The Economic Data Global Express (e-EDGE)

v.6 n.7       Released Feb. 19, 2002
Produced by the Los Angeles County Economic Development Corporation as a public service to the global community.

WILL THE EUROPEAN CENTRAL BANK CUT INTEREST RATES?

     Economic weakness in most Eurozone countries has stimulated debate once again about the correctness of the European Central Bank's (ECB) single policy target which is to keep the inflation rate at or below 2.0%.  The ECB's critics have pointed out that this target may be too constraining and somewhat unrealistic, not giving the ECB enough flexibility in setting interest rates for the Eurozone economy.  The ECB delayed lowering interest rates until the middle of last year as inflation remained above its target, but finally reduced its key rate to 3.25% by October.  Since then, however, ECB policymakers have given no signals to financial markets of further rate cuts, despite falling prices and "near recessionary" conditions in Germany, the EU's largest member country.
     Consumer price inflation in the Eurozone increased from an annual rate of 1.9% in early 2000 to 3.4% in mid 2001, and then declined to 2.1% in January 2002.  This impressive improvement in inflation has boosted the hopes of financial markets that the ECB would resume interest rate cuts as early as next week.  These hopes may be dashed, however, because the ECB's policy is based not only on current rates of inflation but also on its forecast of inflation over a two-year period into the future.  Consequently, if the ECB expects stronger growth in the Eurozone in the second half of 2002 and further strengthening in 2003, this may be sufficient rationale for the bank to remain in a holding stance on interest rates.
     In setting its monetary policy strategy over the next several weeks and months, the ECB will also be monitoring the euro.  The euro has weakened against the dollar from US$0.92 in November 2001 to US$0.87 in February 2002.  ECB officials may not want to see further declines in the value of the euro (higher import prices) which could be triggered by lower interest rates.  On the other hand, if market fundamentals were to bolster the euro to US$0.90 or higher over a sustained period, the probability of another interest rate cut by the ECB would be greatly enhanced.  ECB President Wim Duisenberg & Company have some serious soul searching to do over their current operating strategy. (Ken Ackbarali)
 

INVENTORY REPORT:  CLEARING OUT THE CUPBOARDS

     The Census Bureau reported last week that inventories held by U.S. manufacturers, wholesalers, and retailers fell by 0.4% in December, the eleventh consecutive monthly decline.  However, stocks fell much less rapidly than in November and October, which were down by 1.2% and 1.6% respectively.  Manufacturing and wholesale inventories dropped by 0.6% in December, but retail stocks edged down by only by 0.1%.  Within the retail sector, stocks of automotive dealers, building materials stores, and furniture, electronics & appliance stores actually increased.  On the other hand, department stores and apparel stores had been conservative when they ordered their holiday merchandise.  Sales turned out to be better than expected and their inventories declined accordingly.
     Why worry about something as arcane as business inventories?  There are two good reasons.  First, the change in business inventories is one of those all-important details required to estimate the nation's economic output, or Gross Domestic Product (GDP).  To take the current example, government statisticians have a pretty good handle on how much U.S. businesses, households, and governments spent on goods and services last quarter.  But they don't know how many of these items were actually produced in the U.S. during the fourth quarter until they get complete information on foreign trade (imported goods were clearly produced elsewhere) and the change in inventories.  If business stocks fell, as they did between September and December, then some of last quarter's spending went for goods produced earlier in the year and shouldn't be counted in last quarter's GDP estimate.  The best example is all those cars and light trucks already sitting on dealers' lots that were sold using zero-percent loans during late September and October.
     The second reason to study the inventory data is that they reveal an important fact about the U.S. economic situation in the current quarter.  Specifically, stocks are now very low for many firms in a variety of industries.  But demand for goods and services will rise as the economy begins to recover in the next few months.  With little in the way of backup inventories, U.S. businesses will simply have to crank up their production lines lest they miss out on higher sales.  Indeed, inventory re-stocking is expected to be a major contributor to the economy's growth during the first quarter.  January's industrial production results (see below) suggest this process is already beginning to get under way.  (Nancy D. Sidhu)
PR: http://www.census.gov/mtis/www/current.html
 

INDUSTRIAL PRODUCTION STILL WEAK (BUT LOOKING A BIT BETTER)

