The Economic Data Global Express (e-EDGE)

v.5 n.12       Released Mar. 19, 2001
Produced by the Los Angeles County Economic Development Corporation as a public service to the global community.

FED TO CUT INTEREST RATES AGAIN--BUT WHAT IMPACT?

     The much anticipated meeting of the Federal Open Market Committee (FOMC), scheduled for tomorrow, is likely to bring no surprises.  The most likely outcome is a reduction in the key Federal Funds Rate (FFR) of 0.5%.  This will be the 3rd reduction since the year began and would bring the FFR down to 5.0%.  Financial markets will be assessing the outcome as an indication of just how concerned the FOMC is about the economy's weakness and the falling stock market.
     In understanding the impact of lower interest rates, we need to revisit the fundamentals.  First, changes in monetary policy works with a lag which is estimated at 9 to 12 months; consequently, the January easing actions of the Fed will not be felt in the economy until this fall.  Second, the erosion of consumer confidence cannot be reversed by cheaper credit; countervailing developments such as large numbers of worker layoffs have heightened insecurity.  Third, as banks have experienced increased credit problems, they are likely to tighten credit standards.  Fourth, lower rates would have some positive psychological effect on stock markets, but any temporary boost in stock prices can be offset by the continuing erosion of corporate earnings.
     Another one or two interest rate cuts seem appropriate and would be welcome.  Let's not look to this, however, as a miracle cure.  Federal Reserve policy actions may not be enough to deal with slower investment in technology, heavy consumer debt loads, higher energy costs, and a falling stock market.  On top of this the tax cut this year may not be big enough or come early enough to make a significant difference in household spending.  It is beginning to seem that, whether or not a recognizable recession occurs, the hoped for soft landing may be much harder than the Fed would like to see.  (Ken Ackbarali)
 

STATE/LOCAL UNEMPLOYMENT RATES DROPPED IN FEBRUARY

     Despite blackouts and rain, California's headline unemployment rate fell to 4.5% in February from 4.6% in January and 4.7% in December.  Additionally, last month was well below the 4.9% rate of February 2000, and indeed this was the lowest rate since December 1969.  (These figures are all adjusted for seasonal variation.  Normally, February weather in California is not as bad as January; so last month's seasonally adjusted decline is actually better than it appears on the surface.)
     Jobless rates at the county level are not seasonally adjusted.  The usual seasonal pattern calls for the number of unemployed, and the jobless rate, to fall slightly in February.  Unemployment rates in Southern California's counties all were flat to down last month and were also below their levels of February 2000.  Los Angeles County's unemployment rate dropped back to 4.7% after bouncing up to 5.4% in January.  February's rate was down by 0.9 percentage points from February 2000.  Orange County's jobless rate was 2.3% last month, down by 0.1 percentage point from January and by 0.2 percentage points over the year.  Riverside County's jobless rate held constant at 4.8% in February, while San Bernardino County's rate fell to 4.4% from 4.6% in January.  Both counties registered year-over-year declines, of 0.3 and 0.2 percentage points respectively.  Ventura County's unemployment rate declined to 3.9% last month and was down by 0.3 percentage points over the year.  Finally, San Diego's unemployment rate was 2.6% last month, down from 2.9% in February 2000.
     In the 8-county Bay Area, the jobless rate held steady in February at 2.4%.  San Jose's unemployment rate of 1.7% ranked #3 in the state, behind Marin and San Mateo counties, whose jobless rates were each 1.6%.  To the east of San Francisco Bay, Alameda/Contra Costa counties' combined jobless rate was 2.7% in February versus 3.0% during February 2000.  Meanwhile, San Francisco County unemployment was 3.2%, up by 0.2 percentage points from last year.
     The unemployment picture in the Central Valley was varied.  The Sacramento metro area continued to lead the state's inland region with a 3.9% unemployment rate.  At the other extreme, joblessness was in double digits in much of central California.  Examples include Merced County at 17.9%, Fresno at 15.5%, Tulare County at 17.9%, and Kern County at 12.4%. Imperial County, which is also agriculturally oriented, posted with an 18.0% unemployment rate.  (Nancy D. Sidhu)
PR: http://www.edd.ca.gov/nwsrel03.htm
PR: http://www.calmis.cahwnet.gov/FILE/LFMONTH/CAL1$PR.TXT
 

