The Economic Data Global Express (e-EDGE)

v.5 n.17       Released Apr. 23, 2001
Produced by the Los Angeles County Economic Development Corporation as a public service to the global community.

SURPRISE FED INTEREST RATE CUT--ANY MORE ON THE WAY?

     Last Wednesday, at a rare teleconferencing meeting, the Federal Open Market Committee (FOMC) cut its key Federal Funds interest rate by another 50 basis points to 4.50%. This is the 4th reduction so far this year, a total of two percentage points, and it clearly underscores the Fed's concern about the nation's economic slowdown. The FOMC's decision was prompted in part by the Conference Board's index of leading indicators which fell 0.3% in March and the University of Michigan's consumer sentiment index falling to a seven-year low in April.  Concerns are also mounting over the slowing of U.S. imports, which reflects softer U.S. demand, and cutbacks in investment spending stemming from disappointing profits in both the technology-production and technology-using sectors.
     Are additional interest rate cuts likely in the period ahead?  At its May 15th meeting, the FOMC will be persuaded to cut interest rates again (25 or 50 basis points) by the following factors: (a) core inflation has moved up only modestly and is currently running at an annual rate of 2.7%--giving the Fed room to ease some more; and (b) concerns have risen over the prospects of a recession or what may feel like one, i.e. GDP growth may be close to zero in both the 1st and 2nd quarters.  On the side of restraining the Fed from another rate cut only three weeks after its latest action are: (a) long-term bond rates and mortgage rates have moved up, as market expectations of future inflation have edged up in the face of aggressive monetary easing;  and (b) Mr. Greenspan and his colleagues are anxious to avoid another episode of euphoria in the stock market that could incite another speculative run-up in stock prices.
     The factors favoring a rate cut in May are likely to prevail.  If one more round of easing  helps to contain the U.S. economic slowdown to the first half of 2001, the global economy will benefit enormously from the "locomotive" effect of a stronger U.S. economy by the second half.  For sheer gutsiness and doing it right from a technical standpoint, many of the Fed's harshest critics will be silenced. (Ken Ackbarali)
 

ENERGY PRICES DROPPED LAST MONTH, BUT SHOULD RISE THIS SUMMER

     The U.S. Consumer Price Index (CPI) rose by just 0.1% in March, thanks to a 2.1% decline in energy prices.  The overall CPI had risen by 0.3% in February, while energy prices had declined by only 0.2%.  Gasoline prices declined by 3.8% in March and were 5.8% below the year-ago level.  Food prices rose by 0.2%, down from a 0.5% increase in February.  The core CPI, which excludes food and energy prices, rose by 0.2% last month.  For the first 3 months of 2001, the CPI rose by 4.0% at an annualized rate.  In comparison, the CPI increase for the year 2000 was 3.4%.
     For the greater L.A. metro area, the inflation news was less comforting.  The L.A. area CPI rose by 0.5% in March, following a 0.7% increase in February.  Local CPIs are not seasonally adjusted.  Utility natural gas prices rose by 7.4% last month and were 59.8% higher than a year ago.  Natural gas is the fuel of choice for electric power plants under construction, a very discomforting thought given the already high prices.  Gasoline prices rose by 2.6% last month but were 3.8% below the year-ago level.  Excluding food and energy prices, the local CPI rose by 0.3% and was 2.5% above the year-ago level.
     We can expect higher energy prices this summer.  Refineries were running at around 90-95% capacity last month, trying to catch up with demand.  The new reformulated gasoline is more difficult to produce; so some parts of the country should expect a supply shortage and price hike this summer, particularly if there are significant disruptions to production (e.g., refinery breakdowns).  A hot summer would also drive up our demand for electricity, which increases the demand on natural gas.  So, pray for a mild summer, drive less, and conserve all kinds of energy like there's no tomorrow.  (George Huang)
PR: http://www.bls.gov/news.release/cpi.nr0.htm
 

MARCH INDUSTRIAL PRODUCTION:  GOOD HEADLINES BUT . . .