     The Federal Reserve Board reported that U.S. industrial production edged down by 0.1% in January, the smallest downtick in the past six months.  Relatively warm weather and lower factory usage of fuels caused utility output to fall by 0.7% last month.  And reduced electric power generation plus generally lower energy prices meant that "mining" activity (which includes oil and gas well drilling as well as coal mining) continued its multi-month decline.  The big news in this report was that the level of manufacturing activity did not change between December and January, ending a six-month string of down months.  Among the high tech equipment industries, production of computers and semiconductors registered increases in January, along with a variety of traditional industries like industrial machinery, primary metals, chemicals, and furniture manufacturing.  On the down side, automotive, home electronics, textiles, aerospace and printing & publishing manufacturers reported lower production.  Since reaching a peak in June 2000, factory activity has fallen by a total of 7.8%.  Last month's mix of pluses and minuses is hard to describe but exactly what we should expect to see if manufacturing is indeed nearing the bottom of its cycle.  Cross your fingers!   (Nancy D. Sidhu)
PR: http://www.federalreserve.gov/releases/G17/Current/
 

WHOLESALE PRICES ENDED ITS SLIDE

     The US Producer Price Index for finished goods rose by 0.1% last month, the first increase since October.  The index was 2.6% below the year-ago level.  The main culprit was the 0.8% increase in food prices.  Energy prices rose by 0.1%, also the first increase since October.  However, energy prices had fallen by 13.3% during the fourth quarter, due to the shift in travel patterns resulting from the 9/11 attacks and the drastic decline in commercial travel and economic activity.  Excluding food and energy prices, the core PPI declined by 0.1% in January.
     The PPI for intermediate goods fell by 0.1% and was 4.6% below the year-ago level.  Energy prices fell by 0.6% and food prices declined by 0.1%.  These two subindexes both have posted four consecutive monthly declines.  The core PPI for intermediate goods was unchanged, after falling for seven consecutive months.
     The PPI for crude goods rose by 3.7%, thanks to a 5.6% jump in energy prices and a 4.0% increase in food prices.  The core PPI for crude goods fell by 0.5%.  Crude product prices tend to fluctuate wildly, and the PPI for crude goods was actually 40.4% below the year-ago level, before energy prices began their rapid descent.  For example, compared to a year ago, natural gas costs were 75% lower last month and crude petroleum prices were 38% lower.  (George Huang)
PR: http://www.bls.gov/news.release/ppi.nr0.htm
 

DECEMBER HOTEL NUMBERS BAD

     According to the December data from PKF Consulting, the local hotel industry closed out 2001 on a sour note.  The occupancy rate for Los Angeles County as a whole was 51.8%, down from 61.4% a year earlier.  The average daily room rate (ADR) declined by 7.3% to $106.51.   The highest occupancy rate during the month was found in amazing Valencia (73.7%), while the lowest was in downtown Los Angeles (26.6%).  However, the ADR is the latter area was up by 7.3% over the year.  Go figure.  For all of 2001, the County's occupancy rate was 68.4%, down from 76.1% in 2000.  The ADR slipped by 1.4% to $120.66.  Again, Valencia was front and center with an 83.6% occupancy rate.
     The December PKF data for Orange County was not much fun, either.   The monthly occupancy rate was also 51.8%, down from 59.5% a year earlier.  The ADR eased by 4.5% to $97.94.  The five sub-markets performed about the same.  For the year 2001, the County's occupancy rate was 67.2% compared with 72.8%, while the ADR was up by 3.1% to $113.56.
     It was no picnic in the Bay Area in December either, with San Francisco reporting a 51.6% occupancy while San Jose came in at 45.0%.  And the ADRs were tumbling with San Francisco off by 19.8% and San Jose down 24.4%.  One message from this -- there are bargains by the Bay, so go enjoy!  (Jack Kyser)
 

QUICK STATS:

* BLS: US Producer Price Index for finished goods for 1/02: +0.1% (12/01: -0.6%)
* BLS: US Producer Price Index for intermediate goods for 1/02: -0.1% (12/01: -0.8%)
* BLS: US Producer Price Index for crude goods for 1/02: +3.7% (12/01: -9.6%)
* BLS: US export prices for 1/02: -0.1% (12/01: -0.3%)
* BLS: US import prices for 1/02: +0.4% (12/01: -0.9%)
* Census: US business sales for 12/01: +0.0% (11/01: -1.6%)
* Census: US business inventories for 12/01: -0.4% (11/01: -1.2%)
* Census: US retail sales for 1/02: -0.2% (12/01: +0.2%)
* Census: US housing starts for 1/02: +6.3% to 1.678 million annual units (12/01: -2.3% to 1.579mil.a.u.)
* Federal Reserve: US industrial production for 1/02: -0.1% (12/01: -0.3%)
* Federal Reserve: US industrial capacity utilization rate for 1/02: 74.2% (12/01: 74.4%)
* U. Michigan: US Consumer Sentiment Survey for 2/02: 90.9% (1/02: 93.0%)

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