The Economic Data Global Express (e-EDGE)

v.6 n.46       Released Nov. 18, 2002
Produced by the Los Angeles County Economic Development Corporation as a public service to the global community.

CALIFORNIA BUDGET DEBATES RESUME

     When the Governor and the legislature finally went home last September, after crafting a "balanced" budget, many criticized the stopgap nature of their resolution of the state's budget problems for fiscal year 2002-2003 (which ends June 30, 2003) and predicted more difficulties in the future.  It certainly didn't take very long for the next round of trouble to start.  Last week the Legislative Analyst's Office (LAO) released the results of a five-year budget projection exercise.  These results indicate the likely levels of state government spending and revenue assuming no changes are made to current laws.  The laws will have to change if the projected outcome is realized, however, for the LAO says the state will face a $21.1 billion budget problem through June 2004 and chronic deficits in the following years.
     Pundits will debate the causes endlessly.  However, several factors play a significant role in the state's growing budget problems.  (1) Tax revenues are too low.  The state sales tax rate rose automatically by one-half percent in January, but this increase was not enough to counteract this year's likely decline in personal income and corporate tax revenues.  Also, the state will not receive any tobacco tax revenues in future years, because they will all be collected early, in fiscal year 2002-2003.  Thus, revenues are projected to decline in fiscal year 2003-2004.  (2) State spending is too high.   Last summer the budgeteers elected not to reduce spending very much, relying instead on a variety of budget transfers and loans to tide them over.  Unfortunately, the LAO projects that state spending will increase, worsening the budget gap, both this year and next.  (3) The economic recovery is too slow.  This is a problem for the U.S. and especially for California, home of the nation's high technology industries.  Employment is not growing; total state wage and salary income is stagnant at best.  The same is true of taxes paid on that income.  More to the point, the stock market crash siphoned an estimated $10 billion out of state personal income tax revenues last year (fiscal 2001-2002), which shows no sign of returning soon.
     What's the bottom line?  The LAO projects that, if nothing is done, the state's books will show a $6.1 billion deficit at the end of this fiscal year--June 30, 2003--and a humongous $21.1 billion problem by June 2004.  California cannot have a deficit by law.  Thus, something will have to be done.  A lot of the one-time measures were used last summer; so the problem is likely to be even harder to resolve.  Expect to hear lots of noise emanating from Sacramento over the next 8-10 months.  And hold on to your wallets!   (Nancy D. Sidhu)
LAO's analysis: http://www.lao.ca.gov/2002/fiscal_outlook/fiscal_outlook_2002.html
 

ARGENTINA'S DEBT DEFAULT--A CRISIS IN THE MAKING?

     Argentina's decision last week to default on a $805 million loan repayment to the World Bank caught the international financial community by surprise.  After 11 months of frustrating negotiations with the IMF, Argentina has failed to achieve a rollover of its $13 billion debt and to obtain a new financial aid package.  The IMF contends that Argentina has not been forthcoming about its program to reform its fiscal and banking systems, necessary steps to regaining the international investment community's confidence.  In a compromise move--some observers call it a "sop"--Argentina made an "interest only" payment of $79.2 million to the World Bank, leaving itself 30 days to pay the remainder.  Failure to meet the next scheduled payment in 30 days will place Argentina in bad company--Iraq, Somalia, Liberia, Zimbabwe, and Yugoslavia--among countries regarded as renegades for not repaying debts to international institutions.
     Several issues are behind this debacle:  (1) Former President Fernando De la Rua missed agreed-upon budget deficit targets several times and let the country default on Argentina's $144 billion foreign debt in December 2001.  (2) Little has been done over the past year to reform Argentina's banking system, which is virtually paralyzed.  (3) The economy is imploding this year as GDP is estimated to shrink by 10%, following 3 years of recession.  (4) Unemployment has reached 20% and millions of Argentineans are now living close to poverty.  (5) Caretaker President Eduardo Duhalde has been ambivalent about having national elections in March 2003 and may postpone them until June.
     Argentina, with 36 million people, has the 18th largest economy in the world and the second biggest in Latin America after Brazil.  Its economy is bigger than Switzerland and is ranked just behind Taiwan.  As it has trading and investment relationships with the United States and California, Argentina's situation needs to be monitored closely over the next several months.  A broader default, especially coming so soon after last year's financial crisis, could destabilize conditions in the region--affecting Brazil, Uruguay, Paraguay, Peru, Venezuela, and Chile.  The world economy, squishy as it is with war drums beating, does not need another financial crisis.  (Ken Ackbarali)
 

