still persistent despite a slowing economy.
     Unit labor costs, or the cost of labor per unit of output, rose by 4.1% after a smaller gain of 3.2% in 3Q00.  The increasing pressure in labor costs was partly offset by a decline in non-labor costs, which dropped by 2.1% in 4Q00 and by 1.2% in 3Q00.  Non-labor costs had risen significantly from 4Q99 through 2Q00 because of rising petroleum costs but have since declined.
     For the year, nonfarm labor productivity rose by 4.3% (1999: +2.6%), the strongest annual increase since 1983.  Output grew by 5.7% (1999: +4.8%), also the largest increase since '83.  Hourly compensation grew by 5.1%, slightly larger than the 4.4% scored in 1999.  Unit labor costs rose by just 0.7% (1999: +1.8%), mainly because of the weaker numbers in 1Q00 and 2Q00.  With businesses cutting back on capital investment and unused capacity in many industries, we can expect weak labor productivity increases for a short while.  (George Huang)
PR: http://www.bls.gov/news.release/prod2.nr0.htm
 

FIRST QUARTER 2000 RETAIL SALES

     The State Board of Equalization's report on taxable retail sales for the first quarter of 2000 contained some eye-popping numbers (yes, there is quite a time lag here).  Sales in the state were up over the year by 14.9%.  Around Southern California, the retail sales pace was set by Riverside County with a 16.7% increase, followed closely by San Bernardino County with a 16.2% advance.  San Diego County posted a 14.4% gain,  while retail sales in Los Angeles County were up by 13.6%.  Orange County recorded a 13.2% gain over the year, while Ventura County saw sales increase by 12.1%.
     These gains reflected the strong employment picture plus no doubt a little "wealth effect."  Obviously, the first quarter retail sales were too hot not to cool down, though it may be a while before we know just how much.  (Jack Kyser)
PR: http://www.boe.ca.gov/news/tsalescont00.htm
 

WHERE'S CALIFORNIA & L.A.'S EMPLOYMENT DATA

     Due to the annual re-benchmarking of California's employment data, the release date for January labor force and employment statistics is set for Feb. 23.  Our Feb. 26 e-EDGE will cover the revised data.
 

GETTING TO KNOW NAICS

     The Standard Industrial Classification code system (SIC) so familiar to many of us is being replaced by the North American Industry Classification System (NAICS), a new coding system that will be used by the three NAFTA countries (Canada, US, and Mexico).  You may have seen NAICS in a recent government documentation that you had to fill out. One of the most important features in this new system is the addition of 350 new industries such as on-line information services. You can read more about NAICS at http://www.census.gov/naics .
 

QUICK STATS:

* Census: US wholesale trade for 12/00: +0.7% (11/00: +0.0%)
* Census: US wholesale inventories for 12/00: +0.0% (11/00: +0.4%)
* BLS: US nonfarm labor productivity for 4Q00: +2.4% (3Q00: +3.0%)
* Federal Reserve: US consumer credit for 12/00: +2.4% (11/00: +11.1%)

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