The Economic Data Global Express (e-EDGE)

v.6 n.44       Released Nov. 8, 2002
Produced by the Los Angeles County Economic Development Corporation as a public service to the global community.

TO CUT OR NOT TO CUT--SPOTLIGHT ON THE FED

     The Federal Open Market Committee (FOMC) is scheduled to meet on Wednesday (November 6th) to consider whether its Fed Funds Rate (FFR) should be lowered or remain unchanged. In the past week, opinion among financial market participants and economists as to the likely policy action of the FOMC has shifted rather abruptly.  A fairly broad segment of "Wall Street" players expect interest rates to be lowered by 25 to 50 basis points.  These are the extreme pessimists about expected U.S. economic performance over the near term. Others feel confident that the Fed will wait longer before moving rates down again.  Here are the rationales for each position.
     Why another rate cut may be voted:  (1) Consumer confidence continues to fall. The Conference Board Index has declined for the fifth month in a row placing its October reading at a 9-year low.  (2) The loss of jobs in October was smaller than expected but the national unemployment rate moved up, causing many to worry about this "jobless recovery".  (3) Certain members of the FOMC may be shifting their sights to deflation and may be looking at the lessons from Japan, i.e. the risk of waiting until real interest rates reach zero.
     Why an interest rate cut is not likely:  (1) Economic growth strengthened in the third quarter, as evidenced by the rise in GDP of 3.1% at an annual rate--a good deal better than the 1.3% increase recorded in the 2nd quarter.  (2) Consumer borrowing and spending are continuing at a strong pace, partly spurred by the current low level of interest rates--another rate cut will have only an incremental effect in the near term.  (3) A pick up in business investment, especially for computers and software, may be close at hand. (4) Concerns about the outbreak of war in Iraq and corporate governance will not be alleviated by any Federal Reserve policy actions.
     Likely outcome:  Individual FOMC members will cast their votes on the basis of their views about how much staying power the consumer still has, how quickly business investment will ramp up, and how potent interest rates are at his point in the business cycle and at their current low levels. The weight is on the side of leaving rates unchanged, but issuing a stronger statement shifting its "bias" towards economic weakness.  (Ken Ackbarali)
 

U.S. ECONOMY PERKED UP IN THIRD QUARTER

     The Bureau of Economic Analysis announced that the U.S. Gross Domestic Product (GDP) grew by 3.1% during the third quarter.  This estimate was right in line with the economy's performance during the first six months of the year, a fact that is hidden by the reported quarterly growth rates of 5.0% in the first quarter and 1.3% in the second.  [All growth rates quoted in this article are seasonally adjusted at an annual rate, or SAAR.]
     The economy's performance was led by higher spending for consumer goods and services, which increased by 4.2%.  In turn, consumer spending was boosted by robust purchases of motor vehicles and other durable goods.  Business purchases of equipment and software increased at a 6.5% rate, up from a 3.3% advance in the second quarter.  This was the best two-quarter performance since the first half of 2000.  Purchases of computers and peripherals accounted for most of last quarter's increase.  Government spending by both federal and state/local governments also rose.
     On the down side are three parts of the economy for which the BEA has only two months of information:  (1) business spending for plant (which BEA calls "nonresidential structures") continued its rapid descent, falling by 16.0%, the fourth consecutive double-digit decline.  (2) The nation's trade deficit worsened a little, as net exports of goods and services dropped to -$491 billion (in 1996 dollars) from -$487 in the spring quarter.  (3) Finally, U.S. business firms added only $1.9 billion to inventories last quarter, a little less than the $4.9 billion added during the second quarter.
     All in all, the U.S. economy turned in a moderately good performance during the third quarter.  Consumers continued to lead the way, as they have for much of the past few years.  Business investment spending--a big question mark in the economic outlook--appears to have reached bottom, with increases in equipment, finally, offsetting declines in construction.  Government spending also adds to the economy's growth.
     Why was this report greeted with such negative headlines?  Partly because 3.1% was below "expectations."  However, this reason for gloom probably should be discounted since we don't yet know anything about inventories and foreign trade in September.  A more important reason for concern may be that a 3% rate of economic growth is apparently not high enough to increase the nation's employment rolls and reduce the unemployment rate. (Nancy D. Sidhu)
PR: http://www.bea.doc.gov/bea/newsrel/gdpnewsrelease.htm
 