HIGHER ENERGY COSTS DROVE UP WHOLESALE PRICES IN OCTOBER

     The Producer Price Index (PPI) for finished goods rose by 1.1% in October, the highest monthly increase in recent memory.  Compared to a year ago, the index was 0.6% higher.  This is the first year-over-year increase since 9/2001.  Food prices rose by 0.7%, the highest increase since February.  Energy prices shot up by 4.2%, thanks to a 17.9% jump in gasoline prices.  Excluding food and energy prices, the core PPI for finished goods rose by 0.5%.  A major source of increase was higher auto prices, reflecting the new model year and somewhat lower cash incentives.
     The Producer Price Index (PPI) for intermediate goods rose by 0.7%, the biggest gain since April.  Compared to a year ago, the index was 1.6% higher.  This is the first year-over-year increase since 6/2001.  Food prices fell slightly (-0.2%).  Energy prices rose by 4.1%, the largest increase since April.  Natural gas and petroleum products posted big gains.  The core PPI for intermediate goods rose by just 0.1%.
     The Producer Price Index (PPI) for crude goods rose by 3.4%.  Compared to a year ago, the index was 14.3% higher.  This is the second consecutive month of year-over-year increases.  Food prices declined by just 0.1%.  Energy prices rose by 8.9%, the largest increase since April.  Natural gas prices jumped by 18.5%, while crude oil prices rose by 1.7%.  The core PPI for crude goods rose by 0.9%.  (George Huang)
PR: http://www.bls.gov/news.release/ppi.nr0.htm
 

SEPTEMBER HOTEL TRENDS

     PKF Consulting has just released their September hotel data, and of course comparisons with last year are difficult.  In Los Angeles County, the occupancy rate was 65.1% compared with 57.4% last year.  The rate during the 3 preceding months averaged 71.6%.  The average daily room rate (ADR) for September was $114.19, up 2.3% from last year.  Around the County, the strongest submarkets were Hollywood (76.8%) and Valencia (74.4%).  Downtown was low at 41.8%.
     Orange County's September occupancy rate was 56.6%, compared with 50.7% last year.  During the previous 3 months, June-August, the rate averaged 75.3%.  The ADR in September declined by 2.1% to $107.58.  The County's two strongest submarkets were South County (66.8%) and Newport Beach (65.5%).
     The Bay area's hotel industry also continued to struggle in September.  In San Francisco, the occupancy rate was 69.6%, compared with 58.3% last year.  For the 3 preceding months, the occupancy rate was 72.3%.  The ADR for September was $143.72, down by 8.7% over the year.  In the 3 preceding months, there were double-digit declines.  The trend was the same in the San Jose/Peninsula area.  The September occupancy rate was 59.9%, while for the 3 preceding months the average was 62.6%.  The September ADR was $116.05, down 8.2% over the year.  (Jack Kyser)
 

LAEDC JOINS MAYOR'S TRIP TO ASIA

     LAEDC CEO Lee Harrington accompanied Mayor Hahn's delegation to Asia last week.  This trip marks the latest effort to attract Asian tourists back to Southern California.  Some major business agreements are also expected to be signed during this tour.
PR: http://www.lacity.org/mayor/myrpress/ND7242.pdf
 

VARIOUS EVENT CALENDARS

     To prevent the e-EDGE from listing too many events, we encourage you to visit our events pages:
LAEDC events: http://www.laedc.org/data/events/index.shtml
World Trade Center Association events: http://www.wtcanet.org/index_event.htm
LAEDC's economic development-related events: http://www.laedc.org/events/calendarevent.asp
 

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 10/02: +0.0% (9/02: +0.2%)
* BLS: US import prices for 10/02: +0.1% (9/02: +0.7%)
* BLS: US Producer Price Index for finished goods for 10/02: +1.1% (9/02: +0.1%)
* BLS: US Producer Price Index for intermediate goods for 10/02: +0.7% (9/02: +0.5%)
* BLS: US Producer Price Index for crude goods for 10/02: +3.4% (9/02: +0.6%)
* Census: US retail sales for 10/02: +0.0% (9/02: -1.3%) -- non-auto retailing rose by 0.7%
* Census: US business sales for 9/02: -0.5% (8/02: +0.1%)
* Census: US business inventories for 9/02: +0.5% (8/02: +0.1%)
* Federal Reserve: US industrial production for 10/02: -0.8% (9/02: -0.2%)
* Federal Reserve: US industrial capacity utilization rate for 10/02: 75.2% (9/02: 75.8%)
* Univ. of Michigan: US Consumer Sentiment Survey for 11/02: 85.0 (10/02: 80.6)

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