The Economic Data Global Express (e-EDGE)

v.6 n.32       Released Aug. 12, 2002
Produced by the Los Angeles County Economic Development Corporation as a public service to the global community.

FED IN A DELICATE SPOT--BUT WILL HOLD INTEREST RATES

     Having aggressively moved its key Federal Funds Rate (FFR) down to what many believed to be a rock bottom 1.75%, the Federal Open Market Committee had been expected to sit on the sidelines through the end of 2002. In the past two weeks, however, speculation has been rampant that the Fed would lower rates some more and perhaps as early as tomorrow at its scheduled meeting. Indeed, major investment firms on Wall Street and some economists outside of Wall Street have publicly switched their forecasts to a lower interest rate scenario. Let's explore the fundamentals to see why financial markets are more perplexed than usual and how the Fed may deal with one of its more delicate policy dilemmas.
     Factors Supporting a Rate Cut:  (1) The Fed may be quite concerned about the economy's weakness in the current quarter and questioning whether GDP growth (annual rate) in the second half of the year might be closer to 2.0% than 3.0%.  (2) The stock market "meltdown" in July and its continuing volatility have raised the fear factor for millions of investors, and confidence has been dealt a heavy blow.  (3) The Latin American "crisis" (Brazil, Argentina, Uruguay) continues to plague international financial markets with the threat of contagion.  (4) Lower mortgage rates would keep refinancing at fever pitch for a while longer and also continue to stimulate home sales and car sales.
     Factors Against a Rate Cut:  (1) The dollar has begun to strengthen in the past two weeks after weakening against the yen, euro, and other currencies earlier this year--a rate cut could reverse this trend.  (2) Excess capacity in the telecom industry, corporate scandals and questionable accounting practices, weak business investment, and the growing trade deficit will not be helped by lower interest rates.  (3) The psychological effect of a rate cut could be disastrous on financial market participants--their interpretation would be that the Fed expects a lot more bad news and weak growth numbers in the months ahead.
     A "no win" situation:  Many stakeholders and constituencies are likely to be disappointed if the Fed opts to remain in a holding pattern in this unsettled environment. Others will undoubtedly be critical of a rate cut.  The decision may very well turn on whether the FOMC believes consumer demand will strengthen as a result of lower interest rates.  But, remember the long lag between monetary easing and a change in behavior.
     Our best shot:  The Fed is likely to keep rates unchanged.  However, changing the "bias" from neutral to easing is an action that may be taken, with the Fed indicating its heightened concerns about economic conditions.  (Ken Ackbarali)
 

STATE/LOCAL UNEMPLOYMENT RATES MIXED IN JULY

     California's unemployment rate was 6.3% last month, down a bit from recent readings of 6.5% in June and 6.4% in May.   The state's jobless rate was 5.3% in June 2001.  Meanwhile, the U.S. unemployment rate increased by 1.3 percentage points over the past 12 months, from 4.6% to 5.9%.  (These figures are all adjusted to eliminate normal seasonal variation.)
     Jobless rates at the county level are not seasonally adjusted.  Typically, employment rises a little in July, while the amount of unemployment increases a good deal (partly due to educators going on their summer vacations).  Southern California county unemployment rates were flat to higher last month.  Los Angeles County's jobless rate was 7.3%, even with June.  Jobless rates in Orange County and San Bernardino also were flat over the month, the former at 4.1% and the latter at 5.8%.  Meanwhile, Riverside County's unemployment rate increased from 5.8% in June to 6.7% last month, and Ventura County's rate rose by 0.4 percentage points to 5.3%.  Compared to July 2001, last month's jobless rate was noticeably higher in Los Angeles County, up by 1.2 percentage points.  Orange, Riverside and San Bernardino counties registered smaller year-to-year increases of 0.7, 0.8, and 0.6 percentage points respectively, while joblessness in Ventura County increased by only 0.2 percentage points.  Most of these year-to-year increases are smaller than they were in previous months.  San Diego's unemployment rate was 4.2%, the same as in June and 1.0 percentage point higher than last year.
     The Southern California (5-county) jobless rate has increased significantly over the past 12 months, rising by 0.7 percentage points and setting a new cyclical high of 6.4% last month.  In the Bay Area, the combined 9-county unemployment rate edged down to 6.1% in July (so far, the area's cyclical high was 6.2% in January and June). This rate was 1.5 percentage points above the July 2001 level of 4.6%, another instance where the year-to-year margin has been dropping.  San Jose has experienced the worst of the area's problems.  Last month's jobless rate was 7.6%, much higher than the July 2001 rate of 5.2%.  Contra Costa, San Mateo and Solano counties also registered big year-to-year increases of 1.5, 1.3, and 1.2 percentage points to 5.2%, 4.6%, and 5.5% respectively.  The unemployment rate in San Francisco County increased from 5.9% in July 2001 to 6.9% last month.
     Unemployment continued high in most of the Central Valley. Compared to last year, however, the Central Valley's unemployment record was mixed.  The jobless rate in Sacramento County was 5.5% last month, up from 4.4% in July 2001.  Joblessness in Kern County also increased by 1.1 percentage points, to 10.5%.  Fresno and Tulare counties continued high too, at 12.8% and 14.0% respectively.  However, Fresno's rate rose by only 0.4 percentage points over the year while unemployment declined by the same amount in Tulare County.  Finally, Imperial County's jobless rate has dropped by 2.4 percentage points over the past 12 months, but it remained highest in the state in June, at 21.7%.   (Nancy D. Sidhu)
PR: http://www.edd.ca.gov/nwsrel08.htm
 