     U.S. industrial production rose by 0.4% in March, the first increase in six months.  This is certainly good news.  However, production during the 1st quarter 2001 as a whole dropped 1.2% below the 4th quarter 2000.  The year-to-year gain also was anemic, up by only 0.9% from March 2000.  Utilities and mining were the major gainers in March, up by 1.1% and 0.8% respectively from February.  These increases are nice to see but manufacturing, which is much more important to the U.S. economic outlook, was weak, rising by only 0.2% over the month.
     Manufacturing's overall performance in March hides more than it reveals.  We need to look below the surface.  When we do, we find a piece of very good news.  The U.S. automotive industry--whose problems with falling sales and rising inventories depressed economic growth during the first quarter--has finally turned the corner.  Production of motor vehicles & parts plunged by 21% between September 2000 and January, then turned up by 3.6% in February and climbed by another 7.0% in March.  Better yet, inventories of cars and light trucks, which ballooned between September and January, are back down to more comfortable levels.  As a result, automotive production is scheduled to rise again to levels consistent with the current pace of sales, and the industry's recent drag on the economy will become a plus factor in the 2nd quarter.
     Outside the automotive sector, manufacturing output declined by 0.1% in March.  High tech manufacturing was a notable exception, posting an increase of 0.9% last month and 31.6% over the March 2000 level.  Looks impressive, but this sector (which includes computers & peripherals, communications equipment, and semiconductors & related electronic components) is experiencing problems not unlike those of the automotive industry, and their resolution is not yet in sight.  Production of the U.S. high tech manufacturing sector has been decelerating rapidly.  Output in the 4th quarter 2000 was 55% above the year-earlier level.  However, March output was only 0.7% above December, or 3.2% annualized.  Problems are most severe in the semiconductor industry, where 4th quarter 2000 output was 73% higher than 4th quarter 1999, while March output was actually 1.1% below December 2000.  To make matters worse, high tech manufacturers have been expanding capacity all during this period.  As a result, the sector's capacity utilization rate dropped from 89% in 3rd quarter 2000 to 85% in the 4th quarter and was down to 77% in March 2001.  The high tech manufacturing industries clearly have not turned the corner yet.  More adjustments will have to be made to both production rates and capital spending before this sector comes back into balance.  (Nancy D. Sidhu)
PR: http://www.federalreserve.gov/releases/G17/Current/
 

MARCH CONTAINER TRAFFIC BRIGHTER

     The loaded import container numbers for March at the ports of Long Beach and Los Angeles made for better reading than last month.  After a year-to-year decline in February, both ports recorded gains in March.  Long Beach was up by 9.6% and Los Angeles recorded a 14.4% gain.  The export numbers for March were mixed, however.  Long Beach recorded another decline, 13.8%, the fifth in a row.  But Los Angeles posted another increase, 6.4%.  For the month, the twin ports moved nearly 762,000 containers, up by 7.6% over the year.  (Jack Kyser)
 

MIXED HOTEL NEWS IN FEBRUARY

     According to PKF Consulting, there were mixed trends in the local hotel industry in February.  In Los Angeles County, the occupancy rate for the month came in at 78.1%, down from last year's 80.4% reading.  However, the average daily room rate increased by 4.1% to $130.63.  Four areas in the County managed occupancy rates above the 80% level (which means a full house).  These included the South Bay (84.6%), LAX (84.3%), Long Beach (81.6%), and Santa Monica (80.6%).
     In Orange County, trends were more positive.  The occupancy rate came in at 71.4%, compared with last year's 70.4%, while the average daily room rate in February moved up by 9.5% to $119.49.  The two strongest submarkets in the County were Newport Beach (78.2%) and the Orange County Airport area (77.8%).  (Jack Kyser)
 

FREE TRADE AREA OF THE AMERICAS--10 YEARS IN THE MAKING

     Leaders of the 34 countries of the Western Hemisphere (excluding Cuba) just agreed to establish the world's largest free trade bloc by the end of 2005.  The Summit of the Americas at Quebec reinforced an idea that had begun more than 10 years ago under the "Enterprise for the Americas Initiative" (EAI) proposed by the first President Bush.  The Free Trade Area of the Americas (FTAA) will be a $11-13 trillion economic area with over 800 million consumers.  A new era of cooperation between the Northern Colossus and its southern neighbors can indeed help bring more economic prosperity and political liberalization to the hemisphere.  But the second President Bush first has to get "trade promotion" authority (formerly the "fast-track" authority) from Congress.  This would permit a simple up or down vote by Congress with no changes to the negotiated terms.  Without that authority sealed in stone, other American nations will be reluctant to engage in negotiations with the U.S. because Congress might try to alter the content of such trade agreements. (George Huang)
EAI info: http://bushlibrary.tamu.edu/papers/1990/90091401.html
FTAA info: http://www.alca-ftaa.org/Alca_e.asp
 

QUICK STATS:

* BLS: US Consumer Price Index for 3/01: +0.1% (2/01: +0.3%)
* BLS: LA Area Consumer Price Index for 3/01: +0.5% (2/01: +0.7%)
* Census: US exports for 2/01: +0.1% to US$90.5 billion (1/01: +0.4% to $89.6bil.)
* Census: US imports for 2/01: -4.4% to $117.4bil. (1/01: +0.4% to $122.8bil.)
* Census: US trade deficit for 2/01: $27.0bil. (1/01: $33.3bil.)
* Census: US housing starts for 3/01: -1.3% to 1.61 million annual units (2/01: -2.2% to 1.63mil.a.u.)
* Conference Board: US Index of Leading Economic Indicators for 3/01: -0.3% (2/01: -0.2%)
* Federal Reserve: US industrial production for 3/01: +0.4% (2/01: -0.4%)
* Federal Reserve: US industrial capacity utilization rate for 3/01: 79.4% (2/01: 79.3%)

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