Western Economic Developments
March 1996
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- Recently revised payroll employment figures reveal solid Twelfth
District economic performance in late 1995 and early 1996, spurred by
job growth in California that accelerated over much of 1995. In addition,
the District still contains four of the five fastest-growing states
in the nation. Rapid expansion in the service, trade, and construction
sectors accounts for much of recent District employment growth. Manufacturing
activity also has been solid, particularly in the electronics sector,
although there are signs of reduced semiconductor demand.
- Early in the California recovery, employment growth was concentrated
in several sectors that expanded rapidly nationwide. Employment growth
during 1995, however, was more broad-based.
- Data from a sample of large District banks indicate that total loans
outstanding increased during January and February at a rate markedly
higher than in the fourth quarter of 1995. This was primarily driven
by growth in California, although growth was slower there than during
the state's mid-1995 peak.
The 12th District economy exhibited solid growth in the last few months
of 1995 and first month of 1996. Recently revised figures indicate that
District nonagricultural payroll employment expanded by 3.0 percent over
the year ending in January, and annualized monthly growth for November
through January was also at that level. The big news is California's contribution:
state payroll employment grew by 2.8 percent over the 12 months ending
in January 1996. California employment growth in February continued at
a 2.9 percent annualized pace, although growth over the 12 months ending
in February was 2.3 percent, due to particularly strong growth in February
1995.
Among other states, Nevada, Utah, Oregon, and Arizona continue to expand
rapidly; their job growth ranks them first, second, third, and fifth among
all states nationally. Idaho also continues to expand at a solid and stable
rate. Although the Washington state economy slowed during 1995 and early
1996, the state's prospects are brightened by a resurgence at Boeing and
planned expansions by firms in the high-tech manufacturing and service
sectors. In contrast, economic conditions in Alaska and Hawaii weakened
further in recent months, with no signs of near-term improvement.
Rapid expansion in the service, trade, and construction sectors accounts
for much of the recent District employment growth. District manufacturing
activity has also been strong. Despite the Boeing strike in October and
November, District manufacturing jobs expanded by 1.1 percent over the
year ending in January, which compares very favorably to 1.5 percent shrinkage
in total national manufacturing jobs over the same period. The District
electronics sector has been particularly robust, although there are signs
of cooling in the key semiconductor sub-sector.
Revised employment data show that the California economy experienced
accelerating growth during most of 1994 and 1995. State employment growth
was 1.7 percent in 1994 and 2.8 percent in 1995. Decline in the defense-related
sectors continues, albeit at a less rapid pace than during the late 1980s
and early 1990s. However, during the current expansion other sectors--including
several high-tech manufacturing sectors, particularly computer components
and software, and other business services and motion picture production--are
supporting the state's resurgence.
In California, total job growth from the trough in April 1993 to January
1996 was 568,900 jobs, which implies a 1.4 percent annual growth rate
over the period. The first table shows some of the fastest-growing industry
categories (2-digit Standard Industrial Classification), listed in order
of their contribution to total California employment growth during the
recovery period beginning in April 1993. For comparison, each industry's
contribution to U.S. growth, and its U.S. rank, is also listed.
By far the largest contributor to California job growth was the "Business
Services" sector. This is a diverse sector whose key sub-categories
include advertising, software and data processing services, and personnel
supply services ("temp agencies"), among others. Almost 1/3
of total state job growth during the recovery has been in this sector.
Motion pictures, private social services, and health services also made
large contributions, as did growth in restaurant and bar employment. These
top 6 sectors account for a striking 70 percent of net job growth in the
state.
Among the top growth sectors in California, only the special construction
trades sector is a non-service producing industry. The largest contribution
from a durable manufacturing industry is from electronics, which i ranked
twelfth; it by grew by 2.4 percent yearly and contributed 3.0 percent
of new jobs in the state over the period.
In contrast, for the nation as a whole the job growth shares are not
as concentrated, and growth in motion pictures and social services does
not rank as highly. Surprisingly, motion picture employment grew faster
nationally than in California. However, it accounts for a much larger
employment share in California and therefore has contributed a greater
share of new jobs in the state. The business services sector also grew
rapidly nationwide, and it accounts for a larger share of jobs in California
than it does in the rest of the nation. These results suggest that to
a large degree, California's recovery was spurred by the state being well-positioned
in sectors that grew rapidly nationwide.
The contributions by 2-digit sector mask differences arising at more
detailed industry disaggregations. The second table lists, in order of
their contribution to California employment growth, several fast-growing
3-digit industry sectors. Only a limited set of industries is available;
because the list differs between the state and nation, comparison of the
California and U.S. figures is not possible.
The table reveals that almost all of the state's job growth in the motion
picture sector is coming from motion picture production (as opposed to
distribution, which is also included in the broader 2-digit category).
The rest of the industries are all manufacturing industries. The electronic
components and special industry machinery sectors both made substantial
contributions to growth; the former includes semiconductors, and the latter
has a sub-sector which is closely linked to semiconductor production.
Toy production and metal products also grew very rapidly, and female outerwear
provides a large and growing share of state jobs.
