The Economic Data Global Express (e-EDGE)

v.5 n.26       Released June 25, 2001
Produced by the Los Angeles County Economic Development Corporation as a public service to the global community.

ANOTHER INTEREST RATE CUT?  NOT "IF", BUT HOW BIG.

     Having reduced interest rates five times this year and by 0.5% each time, it is now reasonable to ask whether the Fed will continue its aggressive easing.  The Federal Open Market Committee (FOMC) is scheduled to meet tomorrow (6/26) and Wednesday (6/27) to decide on its next policy action.  The FOMC is likely to focus on the sources of weakness in the economy and the lingering threat of a recession.  The most recent "Beige Book" underscored economic weakness in many regions of the United States.  Manufacturing has been hard hit and the Information Technology sector has seen a dramatic falloff in demand, a trend that is spreading worldwide.  Consumer confidence continues to be weak, while consumer spending is feeding on a steep buildup in installment debt.
     A more recent factor that has crept into the dialogue on monetary policy is bank loan quality, as indicated in Chairman Greenspan's recent congressional testimony.  Bank lending policies remain tight and, in the current economic environment, this  cautious attitude aggravates the economy's loss of momentum. This argues for another ½% cut in interest rates this week instead of a smaller cut now and additional ones later on.  Official Fed comments in recent weeks indicate renewed concerns about inflation, but there does not seem to be an overarching urgency to change to an anti-inflationary stance at this time.  Fortunately, the Fed has considerable flexibility in policymaking, as it is not constrained by an official inflation target like the European Central Bank, the Bank of England, and others.
     The most likely outcome is only a 0.25% cut in the Fed Funds Rate this week to 3.75%.  Financial markets will interpret this option, as opposed to a 0.5% cut, as the end of this string of easing moves.  However, opting for a cut of 0.5% in a single move, which cannot be ruled out, would signal to financial markets that the Fed's worries about economic weakness are far from over.  (Ken Ackbarali)
 

MAY'S FEDERAL BUDGET IN THE RED

     The federal government's budget ran a deficit of $27.9 billion in May, significantly worse than the May 2000 deficit of $3.6 billion.  Government outlays were up by 2.3%, but receipts dropped by 14.3%, due partly to the economy but mostly to calendar and technical effects (that only true budget watchers can appreciate!).
     For the first eight months of fiscal year 2001 (which runs from October 2000 through September 2001), the federal budget surplus was $137.1 billion, up by about $16.4 billion from the same period in fiscal 2000.  Year-to-date receipts rose by 4.5%, while government spending rose by a moderate 3.6%.  However, the trends underlying the federal budget are weakening.  Most noticeably, corporate profits tax payments have run below last year for four consecutive months and were down by 3.0% for the fiscal year-to-date.  A year ago, corporate tax revenues were up by almost 16%.  In addition, growth in personal income tax receipts has slowed, from 15.4% during the first 8 months of fiscal 2000 to only 5.8% during the latest period.
     On the expenditure side, total spending is being held down by slow/no growth in interest payments (remember, the federal debt is shrinking) and "Other" (non-defense, non-Social Security, non-Medicare/Medicaid), which together account for just over 40% of total outlays.  Unfortunately, growth of the other 60% looks likely to accelerate.  Defense spending, up by only 3.6% fiscal year-to-date, will pick up once the Defense Department completes its mission review, which seems likely to result in higher procurement spending (a positive for California).  Medicaid spending has grown by 10.7% fiscal year-to-date.  Medicare, which was up by 7.7% through May, also is headed for double-digit growth due to increased payment rates to hospitals and other health car providers.
     These deteriorating trends led the Congressional Budget Office to revise its current-year surplus estimate down.  CBO now anticipates the fiscal year 2001 budget surplus will be only $200 billion when the year has ended, and we agree.  That would be a significant decline from the $237 billion registered in fiscal 2000.  What about next year?  Whether the fiscal 2002 surplus grows or shrinks again will depend on the balance between Washington's perennial desire to increase spending (including defense spending) and the timing/speed of the economic recovery.  The sooner the economy picks up, the bigger revenues will be.  The surplus will grow accordingly.  (Nancy D. Sidhu)
PR: http://www.fms.treas.gov/mts/
 

CALIFORNIA BUDGET UPDATE

     This week the California Legislature gets down to its real business, enacting the laws that determine how much the state will collect in revenues and how much it will be able to spend on new programs.  For much of 2001, the state's legislators have been focused on the energy crisis: what it is, why it is, and what to do about it.  Very little normal business has been transacted as a result.  However, a small group of legislative leaders has been meeting on the sidelines to sort out the multitude of issues related to the fiscal year 2002 budget, which begins this Sunday, July 1 and ends June 30, 2002.  Last weekend the budget committee completed a draft plan that will be presented to the rest of the legislature this week, in time to meet a constitutional deadline of June 30.
     However, the plan may well meet resistance.  After surging by 8.5% in the current fiscal year, the state's general fund revenues are forecast to decline by 4.1% in fiscal year 2002.  This means the legislators must cut their spending plans to fit the new, smaller amount of available revenue.  Many legislators will want cuts made to their particular programs restored.  Another issue concerns the state sales tax rate, which was reduced by one-quarter percent this past January.  The reduction was made because general fund reserves had risen above a trigger level, 4% of revenue, enacted in the early 1990s.  Now, reserves are forecast to fall back below the trigger level, and the same law says the sales tax should be restored to its previous rate.  A number of legislators want the rate cut made permanent, which would require even more reductions in spending.  The number of legislators objecting to the committee's plan is crucial; all budget legislation must be approved by a two-thirds vote.
     The six members of the budget committee made many hard decisions in recent days. They trimmed programs here, cut spending there, and allowed the sales tax rate to rise, all in order to generate a higher level of general fund reserves.  Why do reserves matter so?  Without a cushion of reserves to dip into, legislators will have to reduce spending dollar-for-dollar with any unanticipated decline in revenues.  That's exactly what happened during the recession of the early 1990s, and the results weren't pretty.  Despite some misgivings, Governor Davis and the legislative leaders want to avoid a repeat performance.  The only question is how they will manage it.  Stay tuned.  (Nancy D. Sidhu)
 