JULY JOBS DATA LACKLUSTER

     The July data from the California Employment Development Department (EDD) pointed to an economy that was struggling to get going.  While the state added jobs from June to July (7,500 seasonally adjusted), the only sectors adding jobs were trade and government.  Over the year employment was down by 0.3% or 35,500 jobs.  The manufacturing sector continues to shed the most jobs, down by 83,000 employees over the year.
     Around Southern California, there wasn't much change in trend.  Los Angeles County lost 25,800 jobs over the year, a decline of 0.6%.  Manufacturing was down by 20,200, while services slipped by 13,000.  Unlike the state, both retail and wholesale trade lost jobs over the year.  Employment in motion picture production continued to be uninspiring, down over both the month and year, with the latter loss at 9,800 jobs.  Nonfarm employment in Orange County was still ahead of last year, but the increase was just 2,700 jobs or 0.2%.  The County's manufacturing sector continued to lose jobs, down by 5,300 employees.
     The Riverside-San Bernardino area continued to set the job growth pace in July, with an increase of 29,700 or 2.9%.  The area's manufacturing sector has been moving sideways over the last 3 months.  The largest job gains were in government (+12,000), services (+8,400) and retail trade (+5,300).  San Diego County also did well in July, recording a 21,800 job or 1.8% gain over the year.  By far the strongest sector was services, up by 11,800 jobs.  Ventura County continued to tip-toe along the edge in July, with an increase over the year of just 1,000 jobs or 0.4%.  The June gain was revised down to only 100 jobs.  Of note is the stabilization in Ventura's manufacturing sector.
     To the north, it was still rough in the Bay Area during July.  Oakland was down over the year by 2,100 jobs, San Francisco was off by 31,500, while San Jose lost 40,600 jobs.  However, the latter was the smallest loss so far this year.  (Jack Kyser)
CA data: http://www.calmis.cahwnet.gov/file/lfmonth/cal$pr.txt
LA County data: http://www.calmis.cahwnet.gov/file/lfmonth/la$pr.txt
 

WHOLESALE PRICES FELL IN JULY

     The Producer Price Index (PPI) for finished goods declined by 0.2% in July, after rising by 0.1% in June.  This is the third month-to-month decline in the past four months.  Food prices declined by 0.1% while energy prices increased by 0.1%.  What made the real difference was the 0.3% decline in the core PPI for finished goods, which excludes food and energy prices.  The main cause is the new round of price incentives on cars and light trucks (note: cash rebates count as price reductions, but financing deals do not).  The PPI for finished goods in July was 1.1% below the year-ago level.
     The PPI for intermediate goods rose by 0.2% in July, following a similar increase in June.  Food prices rose by 1.5%, but energy costs fell by 1.0%.  The core PPI for intermediate goods rose by 0.2%.  Compared to a year ago, the PPI for intermediate goods was 1.5% lower.
     The PPI for crude goods/raw materials rose by 0.6%, after falling by 3.6% in June.  Prices for crude goods tend to be more volatile.  Food prices rose by 1.5% while energy prices fell by 0.9%.  The core PPI for crude goods rose by 1.7% last month.  Overall, the PPI for crude goods was 6.2% below the year-ago level.
     Based on these numbers, the threat of inflation seems minimal.  Economic conditions, rather than potential inflation, will be on the minds of Federal Reserve officials when their meeting starts tomorrow.  (George Huang)
PR: http://www.bls.gov/news.release/prod2.nr0.htm
 

