The Economic Data Global Express (e-EDGE)

v.5 n.48       Released Nov. 26, 2001
Produced by the Los Angeles County Economic Development Corporation as a public service to the global community.

FEDERAL BUDGET UPDATE:  GOING FROM BAD  . . . .

     The federal government's budget ended fiscal year 2001 (in September 2001) with a sizeable surplus of $127.0 billion.  However, this was 46% below the fiscal 2000 surplus of $237 billion and only a little bigger than fiscal 1999's $124 billion.  This deterioration was primarily due to the slowing economy, which reduced business and personal income tax liabilities, and to the Economic Growth and Tax Relief Reconciliation Act of 2001 (whew!), which granted individuals about $40 billion in tax rebates and other tax goodies and postponed some corporate profit tax payments from their normal September 15 due date to October 1, the first day of the new fiscal year, 2002.
     Last week, the Treasury Department reported the federal government ran a deficit of only $9.4 billion in October, marginally better than October 2000.  However, the current month's result was boosted by a huge increase in corporate profit taxes, i.e., the monies that weren't paid in September.  [Note that in the real world, business profitability is plunging:  if we ignore the budgetary niceties and combine September and October, corporate profits tax revenues plunged by almost 40% between 2000 and 2001.]  On the other hand, higher government spending in the usual categories--defense, Medicaid, unemployment compensation, and Social Security--offset most of the apparent increase in revenues.
    All of the government's official surplus estimates for the current fiscal year are out-of-date due to the recession and the need for higher spending on defense and homeland security.  A quick survey of several private-sector economists yields a wide range of budget forecasts for fiscal 2002.  Many expect the government budget to run a deficit, rather a surplus.  Stay tuned.  (Nancy D. Sidhu)
 

CALIFORNIA BUDGET UPDATE:  . . .  TO WORSE

     On the home front, California's budget situation is even grimmer.  Revenues through the first 4 months of fiscal year 2001-02 (which ends in June 2002) have dropped by $1.7 billion, or 8%.  This is about $0.8 billion below the state's budget forecast, on which all of its current spending plans were made.  Unlike the nation, the State of California may not operate in a deficit budget situation.  No wonder the Governor is insisting that state government departments and agencies reduce their spending and fast.
     The Legislative Analyst's Office (LAO) recently published its forecast of the state's economy and the budget.  Not a pretty picture.  Without any preventive actions, the LAO expects the state's budget will be about $4.5 billion in deficit by June 2002 versus the current budget's forecast of a $2.6 billion reserve (or surplus).  Worse yet, LAO warns a lot more red ink will flow next year, for a total two-year deficit of  "$12.4 billion and potentially even more" unless drastic measures are taken.  There are only a limited number of ways to resolve these problems, namely spending reductions and/or tax increases.  Hold onto your wallets.  (Nancy D. Sidhu)
 

U.S. TRADE DEFICIT SHRINKS IN REACTION TO 9/11 DISASTER

     The balance on goods and services, which measures U.S. international trade transactions, declined in September to a deficit of $18.7 billion from a deficit of $27.1 billion in August.  The September deficit was the smallest since March 1999 and represented a 31% decline from the prior month.  Most of the decline was attributable to insurance payments by foreign insurance companies to American claimants as a result of the September 11th terrorist attacks.  These payments are estimated at $11 billion and are reflected in the U.S. external accounts as a "decrease in service imports on a net basis."
     It is important to view the impact of the 9/11 disaster on insurance payments as a one-off event that raised the U.S. trade surplus on services from $7.0 billion in August to $17.2 billion in September.  Subsequent monthly data will more clearly reflect the recession in the U.S. and in the economies of major trading partners. U.S. merchandise exports declined in September by $4.0 billion while U.S. merchandise imports fell by a smaller $2.1 billion.  This reversed the decline in the merchandise deficit experienced in August and pushed the deficit back up to $35.9 billion in September.
     There is no question that air freight and surface shipments, especially with Canada and Mexico, were disrupted by the 9/11 attack.  However, it appears that the disruption did not last very long.  The real issue now is how much shrinkage the U.S. and the rest of the world will experience in total international trade as the global recession deepens and spreads.  Economic growth this year and next could take some heavy hits in countries (e.g. Indonesia, Malaysia, and Thailand) whose economies are highly trade sensitive.  (Ken Ackbarali)
PR: http://www.census.gov/indicator/www/ustrade.html
 

OCTOBER AIRLINE TRAFFIC

     For October, there are divergent trends in airline passenger traffic.  At regional airports, the passenger counts were still below last year, but not as much as in September.  Los Angeles International Airport reported a 28.8% decline in total passenger traffic, with international traffic even weaker, a 34.3% decline over the year.  At John Wayne Orange County Airport, October traffic was down by only 15.3%, an improvement from September's 33.2% slippage.  At Palm Springs, the October passenger count was down by 20.7%, compared with September's 39.8% decline.  (Jack Kyser)
 