ENERGY NOTES

     This new, temporary section of e-EDGE will try to keep you up-to-date on the energy crisis.  Major developments last week included:
- The FERC instituted a price mitigation scheme (basically a price cap) for the whole western region of the country.  This action makes it less likely that power generators will avoid the California market and sell to others because of State's price cap.  Hence FERC's decision reduces the potential for more blackouts than under a California-only price cap.  Interestingly, sellers to California are allowed a 10% surcharge to cover their credit risk.  Cal ISO calculates that FERC's de facto price cap should be $92/MWh rather than the $108/MWh initially announced by FERC.  (FERC PR: http://www.ferc.fed.us/news1/pressreleases/mitigation.pdf  ; Cal ISO price table: http://www.caiso.com/prices/ )
- California Treasurer Angelides gave a presentation to potential buyers of the State's $13.423 billion power revenue bond issue.  The presentation is a good summary of the Governor's efforts to resolve the power crisis, including average contracted prices for those long-term contracts signed earlier this year.  (Presentation file: go to http://www.treasurer.ca.gov/ and click on "California Presentation to Investors - June 22")
- Governor Davis authorized an interim financing (bridge loan) of $4.55 billion to cover expenses until the bond sales begin (after Labor Day).  This is a crucial development because some of the existing contracts allow generators to dump the contracts if the Dept. of Water Resources (DWR) does not have external financing by July 1.
- The State has agreed to buy San Diego Gas & Electric's (SDG&E) transmission lines for about $1 billion.  This will help SDG&E cover $750 million in undercollections.  Legislative approval is still required.
     For this week, a few major issues will be confronted:
- CPUC will review and decide on 1) the suspension of retail choice and 2) a rate increase for SDG&E customers.
- Edison International is expected to sell $1-2 billion in bonds this week.  While it will pay a high interest rate on the bonds, Edison needs the funds to pay off some of its other debts coming due this year.
- Settlement talks between the State and power generators will begin in Washington today.  The State wants refunds of $9 billion "excessive" charges by generators, and generators want payments for power sold to the State but still uncollected.  After 15 days, the parties will either have reached an agreement or the Administrative Law Judge will issue his recommendation to the FERC.  Other issues will also be reviewed, including natural gas transportation constraints, immunity for power generators from future prosecutions or lawsuits, and PG&E bankruptcy.  (Yahoo news: http://biz.yahoo.com/rf/010625/n25231622.html )
- Outlook is for continued cooler-than-normal weather.  Your prayer is working.  (George Huang)

HOTEL BIZ LACKLUSTER IN APRIL

     The April data from PKF Consulting points to a disappointing trend in hotel business in Los Angeles County.  The occupancy rate for April came in at 70.1%, down from 76.0% last year.  Moreover, the average daily room rate also dropped, by 1.6% to $124.22.  This was the first year-over-year decline in this measure since mid-1995.  And only one market in the County managed an occupancy rate over 80% during the month, Santa Clarita at 89.9%.  April of 2000 had five areas over the 80% mark.
     Orange County's hotel industry also experienced the April blahs, with the occupancy rate dropping by 4.0 percentage points to 72.4%.  However, the average daily room rate advanced 5.2% to $118.66.  The strongest submarket in Orange County in April was Anaheim, at 75.4%.  And a news flash:  Disney is cutting the admission price to its new California Adventure, which might spark business in the coming months.  (Jack Kyser)
 

QUICK STATS:

* Census: US housing starts for 5/01: -0.4% to 1.62 million annual units (4/01: +2.3% to 1.63mil.a.u.)
* Census: US exports for 4/01: -2.0% to US$86.9bil. (3/01: -2.0% to US$88.7bil.)
* Census: US imports for 4/01: -2.2% to US$119.1bil. (3/01: +2.3% to US$121.8bil.)
* Census: US trade deficit for 4/01: US$32.2bil. (3/01: US$33.1bil.)
* BEA: US current account deficit for 1Q01: US$109.6bil. (4Q00: US$116.3bil.)
* Conference Board: US index of Leading Economic Indicators for 5/01: +0.5% (4/01: +0.1%)
* Natl Assn of Realtors: US existing home sales for 5/01: +2.9% to 5.37mil. annual units (4/01: -3.9% to 5.22mil.a.u.)
* US Treasury Dept.: US Treasury Budget balance for 5/01: -$27.9bil. (4/01: +189.8bil.)

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