The Economic Data Global Express (e-EDGE)

v.6 n.38       Released Sep. 23, 2002
Produced by the Los Angeles County Economic Development Corporation as a public service to the global community.

FED UNDER PRESSURE TO CUT INTEREST RATES--BUT WILL HOLD

     The fundamental question which members of the Federal Open Market Committee will be trying to answer at tomorrow's meeting is whether the economy needs additional stimulation now.  If there is consensus (or near consensus) that there is a high risk that the economy will falter and slow in the remaining months of this year and into next year, the Fed may respond by lowering the Fed Funds Rate (FFR) by 25 basis points to 1.50%.  While one cannot completely rule out this action, it is unlikely.
     Here are the major reasons why the Fed will continue to stand pat, at least until its November 6th meeting:
     1. The so-called "jobless recovery" will not be alleviated by another 1/4% or 1/2% reduction in interest rates.  Until corporate managements become convinced that sales (industrial and consumer demand) will be stronger and earnings will improve, they will remain cautious about hiring.
     2. The further plunge in equity prices in recent weeks reflects both the string of disappointing earnings and the negative psychology coming from the escalating talk about war in Iraq, as well as the unsettled geo-political environment in the Middle East.  Lower interest rates will not heal the stock market.
     3. The international economic situation continues to be unstable, with new evidence of virtual stagnation in Germany (political gridlock over economic reform) and heightened uncertainty in Latin America.  Easing of Fed policies will not change the outlook for these issues either.
     4. "Refi fever" continues to rage on and has boosted spendable income for millions of households.  Financial institutions are figuratively stepping on one another in their efforts to attract borrowers at incredibly low interest rates on mortgages and home equity lines of credit.  Would a drop from 6.1% to 5.9% in 30-year fixed rates make a big difference?
     In the current environment, policymakers are focusing on homeland security, bigger government spending and larger deficits, America's foreign policy and military posture, corporate accounting scandals, and a fragile global economy.  The action is not at the Fed at this time  If  the economy deteriorates in the weeks ahead, and this scenario has not been discounted by some, the Fed may not be able to wave off pressures for a rate cut at its November or December meetings.  (Ken Ackbarali)
 

U.S. HOUSING STARTS

     U.S. housing starts declined by 2.2% to 1.61 million units in August, the third consecutive monthly drop from May's peak of 1.74 million starts.  Starts of single-family dwellings posted a 4.4% decline, while starts of multi family units grew by 6.2% last month.  By region, housing activity increased in the northeast (by 9.4%) and south (+3.1%) but registered declines in the west (down by 1.6%) and Midwest (-18.7%).
     Last month's decline in activity was met with surprise and some alarm among the fraternity of economic commentators.  Is this concern warranted?  It is the nature of housing starts to fluctuate considerably from one month to the next.  Total starts have averaged 1.65 million units over the past twelve months, for example, but individual months have ranged from 1.52 million units (7.6% below the average) to 1.79 million units (9.1% above average).  Construction activity levels in June (1.69 million units), July (1.65 million units) and August (1.61 million units) were comfortably within range, suggesting little has changed.  The outlook for the rest of 2002 is "more of the same."  Expect more month-to-month fluctuations but activity levels within the current range.  In fact, mortgage rates have ratcheted down once again, with fixed rates in the 6% plus-or-minus range.  At minimum, these easy mortgage credit conditions will support the existing pace of new housing construction and perhaps a bit more.   (Nancy D. Sidhu)
PR: http://www.census.gov/pub/indicator/www/newresconst.pdf
 

INFLATION TAME

     The U.S. Consumer Price Index (CPI) rose by 0.3% last month following a 0.1% increase in July.  The August CPI was 1.8% higher than a year ago.  Food prices fell by 0.1% in August following a 0.2% increase in July.  Energy prices were 0.6% higher in August, following a 0.4% increase in July.  Gasoline prices were up by 0.5%, following a 1.5% increase in July.  Home fuels were 1.8% more expensive in August.  Excluding food and energy prices, the core CPI was 0.3% higher over the month and 2.4% above the year-ago level.
     Inflation was slightly higher in the LA Area.  The LA metro CPI was 0.4% higher in August (local CPIs are not seasonally adjusted), following a 0.2% increase in July, and it was 2.6% above the year-ago level.  Food prices fell by 0.4%, while the overall energy index was unchanged.  Gasoline prices rose by 0.5% and were 3.7% higher than a year ago.  Housing costs were 0.5% higher last month and 4.1% higher than a year ago.  Apparel prices, which had seen drastic declines in recent months, posted a stunning 4.5% jump in August.  Introduction of fall merchandise may be the main reason.  Another area of significant price increases was education (i.e. tuition & books).  Parents: it's time to check out those educational savings plans.
     Up north, the Bay Area CPI rose by 0.2% during the past two months and was only 1.3% higher than a year ago.  The recession there is taking a heavy toll.  Shelter costs, which had risen dramatically during the tech boom of the late 1990s and early 2000s, were only 1.3% higher than a year ago.  (George Huang)
US PR: http://www.bls.gov/news.release/cpi.nr0.htm
LA PR: http://www.bls.gov/ro9/ro9cpila.htm
LA data: http://www.e-edge.org/cpi-la.htm
 