LONG BEACH CONTAINER TRAFFIC FLOJO IN OCTOBER

     The port of Long Beach saw its loaded import container count increase by 1.1% in October, but the number of loaded export containers handled was down by 7.1%.  The total number of import containers moved in October at the two San Pedro Bay ports was up by 3.6% over the year.  September, if you remember, saw an increase of 13.6%.   The number of export containers moved at the two ports in October was down by 5.1%.  The total number of containers handled in October was up 2.8% to 939,888.
     The two local ports are doing well this year compared with other West Coast ports.  There is excess steamship capacity on the Pacific, with lots of large ships on order, which speaks to continued excess capacity and low rates.  Times are not good in the international trade biz.  (Jack Kyser)
 

WHAT ABOUT CHRISTMAS SALES?

     A favorite media question is about Christmas sales -- how strong (or weak) will they be?  In the case of California and Southern California, retailers will be making comparisons with some strong 2000 numbers.  For the state, the 4th quarter of last year was up over 1999 by 9.9%.  Los Angeles County posted an 8.4% increase, while Orange County was ahead by 8.2%.  Riverside County enjoyed a 12.0% gain, San Bernardino County came in with a 9.1% increase, San Diego County was up by 10.3%, and Ventura County moved ahead by 8.4%.  This year, after Thanksgiving traffic at local malls was brisk but consumers were going for the bargains.  (Jack Kyser)
 

WTO WOES?

     While the governments of China and Taiwan both celebrated their entry into the World Trade Organization (WTO) earlier this month, sentiments on the "streets" are quite mixed.  Workers in many industries, particularly those heavily protected by government trade policies, are worried about their jobs.  Many products may see price increases because government subsidies (or tax exemptions) are not allowed under WTO rules.  In Taiwan, consumers are struggling to acquire rice wine, a staple in Taiwanese cuisine currently manufactured and sold by the government's monopoly bureau.  Consumers line up with their household registry in a style similar to rationing during WWII.  Wholesalers are hoarding their supplies of rice wine in anticipation of huge profits after WTO goes into effect.  The profit margin is stunning: a 450% increase in retail value after January 1, 2002 (from around US$0.58/bottle currently to US$3.20/bottle).  Yet this is not the fault of the WTO but the result of government's socioeconomic policies.  WTO rules are supposed to help end these policies so the economies can be more efficient.  Nonetheless the government is concerned about the social costs of such impacts.  Humble rice wine is now a weapon of the opposition parties seeking even more seats in the upcoming parliamentary election.
     In both Japan and Taiwan, there's the sense that China's entry into the WTO may hasten the "hollowing" of their industrial base.  Many companies have already moved their manufacturing operations to China to benefit from cheaper labor, lower real estate costs (through long-term leases from government which owns the land), and more lax environmental and labor regulations.  With the WTO rules reducing quotas and tariffs on Chinese-made products, China will become an even more attractive location for manufacturers.  Many firms' Japanese and Taiwanese operations currently survive on R&D and higher value-added products, but there is no guarantee that these operations will stay in Japan or Taiwan after WTO rules go into effect.
     And there are those who think that WTO membership may do more "harm" than "good" for the Chinese government.  The lack of a well-established social safety net may become a serious social problem if unemployment does rise significantly.  Workers in many state-owned enterprises (SOEs) may lose their "iron rice bowl" (guaranteed employment) when their companies can no longer get  government subsidies or loans channeled through banks under political pressure.  But if China's enforcement of intellectual property rights serves as a good indication of Chinese attitudes regarding international rules, it's more likely that China will comply with WTO rules only selectively in order to reduce the short-term adverse impacts of its entry into the WTO.  (George Huang, after a brief trip to Asia last week)
 

QUICK STATS:

* Census: US housing starts for 10/01: -4.6% (9/01: -2.7%)
* Census: US exports for 9/01: -8.5% to US$77.3 billion (8/01: +1.1% to $84.5)
* Census: US imports for 9/01: -14.0% $96.0bil. (8/01: -1.0% to $111.6)
* Census: US trade deficit for 9/01: US$18.7bil. (8/01: $27.1bil.)
* Conference Board: US Index of Leading Economic Indicators for 10/01: +0.3% (9/01: -0.5%)


The Economic Data Global Express (e-EDGE) is a free service of the Los Angeles County Economic Development Corporation (LAEDC). Permission to quote any proprietary part of this release is granted given proper credit. Distribution is allowed provided that no modifications are made to the original content. Sponsors of this service do not necessarily endorse all opinions stated herein. For more information, please e-mail to research@laedc.org. To contact LAEDC, please call 213-622-4300.

Subscribe to e-EDGE and receive current economic news and major developments.  Your e-mail address will not be disclosed to any outside party (including e-EDGE sponsors) under any circumstances.

To send us comments regarding e-EDGE, please e-mail to research@laedc.org.