A key issue is whether the state growth pattern during 1995 followed
the same pattern as over the entire period. Although not shown in a table,
for 1995 the ranking and contributions of 2-digit industries are similar
to those shown in the first table (which covers the entire recovery period).
Business services still constitutes the most important growth sector in
the state, although its contribution is substantially smaller (18.6 percent),
and the share of motion picture job growth declined. Also in this period,
the contribution of special construction trades increased, and amusement
and recreation services made a large contribution, as did the higher wage
engineering and management services sector. Overall, growth during 1995
was more broad-based than it was earlier in the recovery.
In addition, growth from January 1995 to January 1996 was aided by an
increasing contribution of manufacturing sectors with significant high-tech
components. Two key 2-digit sectors--industrial machinery and equipment,
and electronic and other electrical equipment--contributed 3.2 and 3.1
percent of total California job growth during 1995, which ranks them ninth
and tenth in job creation among all 2-digit industries (not shown in a
table). These sectors are relatively small, but grew very rapidly during
1995 (at 6.5 and 5.4 percent rates). Growth of these sectors was substantially
slower in the rest of the nation; they grew at 2.2 and 2.4 percent nationwide.
The third table, which lists the primary 3-digit growth industries during
1995, shows the growing importance of several high-tech sub-sectors within
the industrial machinery and electronics industries. Growth in toys and
sporting goods, and metal forgings and stampings, continued to be rapid.
However, these sectors are replaced in the 1995 growth list by computer
and office equipment and communications equipment manufacturing. In addition,
the table reveals that growth in electronics components and special industry
machinery accelerated in 1995.
These tabulations suggest that during much of California's economic
recovery, the state has benefitted from having a high share of employment
in industries that grew rapidly for the nation as a whole, including business
services and motion pictures. This helped to spur the state's recovery.
During 1995, however, state employment growth was more broad-base, and
it was particularly rapid in several technology oriented durable manufacturing
industries.
Growth in these technologically oriented manufacturing sectors, and
in service sectors that provide high value products such as computer software
and movies, is likely to translate into strong additional growth in the
rest of the state economy. During 1995, while national growth slowed,
growth in California accelerated. With the recent report of improved national
employment growth, the outlook for California in 1996 appears bright.
Total bank lending picked up in most parts of the District in the first
part of this year, according to a survey of large banks. In California,
the annualized rate of loan growth (adjusted for loan sales) in the first
two months averaged 11.3 percent, which exceeds growth in the fourth quarter
of last year but falls below the mid-1995 peak of 18.7 percent. In the
District as a whole, total, business, and consumer loans experienced solid
growth in January and February and continue to post year-over-year gains.
A modest increase in real estate loans marked a reversal of contraction
in the fourth quarter, but was not sufficient to reverse the declining
trend in year-over-year real estate loan growth that began last July.
The early 1996 acceleration in bank lending was particularly pronounced
in the District outside of California (except in Arizona, where loan growth
slowed). Loan growth among the sample of large banks bounced back to an
average annualized monthly rate of 10.7 percent in January and February,
following a contraction of loans in the fourth quarter. The rebound was
due to jumps in consumer and real estate loan growth. However, on a year-over-year
basis, business and consumer loan growth weakened, and total loan growth
continued to slow sharply.
In addition to the monthly large bank data, we have quarterly data for
all banks. These data, currently available through the fourth quarter,
show contractions in loans outstanding in Alaska, Hawaii, Idaho, and Nevada
in the fourth quarter. In contrast, positive and accelerating loan growth
occurred in Oregon and Utah in the fourth quarter.
Fourth quarter earnings in all states in the District except Idaho and
Utah were good, with banks reporting healthy return on assets (ROA) and
return on equity (ROE). In Idaho and Utah, ROA fell below one percent
and ROE fell below ten percent in the fourth quarter. Fourth quarter profitability
of small banks in southern California was higher than a year earlier but
continued low, with average ROA and ROE at 0.3 and 3.2 percent, respectively.
Asset quality for most banks in the District was good in the fourth
quarter, with the average ratio of past due loans to total loans lower
than or only slightly above that in the nation as a whole.
Economic conditions in Alaska weakened somewhat
in the recent period. Payroll employment dropped slightly in December
and sharply in January, to a level that is 0.1 percent below that of a
year earlier. The largest yearly decline--3.6 percent--was in the manufacturing
sector, due largely to scaling back in the seafood processing industry,
which accounts for over half of state manufacturing employment. Government
employment has also declined, primarily at the federal level recently,
although a $750 million deficit facing the state may increase the loss
of state jobs in the future.
Tourism currently is one of the few bright spots for the state's economy.
According to the Alaska Visitors Association, the number of visitors has
increased 6 percent each year during the last decade. This increase has
been spurred by a lengthening tourist season; for example, Alaskan tour
companies recently extended wildlife tours past September for the first
time.
Oregon is now the third fastest growing state
in the nation. A broad-based employment surge in January contributed to
a 4.8 percent increase over the number of payroll jobs a year earlier.