ONE MILLION TEUs IN AUGUST

     While attention has been focused on the tumultuous labor contract negotiations between the PMA and the ILWU, the local port complex quietly racked up a new milestone in August.  During the month, Long Beach and Los Angeles together handled 1,032,729 containers (measured in TEUs), an increase of 17.0% over the year.  This is a first according to our records.
     Most of the action was in imports, with the number of loaded TEUs at Long Beach up by 5.9%, while Los Angeles posted a 29.9% gain (Note: the new Maersk terminal at Pier 400 opened at the latter).  Total import TEUs at the twin ports were up by 18.7% to 562,064, which was also a new high.  Some of this may reflect a strike-fear push, but there may also be some aggressive stocking by retailers for Christmas.
     On the export side, Long Beach recorded a 14.7% decline over the year but Los Angeles posted a 4.0% gain.  Total loaded export TEUs moved at the two ports during the month were down by 5.1% to 162,506.  (Jack Kyser)
POLA PR: http://www.portofla.org/statistics/detailmonth.htm
POLB PR: http://www.polb.com/html/1_about/newsCurrent/aug02teus.html
 

JULY HOTEL OCCUPANCIES

     The hotel data for July from PKF Consulting was a little late due to some lagging respondents.  However, the news was worth waiting for.  Occupancy during the month in Los Angeles County was 70.2%, the highest level since August of last year.  It was down from 73.3% last July, but the margins are narrowing.  The average daily room rate (ADR) slipped by 4.1% to $114.21.  Around the County in July, Valencia once again enjoyed the highest occupancy rate, 92.5%, but the ADR eased by 0.9% to $100.04.  Santa Monica had an 82.4% occupancy rate, while the ADR declined by 3.1% over the year to $202.74.  Hollywood came in at 80.4% in July, while the ADR slipped down by just 0.3% to $86.96.
     The news was even better for Orange County, where the July occupancy rate was 77.0%, compared with 77.7% last year.  Again, this was the highest occupancy rate since last August.  However, the ADR did decline, by 2.2% to $112.04.  The strength in the County's hotel market was spread around, with Anaheim at 79.97%, followed by South County at 79.88%, and North County at 79.15%.  (Jack Kyser)
 

GERMANY'S ELECTION PRODUCED UNCERTAINTY AND GRIDLOCK!

     The narrow margin of victory by Chancellor Schroeder over his opponent Edmund Stoiber in Sunday's election has dashed hopes for major economic reforms in Germany. The Social Democratic Party, led by Mr. Schroeder, is likely to construct a tenuous and fragile coalition with the "Greens" (Party) to form a parliamentary majority.  However, with less than a strong mandate from the electorate, the new government will be hard pressed to achieve significant reforms on taxes, pensions, immigration and labor market policies. Financial market reaction has been negative.  The DAX 30 (Germany's Dow Jones Industrial Average) dropped by more than 3% today (Monday) to below 3,000 and now stands 30% below its January 2002 average.
     Germany's economy is barely growing this year and is seen as a drag on the rest of Europe.  Its unemployment rate is 9.6% and four million workers are unemployed--virtually the same as in 1998 when Chancellor Schroeder came into office.  Germany's economic slowdown has also put the country at risk of having its budget deficit exceed 3.0% of GDP, thus violating the Maastricht Treaty's requirement.  On top of this, expansion of the European Union in the years ahead with 10 new member countries--less developed Central and Eastern European former Communist satellites (with lower labor costs)--could add even more strains and stresses to the German economy.
     Germany is an important trading partner of the United States and California, and is also important as a source of and a destination for foreign direct investment. Setting the policy stage for Germany to get its economy back on track is critical for Eurozone growth and for the U.S. and California.  We wish the new government the best in dealing with a difficult and fractious situation.  (Ken Ackbarali)
 