MANUFACTURING SECTOR WEAKENED IN OCTOBER

     The manufacturing Purchasing Managers' Index (PMI) compiled by the Institute for Supply Management was below the break-even 50% mark in October for the second consecutive month.  The PMI fell from 49.5% in September to 48.5% in October.  The index for new orders rose from 50.2% to 50.9%, but production fell from 50.9% to 49.3% and order backlogs shrank slightly.  Employment continued to shrink--employment tends to improve only after growth is fairly evident to firms.  Supplier deliveries were slower--a sign that there were some bottlenecks in the supply chain.  This could be the result of the port shutdown during the first nine days of October.  Prices were still rising but at a slower pace than in previous months.  Inventory liquidation at both the factories and their clients' locations continued.  Export orders rose but importing of raw materials declined.  In short, while production dropped in October, the fundamental factors do seem to support a recovery in the coming months--low inventories and emerging bottlenecks, which will force firms to acquire more production capacity, including labor.
     The October survey was "tainted" by the port shutdowns.  Production and employment might have fallen slightly because some factories shut down for a few days as they ran out of imported components.  Prices might have risen because of the added use of air freight.  Inventory liquidation might be induced by the temporary absence of imports and production disruptions rather than by design.  In any event, the weaker condition of the manufacturing sector last month was real, no matter what the ultimate cause was.  (George Huang)
PR: http://www.ism.ws/ISMReport/ROB112002.cfm
 

RISING BENEFITS COSTS--WHO WOULD IT HURT?

     The U.S. Employment Cost Index (ECI) increased by 0.8% during the 3rd quarter, with wages & salaries rising by 0.5% and benefit costs rising by 1.4%.  Compared to a year ago, the total compensation was 3.7% higher (wages & salaries: +3.2%, benefits: +4.9%).  Wages & salaries rose by just half of the rate in 2Q02 (+1.0%)  This was the smallest quarterly increase since 1Q99 (+0.4%), as weak economic conditions have finally caught up with employers and their workers.  Benefit costs, however, are much less under the employers' control (except by switching or canceling plans).  They have risen much faster than wages & salaries as the cost of medical care rose unabated.  Benefit costs, which are mostly health insurance costs, rose even more dramatically for government workers: +3.0% in 3Q02 and +5.4% over a year ago (compared to +1.0% and +4.8% respectively for the private sector).
    Rising healthcare costs hurt small employers more than larger ones, because they have less leverage with insurance companies.  "Monetizing" benefits--paying money instead of providing insurance--may get more common as some companies try to shift the burden of acquiring health insurance to workers.  Others may stop providing benefits altogether.
     Sometimes government mandates add to the burden of employers, with smaller ones getting hurt disproportionally more because they have less "flexibility" in arranging substitutes for missing workers or compensating for higher costs.  These mandates may hurt the precise workers that they seek to protect.  For example, a firm may prefer a single, young male applicant over a child-rearing female applicant just to reduce the possible hassle under the new "paid family leave" program.
     Can this trend be reversed?  Companies operate under the burden of government mandates and sometimes have little flexibility even if options are available.  Therefore legislators need to get creative and develop rules that promote welfare of workers without doing too much damage to the business base, or give employers more leeway in developing their own plans to maximize the overall welfare (for both a company and its workers).  Failure to do so could cause some firms to move to areas with lower cost burdens and hurt workers by "protecting them out of their jobs."  (George Huang)
PR: http://www.bls.gov/news.release/eci.nr0.htm
 

MORE LIFE IN HOMEBUILDING IN SEPTEMBER?