STRONG EMPLOYMENT TRENDS IN FEBRUARY

     Nonfarm employment in California in February was up both over the previous month and over the year.  The latter gain was a healthy 3.5% or 491,000 jobs.  The state's manufacturing sector continued to move forward, with an increase of 18,900 jobs.  Strength in the durable goods sector overcame weakness in nondurables.  However, apparel manufacturing continued its modest recovery with an increase of 900 jobs over the year.  Overall, the biggest job gains continued to come in "services," powered by business services.  This includes computer programming, which added 65,700 jobs in February.  But growth in this sector has definitely eased off since mid-2000, when year-to-year gains hit 100,000 a month.
     Los Angeles County's nonfarm employment was up 2.0% or by 82,100 jobs in February.  However, the County's manufacturing sector continued to lose jobs, down 4,900 over the year.  The culprits continued to be aerospace and apparel manufacturing.  The motion picture production employment numbers continue to be puzzling, with a modest year-to-year gain of 1,700 jobs.  Given all the talk about the industry's rush to stockpile films in anticipation of a possible strike, the numbers do not show any spike in employment.
     Orange County posted a 3.7% or 50,500 job gain in February, and its manufacturing sector continued to add jobs, an increase of 5,600.  The County's apparel industry also moved ahead, with an increase of 1,600 jobs.  The Riverside-San Bernardino area continued to set the regional growth pace, with a February gain of 4.4% or 42,300 jobs.  Its manufacturing sector also added jobs, but the year-to-year gains have moderated somewhat.  Nonfarm employment in San Diego County was up by 3.5% or 40,800 jobs in February.  And manufacturing added 2,600 jobs over the year.  Ventura County recorded a 3.2%  or 8,500 job gain in February, again with increases in manufacturing.
     Despite apprehension over the tech (dot.com) crash, the Bay Area's February nonfarm employment numbers were strong.   The 3-county San Francisco area posted a 4.6% or 48,900 job increase over the year, while the San Jose area chimed in with a 4.4% or 43,600 advance.  (Jack Kyser)
 

PRODUCER PRICES RETREAT

     The Producer Price Index (PPI) for finished goods inched ahead by just 0.1% last month, after a 1.1% increase in January.  Energy prices rose by 1.4%, compared to the 3.8% jump in January.  Food price increases slowed a bit, from 0.8% in January to 0.6% in February.  The core index actually dropped 0.3%, compared to a 0.7% increase in January.  The decline was led by a 1.5% decline in prices of passenger cars and 3.6% drop in light trucks.  Automakers are eager to reduce their excess inventories.  Compared to a year ago, the PPI for finished goods has risen by 4.0%, while the core index rose by just 1.3%.  Energy prices have risen by 18.4%, thanks to a surge in petroleum product prices and natural gas costs.
     The PPI for intermediate goods declined by 0.1% in February, after a 0.7% increase in January.  Food prices dropped by 1.5% and energy prices by 1.1%.  Electric utilities got a bit of a relief when the natural gas costs for them dropped by almost 30% last month.  The overall index is 3.5% higher than a year ago.  The core index was barely changed at 0.1%.  The PPI for crude goods (raw materials) dropped by 14.2%, a stunning reversal from the 13.9% increase in January.  Energy prices dropped by 23.3% and food prices by 1.6%.  The core index also fell, by 2.5%.  In the past 12 months, the PPI for crude goods rose by 20.8%.
     There are some developments that will alter the inflation outlook.  First, OPEC's "million-barrel-a-day" reduction means that OPEC has reduced its oil output by a total of 9.4% since January 1.  If that cut is far deeper than warranted by slowing demand, we can expect higher prices down the line.  The U.S. gasoline inventory is currently about 15% below the year-ago level.  Second, the mandated use of clean air additives in gasoline may drive up gasoline prices this summer.  Already the EPA has issued a revised air quality standard so the reformulated gasoline would be cheaper to produce.  Refiners also face higher costs since one of the additives, MTBE, is derived from natural gas, whose prices have soared in recent months.  Third, the foot-and-mouth epidemic in Britain (and possibly other nations as well) may affect U.S. agricultural prices since the U.S. is a major producer of feed stock.  (George Huang)
PR: http://www.bls.gov/news.release/ppi.nr0.htm
 

LONG BEACH CONTAINERS TRAFFIC DISAPPOINTS

     The February data from the Port of Long Beach was disappointing.  The number of loaded inbound containers was down 8.2%, the first decline in some time.  This reflects the push to reduce inventories.   The number of loaded export containers also was down, by 7.8% over the year.  We await the Los Angeles data.  (Jack Kyser)
 

JANUARY AIRPORT TRAFFIC HEALTHY

     Total traffic at Los Angeles International Airport was up 3.6% over the year in January.  As usual, international activity continued to provide a lot of the punch, with a 10.1% gain.  Ontario International posted a 7.6% increase for the month.  At John Wayne/Orange County, traffic was up a modest 0.5%.  However, the Palm Springs airport continued to see year-to-year slippage in passenger traffic. January was down 2.0%, the 8th decline in a row.
     The January international air cargo numbers at LAX were no winners either.  Inbound tonnage was down 15.2% over the year, while out bound tonnage was off 9.0%.  (Jack Kyser)
 

