The Economic Data Global Express (e-EDGE)

v.5 n.34       Released August 20, 2001
Produced by the Los Angeles County Economic Development Corporation as a public service to the global community.

FED RATE CUT OF 0.25% IN THE BAG, BUT 0.50% IS A LONG SHOT

     The good news is that Federal Reserve action to cut the Federal Funds Rate (FFR) by at least 0.25% is a virtual certainty.  Here is why monetary officials will vote to continue easing: (1) the manufacturing sector of the economy (auto industry and information technology in particular) continues to be weak; (2) worker layoffs persist not only in manufacturing but in virtually all industries; (3) recent signs of weakness in consumer borrowing may eventually dampen spending, but this will be countered in the immediate months ahead by tax cut rebates of $38 billion; (4) the price indices show that inflation is on hold, as businesses cannot raise prices in the current environment; and (5) demand for U.S. exports is being constrained by global weakness.
     After reducing the FFR five times in a row this year by 50 basis points each time, the Federal Reserve's last reduction in June was a smaller 25 basis points, signaling a less aggressive policy stance.  Are the reasons for the shift to a less aggressive strategy in June still valid today?  This is the subject of intense debate. However, we can count on the FFR being cut from 3.75% to 3.50%, with additional cuts of this magnitude possible in the fourth quarter.
     The Fed may not be able to influence business investment spending in the context of weak corporate earnings and soft demand conditions, but the strong housing market will continue to benefit from lower interest rates.  In fact, "refi fever" is boosting consumer spendable income as homeowners cash in on the equity in their homes and lower their mortgage interest cost at the same time.
     The Fed is likely to perform its delicate balancing act once again.  Mr. Greenspan & Co. would not want the hyper-sensitive financial markets to interpret an aggressive 50-basis point cut as the Fed's signal of a higher recession risk.  By delivering the expected 25 basis points, the Fed would avoid being alarmist and financial markets would be less likely to be rattled.  (Ken Ackbarali)
 

SOME GOOD & NOT-SO-GOOD NEWS ABOUT THE U.S. ECONOMY

     Last week we learned quite a bit about the U.S. economy's performance in July.  Here are some of the highlights:
     (1) Industrial production fell by 0.1% in July, its 10th consecutive down month but also the smallest monthly decline.  July was pulled down by lower activity in mining, off by 0.6%, and in the utility industries, where output fell by 0.5% due to cool weather.  Manufacturing output was actually flat last month, following a big 1.0% drop in June.  That's the good news.  The not-so-good news is that this performance was due solely to a 4.7% increase in the production of motor vehicles and parts.  Excluding automotive, manufacturing production decreased by 0.3%.  The high technology industries (computers & office equipment, communications equipment, and semiconductors & related electronic components) led the way down, dropping by 2.4%.
     Retail vehicle sales were weaker than expected in July; so that industry's boost to industrial production is unlikely to be repeated again.  Furthermore, an end to the various miseries of the high tech industries is simply not visible.  The best that can be said is that manufacturing's rate of descent is beginning to slow.  This may not sound like much, but it has to happen before any bottom is reached.
     (2) Retail and food services sales barely moved in July, following a similarly flat performance in June and a 0.2% increase in May.  Last month's sales were 3.0% higher than July 2000.  Sales by motor vehicle dealers fell by 0.5% in July after rising by the same percentage in June.  Excluding motor vehicles, retail sales rose by 0.2% in July after a 0.2% decline the previous month.  Sales of gasoline dealers plummeted by 3.6% and 4.2% in June and July due to falling fuel prices.  July's best performers were sellers of health & personal care goods, with sales up by 1.7% over the month and 10.0% over the year, and vendors of sporting goods, hobbies, books, etc., whose sales were up by 1.2% month-to-month and by 6.3% year-to-year.
     Consumer purchases of durable and nondurable goods have slowed to a near stop.  But don't fret yet.  The first income tax rebate checks went out in July, and more will come into buyers' hands in August and September.  Furthermore, consumer sentiment has been relatively stable recently.  Retail sales should improve some between now and yearend.
     (3) Housing starts continued to surprise on the upside last month, rising to 1.67 million units (seasonally adjusted annual rate), their highest level since February 2000.  Single family starts rose by 1.5% month-to-month, while starts of multiple family units bounced up by 7.6%.  Increases were registered in all regions of the U.S. except the Midwest, where manufacturing's woes have really hit home.  Housing has been the main beneficiary of the Federal Reserve Board's easier monetary policy this year.  Relatively low mortgage rates are boosting activity in this industry, and the industry in turn is helping to prop up the U.S. economy.  (Nancy D. Sidhu)
Industrial production PR: http://www.federalreserve.gov/releases/G17/Current/
Retail sales PR: http://www.census.gov/svsd/www/retail.html
Housing starts PR: http://www.census.gov/indicator/www/newresconst.pdf
 