     The September data from the Construction Industry Research Board pointed to a more sturdy trend in new homebuilding.  The state started the year with a lackluster performance, but at the 9-month mark the total number of units permitted in the state was 7.3% ahead of last year.  The number of multi-family units is even with last year, while single family permits were up by 9.9%.
     Los Angeles County got off to a dreadful start in 2002, with permit totals in one month off by as much as 55% from last year.  But at 9 months, the County's unit count was just 3.1% behind.   Orange County continued to run ahead of last year, with its 9 month permit total up by 22.7% over the like period of 2001.  The Riverside-San Bernardino area also has recorded a rather positive performance in new homebuilding, with its 9 month total ahead of last year's by 22.6%.
     The September data from San Diego and Ventura counties pointed to no change in a weak trend.  The former was behind last year's 9 month unit total by 10.9%, while the latter lagged by 31.5%.
     In the 9-county Bay Area, the 9-month housing permit total trailed last year by 8.2%.  While the single family permit total was ahead by 11.5%, the multi-family permit total lagged by 31.2%.  (Jack Kyser)
 

NO CHANGE IN TREND IN NONRESIDENTIAL

     The Construction Industry Research Board's September data on nonresidential permit values indicated little change in trend.  In Los Angeles County, the 9- month total for industrial permit values was 6.4% behind last year, while office trailed by 71.1%.  However, retail permit values were up by 10.0% over last year. In Orange County, all three sectors lagged across the board.  Industrial values   were off by 79.4%, office was behind by 17.8%, and retail was down by 0.3%.  The latter represented somewhat of a rebound, helped along by a suspected $9.8 million Kohl's store permit.
     In the Riverside-San Bernardino area at the 9 month mark, industrial permit values were behind last year by 22.1%, while office was down by 17.2%.  However, retail permit values were ahead of last year by 3.6%, with all the punch found in Riverside County.  In San Diego County, industrial valuations widened their margin over last year, up by 29.1% for 9 months.  However, office continued to trail by 11.4% while retail was behind by just 1.2%.  In Ventura County, industrial was 60.0% behind, office was down by 81.0% , but retail continued to run ahead of last year by 36.0% (but there have been no Kohl's sightings yet).
     In the Bay Area at the 9-month mark, industrial permit values were 47.7% behind the like period of 2001, while office was down by 64.5%.  However, retail permit values were just 2.5% behind last year, with Santa Clara County's values up by 14.1% over last year.  Go figure!  (Jack Kyser)
 

PORTS STATUS UPDATE -- SOME GOOD NEWS, FINALLY...

     Over the weekend, the ILWU and the PMA reached a tentative agreement that will allow the ports to implement technology to facilitate cargo movement.  Optical scanners, already common at supermarkets and post offices, will now help to track containers at the docks.  A few hundred positions, however, will be eliminated by the new technology but the workers will be protected until they retire.  This issue of the use of computer technology was one of the key points of dispute that led to the port shutdown.  Now the two sides are working on the details of this arrangement and other points of dispute, including pension funding.
     Yet concerns remain over whether the two sides can reach a comprehensive agreement by around Dec. 28, the end of the "cooling-off" period.  Sen. Conrad Burns (R-MT) has introduced a bill, S.3117, to extend the cooling-off period by an additional 30 days so the ports can have more time to clear the existing backlogs.  Manufacturers and traders will have more time to build up their "just-in-case" inventories.  Also it will push the end of the cooling-off period to late January instead of right in the middle of the holiday season.  This bill will likely be considered by the lame-duck Congress after the election.
     At the ports (and right outside the ports), the armada of cargo ships is slowly declining in number.  The number of ships dropped from 117 on 10/21 to 102 on 10/28 to 93 on 11/4.  Still a long way to go, but at least the backlog is getting smaller.  In the meantime, East Asia is reporting container shortages and disrupted shipping schedules.  Air freight rates are now double the normal level, and there's still not enough capacity to meet demand.  (One 6,000-TEU ship carries the equivalent of 750 jumbo jets' capacity.)  (George Huang)
Senate website: http://www.senate.gov (search for "S.3117" under Bill Search)
 

WEEKLY POLL: FOR RETAILERS ONLY

     (Note: this is a poll for retailers only.  We hope to gauge the upcoming holiday season with this brief poll.)  Question of the week: Did the port shutdown affect your holiday merchandise arrival?
http://poll.peter365.com/cgi-bin/poll.pl?pollid=482&subp=6
 

DECISION 2002: MAKE YOUR VOICE HEARD

     Tomorrow is the election day.  Chances are it's too late to mail in your absentee ballot, but you can still have someone else bring it to the polling place.
Polling place locator: http://www.ss.ca.gov/elections/elections_ppl.htm
 

ATTN: LIBRARIES & TEACHERS

     Given that LAEDC publications are now free, you are free to print our books for reference, circulation, or class use.  We do ask, however, that you not recommend your patrons or students to contact us regarding their school projects.  We do not have enough manpower here to answer individual questions.  Instead, refer them to http://laedc.info and download the books that may answer their questions.  If there's a question of general interest, we may discuss it in e-EDGE.  Thank you for your cooperation.
 