FUTURE WATCH: AIR CARGO DEMAND

     Air cargo is a key component of our economy yet is frequently overlooked. While the Ports of Los Angeles and Long Beach move many times more outbound cargo by volume, LAX actually moves a higher volume of exports measured by dollar value.  An article in the Sacramento Bee by Jock O'Connell notes that for the most recent year with comparable data (1997), LAX moved $36.5 billion in exports compared to $19.1 billion at the Port of Long Beach and $16.1 billion at the Port of Los Angeles. Air cargo exports represent the fruit (figuratively and literally) of our economy and is an ideal way to move low-weight, high-value added goods.
     Air cargo volume in Southern California is expected to triple from 2.8 million annual tons in 1999 to 8.9 million tons in 2020.  LAX handles just over 75% of the region's current volume, making it the third busiest cargo airport in the world behind only FedEx-hub Memphis and Hong Kong.  Rising air cargo volumes bode well for our economy, but pose two critical challenges.  First, shifting some of the future air cargo growth away from LAX will be hindered by the fact that only some of the freight is moved on dedicated air-freighters; most travels in the cargo holds of commercial passenger jets.  Nonetheless, Ontario Airport and some of the converted military bases in the region are preparing to take some of the future traffic.
     Second, efficient ground access will be crucial no matter what airport is used.  Shipping goods by air is expensive, yet worthwhile for items that are highly time sensitive. Goods shipped by air are often perishable (such as flowers), time sensitive (pacemakers and apparel) or depreciate rapidly (computer parts).  The appeal of air cargo (and the ability of local just-in-time manufacturers to operate) will diminish rapidly if products arrive rapidly at the airport only to languish on chronically congested freeways.  Air cargo is too important to our economy for us to ignore these challenges.  (Gregory Freeman)
Sources: Southern California Association of Governments; Los Angeles World Airports (LAX)
 

TAX CUT: DIVIDENDS OR SOCIAL INSURANCE?

     President Bush's tax cut proposal encountered new obstacles as some senators call for a "trigger" in case the projected surpluses do not materialize.  Through the "trigger" debate we can see the two views on tax cuts and a third perspective that's perhaps the real purpose of Bush's ambitious plan.
     A trigger mechanism to protect the surplus represents the "dividend" view of tax cuts--the nation runs a surplus (read: profit) and the taxpayers (read: investors) should get tax cuts (read: dividends).  But adopting a trigger means that tax relief will be reduced at a time of declining government revenue, which is usually during bad economic times.  Then we'll have reduced fiscal stimulus (tax cut) just when it's needed the most--not a desirable situation.
     Since the economy is slowing, President Bush has been selling his tax cut as a way to help stimulate the sagging economy.  The "social insurance" view of the tax relief promotes the exact opposite trend of the "dividend" view--more tax cuts when people actually need the money.  This is an opportune way of selling the program, though it runs the risk of losing momentum when the economy picks up.
     But the real purpose of the tax cuts that we don't (and probably won't explicitly) hear from either camp is that they help promote long-term growth.  This is way more complicated to explain to the public than the "dividend" or the "social insurance" view.  To promote long-term growth, we need a tax structure that's simpler, less distorting (read: fewer unproductive credits and loopholes that lead to accounting gimmicks), pro-investment, and stable (i.e. one that doesn't change with every session of Congress or President!).  We can only hope that some of these principles survive our convoluted legislative process.  (George Huang)
 

QUICK STATS:

* BEA: US current account for 2000Q4: -US$115.3 billion (2000Q3: -$113.1bil.)
* BLS: US Producer Price Index for finished goods for 2/01: +0.1% (1/01: +1.1%)
* BLS: US export prices for 2/01: -0.2% (1/01: +0.3%)
* BLS: US import prices for 2/01: +0.1% (1/01: -0.1%)
* Cal EDD: California unemployment rate for 2/01: 4.5% (1/01: 4.6%)
* Cal EDD: California nonfarm employment for 2/01: +104,800 (1/01: -339,300)
* Cal EDD: LA County unemployment rate for 2/01: 4.6% (1/01: 5.3%)
* Cal EDD: LA County nonfarm employment for 2/01: +30,200 (1/01: -92,600)
* Census: US retail sales for 2/01: -0.2% (1/01: +0.7%)
* Census: US business sales for 1/01: +0.0% (12/00: +0.1%)
* Census: US business inventories for 1/01: +0.4% (12/00: +0.0%)
* Census: US housing starts for 2/01: -0.4% to 1.647 mil. annual units (1/01: +4.8% to 1.653mil.a.u.)
* Federal Reserve: US industrial production for 2/01: -0.6% (1/01: -0.6%)
* Federal Reserve: US industrial capacity utilization rate for 2/01: 79.4% (1/01: 80.1%)

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