INFLATION RATE DOWN

     Thanks to a drastic plunge in energy prices, the U.S. Consumer Price Index (CPI) fell by 0.3% in July, the first month-to-month decline since last December.  Food prices rose by 0.3%.  Energy prices declined by 5.6%, thanks to an 11.0% drop in gasoline prices.  The forecast of $3/gal. gasoline did not materialize because of increased production and a drop in demand (mostly due to a slower economy).  There was also a small decline in household fuel (-2.6%), and utility natural gas and electricity costs (-1.0%).  The core CPI, which excludes food and energy costs, rose by 0.2%, which is around the usual trend.  The July CPI was 2.7% above the year-ago level, significantly lower than the 3.0+% year-over-year rates for all but two months since January, 2000.  In comparison, the 2000 annual inflation rate was 3.4%.
     Locally, the L.A. Area CPI also declined by 0.3%, the first decline since Nov. 2000.  (Local CPIs are not seasonally adjusted.)  Compared to a year ago, the CPI was 3.8% higher.  The main contributor to last month's CPI decline was the 7.8% drop in energy prices.  Gasoline prices fell by 7.7% last month but were still 9.7% higher than a year ago.  Utility natural gas costs dropped by 25.7% last month and were 20.9% below the year-ago level.  The core CPI was 0.2% higher than in June and 2.9% above the year-ago level.  (George Huang)
US PR: http://www.bls.gov/news.release/cpi.nr0.htm
LA PR: http://www.bls.gov/special.requests/sanfrancisco/ro9cpila.htm
 

JULY CONTAINER ACTIVITY MIXED

     July is the traditional start of the "peak" container shipping season, but this year has gotten off to a disappointing start.  The Port of Long Beach saw the number of loaded import containers moved during the month decline by 7.4% over the year, while loaded export containers dropped 10.3%.  This pattern was repeated elsewhere at major ports along the Pacific Coast.  The Port of Los Angeles, however, continued to buck the trend, with its loaded import container count up by 2.7%, while export containers advanced by 7.4%.  For the first 7 months of the year, total container traffic at the combined ports of Long Beach and Los Angeles was up by just 0.8% to over 5.3 million TEUs.
     Among the reasons offered for the generally lackluster trade numbers are cautious U.S. retailers, a sluggish U.S. economy, and efforts by business to reduce inventories.  It also has to be recognized that the San Pedro Bay ports are going up against strong numbers posted during the first half of 2000.  For example, the container count in July 2000 was up by 18.6% over July 1999. Times were good back then, and activity was also driven by fears that congestion problems would develop.  (Jack Kyser)
 

WEEKLY ENERGY NOTES:

     - The two chambers of the California Legislature are considering competing bills to address the issue of Southern California Edison's (SCE) $3.5 billion debt, incurred between May 2000, and January 2001 when the wholesale electricity costs were higher than the retail rate SCE was allowed to charge its customers.  Gov. Davis' plan was largely criticized as a corporate bailout.  Lawmakers are drafting plans that would look less like a bailout for Edison.  Pacific Gas & Electric (PG&E) had declared bankruptcy in April, and many fear SCE may do the same if a satisfactory deal is not reached.
     - California Public Utilities Commission (CPUC) will vote on Thursday to decide whether to effectively cede some of its control over electricity rates to the Dept. of Water Resources (DWR), the principal power-buying agency of California.  The proposal is meant to ensure that DWR can collect enough from consumers to pay for the power it purchases.  Without that authority, DWR runs the risk of losing money if wholesale power costs rise again above current rates.  The frozen retail rate was the main reason that SCE & PG&E ended up with billions of dollars of debt.
     In a related matter, the CPUC will also decide whether to end "direct access"--which gives power consumers the choice of buying power from power marketers and generators other than the major utilities.  Officials fear that consumers might use direct access (a.k.a. retail choice) to circumvent the new higher rates and not help the State pay down the bond issue.  Retail choice was one of the basic cornerstones of the State's 1996 deregulation.  Killing it will signal an effective end to California's electricity deregulation.
     (Compiled by George Huang)
 

CEO ECONOMIC FORECAST BREAKFAST

     LA Business Journal presents its CEO Economic Forecast on Tuesday, August 28, at the downtown Biltmore Hotel.  Three local economists--James Doti (Chapman U.), our own Jack Kyser (LAEDC), and Tom Lieser (UCLA)--will speak and have a discussion forum on the L.A. economy.  Please e-mail to bzertuche@labusinessjournal.com for more info.
 

QUICK STATS:

* BLS: US Consumer Price Index for 7/01: -0.3% (6/01: +0.2%)
* BLS: LA Area Consumer Price Index for 7/01: -0.3% (6/01: +0.8%)
* Census: US retail sales for 7/01: +0.0% (6/01: -0.0%)
* Census: US business sales for 6/01: -1.4% (5/01: +0.9%)
* Census: US business inventories for 6/01: -0.4% (5/01: -0.2%)
* Census: US housing starts for 7/01: +2.8% to 1.672 mil. annual units (6/01: +1.1% to 1.627mil.a.u.)
* Census: US exports for 6/01: -2.0% (5/01: +0.9%)
* Census: US imports for 6/01: -0.7% (5/01: -2.3%)
* Census: US trade deficit for 6/01: US$29.4bil. (5/01: $28.5bil.)
* Federal Reserve: US industrial production for 7/01: -0.1% (6/01: -0.9%)
* Federal Reserve: US industrial capacity utilization rate for 7/01: 77.0% (6/01: 77.2%)
* Conference Board: US Index of Leading Economic Indicators for 6/01: +0.3% (5/01: +0.4%)


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