JUNE HOUSING AFFORDABILITY

     Housing affordability continues to slip according to the California Association of Realtors' (CAR) June report.  The Housing Affordability Index (HAI), which measures the percentage of households that can afford to purchase a median-priced home, is currently at 27%, down from 32% in June 2001 and down one percentage point from last month.  Los Angeles County continues to slide with a reading of 31%, down from 35% a year ago.  Orange County remains the same from the previous month, which stood at 22% but still down from 29% a year ago.  The Riverside-San Bernardino area has a reading of 43%, also down from 47% a year ago.  Ventura County increased one percentage point from last month's HAI and is currently at 33%, but still down from last year's 34%.  San Diego also remains the same from the previous month, which has a reading of 20%, down from 25% a year ago.  Up north, San Francisco Bay Area's HAI still remains at 17%, down compared to 19% a year ago.  Santa Clara's reading also remains at 20%, just down one percentage point from a year ago.  The High Dessert Area is the place if you are looking to buy the most affordable home in California.  Its HAI is 66%, just slightly down from 67% a year ago.
     The LAEDC's Economic Forecast, which is scheduled to be released sometime next month, will address the California housing affordability in greater detail. (Candice Flor)
PR: http://www.car.org/index.php?id=MzExMDY=
 

FILM PRODUCTION LOOKING BETTER IN JULY

     The July data from the Entertainment Industry Development Corporation was positive, with total off-lot production days rising by 38.4 percent over the year.  Year-to-year increases were posted in features (+68.2%), commercial (+12.8%) and TV (+42.1%), but music was down (-12.1%).  The July total of 2,189 location production days was up from June, but was below the counts for March, April and May.  Industry sources say that several big budget productions will get started soon, and if it's of any consolation, production in Vancouver BC is off too.  (Jack Kyser)
 

JUNE HOTEL BUSINESS STILL SLOW

     The June report on the local hotel industry from PKF Consulting pointed to more of the same at least in Los Angeles.  Hotel occupancies in the county were 69.5%, up modestly from May's 68.4% but below the 74.8% reading for last year.  The average daily room rate (ADR) eased by 3.4% to $116.59.  The strongest sub-market in the County was Valencia, with an occupancy rate of 93.7% compared with 88.8% last year.  The ADR also was up, by 5.5% to $93.75.  The next best June performance was turned by Hollywood, with an occupancy of 80.6%, up from last year's 74.4%.  The ADR was also ahead by 8.5% to $80.65.
     The June news from Orange County was more encouraging.  The occupancy rate came in at 73.5%, the highest reading since August of last year.  However, the ADR declined by 6.7% to $112.72.  The strongest sub-market in the County was the South, with an occupancy rate of 78.6% (73.0% last year), but it seemed to take promotion to fill the rooms.  The area's ADR declined by 11.8% to $144.14.  (Jack Kyser)
 

BRAZIL GETS IMF LOAN--BUT HAS THE DEFAULT RISK GONE AWAY?

     The International Monetary Fund (IMF) signed an emergency agreement last week to loan $30 billion to Brazil to help avoid a meltdown of its economy and financial markets.
In taking this action, the IMF has subjected itself once again, as it did in the 1997 Asian crisis, to the accusation that its rescue policies encourage the moral hazard of imprudent risk-taking and mismanagement in the recipient countries.
     Policy Choices: The IMF, with the backing of the United States, was faced with a difficult set of choices. It could have sat back and done nothing or waited until after the October elections in Brazil, by which time the crisis could have been worse and might  have spread contagion to other Latin American economies.  A small neighboring country, Uruguay, has already suffered from Brazil's and Argentina's economic crises, since its economy is dependent on tourism and banking tied to these two larger economies.  In order to help Uruguay cope with a run on its banks, the U.S. loaned Uruguay $1.5 billion one week ago. Alternatively, the IMF could have replicated its policy strategy towards Argentina in 2001 and allowed Brazil to default on its huge $264  billion debt. Instead, the IMF chose the lesser of all evils and risked its already fragile reputation by taking bold action that could help to stabilize Brazil and nervous international markets.
     Brazil's Economy:  From a strong performance in 2000, reflected in a 4.5% rise in GDP, Brazil's economy slipped in 2001 to a 1.5% growth rate and is estimated to turn in a similar performance in 2002. Foreign investors, worried about the risk of default and further meltdown, sold off Brazilian stocks, bonds, and currencies, evidence of contagion from Argentina's woes. Brazil's currency, the real, has depreciated about 25% since the beginning of the year. Since the loan agreement with IMF has been struck, however, the real has regained some ground. Benchmark interest rates have moved up to 18% in order to curb a high inflation rate.  For the average Brazilian, per capita income has fallen by a hard-to-believe 37%, from $4,800 in 1997 to $3,000 in 2002.
     Backloading The Deal:  Using a proven banking practice of extending loans in tranches, the IMF loan agreement stipulates that only $6 billion (20%) can be used by Brazil this year, following approval by IMF's board.  The remaining $24 billion (80%) can be used by a new Brazilian government to be elected in October.  An important contingency is that President's Cardoso's commitment to control the national budget and target a surplus of 3.75% of GDP in 2003 must be adhered to.  The investment community is concerned that this target may be difficult to achieve or that the next President, say left-leaning Workers' Party leader Luiz Ignacio Lula da Silva, could renege on the previous government's promise to honor the IMF agreement. Should this happen, Brazil will forfeit 80% of the loan.
     U.S. policy with respect to the Brazilian loan agreement is on shaky ground.  If default on its debt is avoided, the economic stability returns, and the government follows a responsible course with its fiscal policies and debt management, then U.S. support for Brazil will be vindicated.  We will not know the outcome until next year.  In the interim, international financial markets have been pacified, but the risk of default remains albeit less ominously.  (Ken Ackbarali)
 