THE GDP RANKINGS CONTROVERSY

     There has been much media coverage over the GDP rankings published in our Economic Forecast.  The estimates for the year 2000, prepared in 2001 with preliminary data from the Organization for Economic Co-operation & Development (OECD, which ironically is based in France) and other sources, showed that California was number 5, ahead of France.  In August when we were researching data for 2001 GDP, we found that OECD had revised its historical data and that California was actually behind France in 2000 and 2001.  In fact, the revised data show that California was behind Italy in 1999, making it the 7th largest economy in 1999, and 6th largest in 2000 and 2001.  These data (including our own estimates of California and local GDP) were both based on information then available at the time, and were "accurate" at the time of publication.  In economic statistics, "better" numbers come out sometimes years later, and economists revise their analysis based on the new numbers.  Therefore, the statement which says "California was the fifth largest economy in the world" was correct until Sept. 16 when we finally published the revised data.  We also offer our apologies to the French people for one year of anguish (and to the Italians, for two years of sorrow).
     Much media coverage failed to uncover the "real" reason behind the fluctuations in the rankings--the drastic fall of the value of euro.  The euro started at US$1.17/euro on Jan. 1, 1999, ended 1999 with an annual average of $1.07/e, fell to $0.92/e in 2000, and $0.90/e in 2001.  That's a 16% devaluation between 1999 and 2001.  Had the euro been stable at around $1.17/e, the GDP of nations using the euro would have been a lot bigger (France: US$1.5 trillion in 2001).  In fact, the US$/euro exchange rate was US$0.9839/euro as of Sept. 20, 2002.  LAEDC estimates that the annual average this year will be around US$0.98/euro.  Expect the gap between France and California to widen in the near term because of the appreciation of the euro.
     The GDP rankings table was prepared in a way that avoids injecting personal bias into the estimates.  International and U.S. national data are taken from official sources by Ken Ackbarali and George Huang.  State and local estimates were prepared by Jack Kyser (using the gross products data from the Bureau of Economic Analysis [BEA] and personal income data from the California Department of Finance) without the knowledge of the international GDP numbers.  When the local numbers were ready, George put everything into the table and sorted by 2001 GDP.  We were surprised to see that France and California were so close, and that the LA 5-county area was tied with Spain.  Yet we did not change any of the numbers afterwards, and we never make arbitrary changes in statistical reporting on estimates.  What was submitted was final (that is, until the next data revision by primary sources).  Therefore, LAEDC will stand by these numbers because we think they are done correctly and with an uncompromised integrity.  (George Huang)
LAEDC's GDP estimate: http://www.e-edge.org/special/GDP.htm
OECD data: http://cs4-hq.oecd.org/oecd/selected_view.asp?tableId=561&viewname=ANAPart2
 

LAEDC ECONOMIC REPORTS AVAILABLE ONLINE

     In case you missed the notice last week: you can now download LAEDC's various economic reports free-of-charge now at http://laedc.info (yes, ".info" is a valid web address extension).  LAEDC.info is our latest effort to bring you up-to-date, useful, and locally focused economic information that can help your business expand.
 

WORKSHOP ON BUSINESS NEGOTIATIONS

     Larta University presents a workshop on business negotiations.  Taking a holistic approach, participants learn how to prepare effectively, how to commence and conduct a negotiation and how to use special methods and tactics that professionals commonly employ.  It will be held on Wednesday, Sept. 25, from 9am to 12pm.  Please visit http://www.larta.org/lartau/courses.htm#negotiation for more information.
 

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

     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.
 

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 Consumer Price Index for 8/02: +0.3% (7/02: +0.1%)
* BLS: LA Area Consumer Price Index for 8/02: +0.4% (7/02: +0.2%)
* Census: US exports for 7/02: +1.3% (6/02: +1.4%)
* Census: US imports for 7/02: -1.0% (6/02: +0.2%)
* Census: US trade deficit for 7/02: US$34.6 billion (6/02: $36.8bil.)
* Census: US housing starts for 8/02: -2.2% to 1.609 million annual units (7/02: -2.8% to 1.649mil.a.u.)
* Conference Board: US Index of Leading Economic Indicators for 8/02: -0.2% (7/02: -0.1%)
* Federal Reserve: US industrial production for 8/02: -0.3% (7/02: +0.4%)
* Federal Reserve: US industrial capacity utilization rate for 8/02: 76.0% (7/02: 76.2%)
* Treasury: US Treasury Budget for 8/02: -$54.7 billion (7/02: -$29.2bil.)
 

QUICK REMINDERS

* LartaU: Workshop on Business Negotiations, Wednesday, 9/25, 9am-12pm, http://www.larta.org/lartau/courses.htm#negotiation

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