HOLIDAY NOTICE

     LAEDC offices will be closed next Monday, Nov. 11, in observance ov Veterans Day.  e-EDGE will be released on Tuesda, Nov. 12.
 

TURN YOUR BUSINESS VISION INTO REALITY

     LARTA University presents the seminar titled "Turn Your Business Vision into Reality."  The speaker is LARTA CEO Rohit Shukla.  It will be held at Larta's office, this Wednesday, Nov. 6, from 9am to 5pm.  Please visit http://www.larta.org/LartaU/vision.htm for more information.
 

SOUTHERN CALIFORNIA INTERNATIONAL TRADE CONFERENCE

     The 2002 Southern California International Trade Conference will be held on Friday, Nov. 15th, from 7:30am to 2:30pm at the Hilton Universal.  It is presented by Port of LA, LA World Airports, Valley Int'l Trade Association, and Economic Alliance of the San Fernando Valley.  Please call 818-379-7000 for more information.
 

BIOMED NETWORKING FORUM

     You are invited to the Southern California Biomedical Council's 30th Biomedical Industry Networking Forum.  It will be held at the Wilshire Grand Hotel on Tuesday, October 22nd, from 5pm to 9pm.  Please visit http://www.socalbio.org/Calendar/october2002.htm for more information.
 

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 .  LAEDC.info is our latest effort to bring you up-to-date, useful, and locally focused economic information that can help your business expand.
 

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:

* BEA: US Gross Domestic Product (advance) for 3Q02: +3.1% (2Q02: +1.3%)
* BEA: US implicit GDP deflator (adv.) for 3Q02: +1.1% (2Q02: +1.2%)
* BEA: US personal consumption expenditure (adv.) for 3Q02: +4.2% (2Q02: +1.8%)
* BEA: US non-residential fixed investments for 3Q02: +0.6% (2Q02: -2.4%)
* BEA: US personal income for 9/02: +0.4% (8/02: +0.3%)
* BEA: US disposable personal income for 9/02: +0.5% (8/02: +0.3%)
* BEA: US personal consumption expenditure for 9/02: -0.4% (8/02: +0.4%)
* BEA: US personal savings rate for 9/02: 4.2% (8/02: 3.4%)
* BLS: US unemployment rate for 10/02: 5.7% (9/02: 5.6%)
* BLS: US nonfarm employment for 10/02: -5,000 (9/02: -13,000)
* BLS: US employment cost index for 3Q02: +0.8% (2Q02: +1.0%)
* Census: US construction spending for 9/02: +0.6% (8/02: -0.8%)
* Census: US homeownership rate for 3Q02: 68.0% (2Q02: 67.6%)
* Census: US homeowner vacancy rate for 3Q02: 1.7% (2Q02: 1.7%)
* Census: US rental vacancy rate for 3Q02: 9.1% (2Q02: 8.5%)
* Census: US new factory orders for 9/02: -2.3% (8/02: -0.4%)
* Census: US factory shipments for 9/02: -0.1% (8/02: -0.7%)
* Census: US unfilled factory orders for 9/02: -1.1% (8/02: +0.4%)
* Census: US factory inventories for 9/02: +0.0% (8/02: +0.1%)
* Conference Board: US Consumer Confidence Index for 10/02: 79.4 (9/02: 93.7)
* Conference Board: US Help-wanted Advertising Index for 10/02: 43 (9/02: 41)
* Inst. for Supply Mgmt.: US manufacturing Purchasing Managers' Index for 10/02: 48.5% (9/02: 49.5%)
* USDA: US agricultural prices for 10/02: -4.0% (9/02: -1.0%)

QUICK REMINDERS:

Wednesday: Turn Your Business Vision to Reality, LartaU, 213-765-4829

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.