7TH ANNUAL EDDY AWARDS DINNER -- A night to share in the lives of some of the great visionaries of our time.

     The Eddy Awards are in recognition of excellence in economic development.  The Eddy Award recipients this year have all played an essential role in the evolution of the new downtown LA --they have changed its landscape and made it rich with culture, architecture, opportunity, entertainment and spirit.  More than anything, they've given Los Angeles the vitality necessary to become the thriving metropolitan center that anchors the economy surrounding it.  Please join us on October 10th at the new Cathedral of our Lady of the Angels when the LAEDC awards seven outstanding honorees: Eli Broad, Timothy J. Leiweke, James A. Thomas, Cardinal Roger Mahony, Andrea L. Van de Kamp, Stephan D. Smith and Tonian Hohberg.  Please visit http://www.laedc.org/events/7th_eddy.shtml for more information.
 

ATTN: BIOMED ENTREPRENEURS & INVESTORS

     The Southern California Biomedical Council (SCBC, http://www.socalbio.org) presents The 29th Biomedical Industry Networking Forum with a special presentation and panel discussion on recent venture capital investment trends.  It will be held from 5pm to 9pm, Tuesday, Aug. 27, at the Wilshire Grand Hotel in downtown L.A.  Please visit http://www.socalbio.org/Calendar/august2002.htm for more information.
 

TRADE SHOWS LISTINGS (Repeat announcement)

     LAEDC is now compiling a comprehensive listing of trade shows in Southern California.  Please send us such information.  Thank you so much.
     Our current listing includes fashion/apparel, textiles, shoes, home furnishings & giftware, and manufacturing.  It's available at http://www.laedc.org/trade_shows.html
 

QUICK STATS:

* BLS: US export prices for 7/02: +0.3% (6/02: +0.0%)
* BLS: US import prices for 7/02: +0.4% (6/02: -0.3%)
* BLS: US Producer Price Index for finished goods for 7/02: -0.2% (6/02: +0.1%)
* BLS: US Producer Price Index for intermediate goods for 7/02: +0.2% (6/02: +0.2%)
* BLS: US Producer Price Index for crude goods for 7/02: +0.6% (6/02: -3.6%)
* BLS: US labor productivity for 2Q02: +1.1% (1Q02: +8.6%)
* BLS: US unit labor costs for 2Q02: +2.4% (1Q02: -4.6%)
* Cal Assn of Realtors: California Housing Affordability Index for 6/02: 27% (5/02: 28%)
* Cal Assn of Realtors: Los Angeles County Housing Affordability Index for 6/02: 31% (5/02: 32%)
* Cal EDD: California unemployment rate (seasonally adjusted) for 7/02: 6.3% (6/02: 6.5%)
* Cal EDD: California nonfarm employment for 7/02: -121,300 (6/02: +39,900)
* Cal EDD: LA County unemployment rate (sea. adj.) for 7/02: 6.7% (6/02: 7.3%)
* Cal EDD: LA County nonfarm employment for 7/02: -36,500 (6/02: -4,300)
* Census: US wholesale trade for 6/02: +0.6% (5/02: -0.0%)
* Census: US wholesale inventories for 6/02: +0.3% (5/02: +0.0%)
* Federal Reserve: US consumer credit for 6/02: +5.9% over a year ago (5/02: +6.7% oya)

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