Growth has been particularly rapid in the construction sector, which experienced
12 percent employment growth over its year earlier level. The pace of
yearly employment growth also was in excess of three percent in the transportation,
trade, finance, and service sectors. This rapid growth has kept the state
unemployment rate hovering between 4.6 and 4.9 percent since July 1995.
Only two slightly downbeat developments are evident in Oregon. Although
the state's high-tech manufacturing sector has expanded steadily over
the past year, near-term expansion may be held in check by a recent increase
in computer chip inventories. Also, severe flooding in early February
caused extensive damage to roads, homes, and businesses in the western
part of the state, resulting in substantial economic losses. Flood damage
is estimated at approximately $700 million, and rebuilding activity will
place additional pressure on the state's already tight construction industry.
The number of payroll jobs in Washington declined
in January at a 2 percent annual rate, leaving employment 1 percent higher
than its year-ago level. Finance employment surged in January, and the
construction sector also posted a solid gain. However, these expansions
were more than offset by steep declines in the transportation and trade
sectors, and smaller declines in the government and manufacturing sectors.
In contrast, the state's unemployment rate belies any signs of labor market
weakness; it declined to 5.7 percent in January, after being above 6 percent
for much of 1995.
Despite only moderate overall performance in 1995, several developments
brighten the state's prospects for 1996. In 1995, orders at Boeing increased
four-fold over their 1994 level, and the company plans to increase employment
by as many as 15,000 employees in coming years, the majority of them in
Washington state. In the high-tech sector, Intel has begun construction
of a research, development, and manufacturing facility in southern Washington,
and Seattle's Microsoft reportedly plans to expand its workforce by 2,000
employees.
Employment growth in Arizona has accelerated
in recent months. Nonagricultural payroll employment increased at better
than a 5 percent annual pace in each of the three most recently reported
months (through January), after slowing approximately to 3-1/2 percent
in the first three quarters of 1995. The recent pickup in job growth leaves
the labor market relatively tight, with an unemployment rate of about
4.7 percent. Although the job gains have been broad-based, employment
growth has been rapid in the government and services sectors, particularly
among firms that provide services to businesses.
Some of the business service jobs are in high-tech industries, such
as computer software development and research and testing laboratories.
The largest industry concentration of high-tech jobs in Arizona, however,
is in manufacturing of electronic components, in which national growth
has been very strong but concerns about underlying demand strength have
been raised in recent months. Arizona is well-positioned, however, to
weather any slowdown in electronics components manufacturing, as the state's
overall high-tech base is well-diversified.
The California economy continues to improve,
according to most indicators. The payroll survey reports job growth at
a 2.9 percent annualized pace in February. Although growth slowed somewhat
in late 1995, the figures for the period since March 1995 are not yet
benchmarked and might continue to understate actual job growth. The current
figures indicate that annual job growth to February 1996 was 2.3 percent.
It was particularly rapid in services and construction, and even the state's
previously hard-hit manufacturing sector expanded by 1.1 percent in the
year ending in February. Despite substantial job growth, the state's unemployment
rate continues to hover at high levels; it stood at 7.6 percent in February.
Current official employment figures show that California lost about
521,000 jobs between the employment peak in July 1990 and the trough in
April 1993; the addition of 569,000 jobs since then has pushed the nonagricultural
employment tally above its previous peak. Compared to the rest of the
state, Los Angeles County bore the brunt of the employment declines during
the recession and has regained less than one-third of the jobs lost. However,
some of this enduring weakness reflects a shift in the composition of
activity out of Los Angeles proper to the nearby counties of Riverside,
San Bernardino, Orange, and Ventura; these areas have more than made up
their initial job losses and continue to post solid gains.
The economy in Hawaii weakened further in recent
months. The state unemployment rate increased noticeably during 1995 and
began this year at close to 6 percent, which is well above the long-run
average for the state. Nonfarm payroll jobs fell at approximately a 3
percent annual pace around the turn of the year. State government payrolls
were trimmed, construction employment was down, and the services sector
contracted. Over the twelve months ending in January, Hawaii payroll employment
fell 1.4 percent, the weakest performance among the fifty states.
The Idaho economy is expanding at a moderated
but stable rate. Recently revised payroll employment figures indicate
that annual employment growth has hovered around 3 percent since spring
1995, with 3.1 percent annual growth over the period ending in January
1996. Growth in recent months has been steady around that rate, which
helped to reduce the state unemployment rate from 5.7 percent in November
1995 to 5.0 percent in January 1996.
Key growth sectors in Idaho during 1995 and recently include services
and transportation, the latter due largely to increases in trucking and
warehousing facilities. Growth also has been strong in the industrial
machinery and electronics sectors, although near-term growth in these
sectors may be held down by a softened semiconductor market. Also, in
a reversal of weakness observed in late 1994 and early 1995, annualized
construction employment growth has averaged approximately 16 percent over
the six months ending in January, largely propelled by substantial growth
in non-residential construction activity.
Nevada's growth continues to outpace that in
all other states by a large margin. Annual state payroll employment growth
was 8 percent as of January 1996, and the unemployment rate has hovered
around 5 percent since October. The strongest growth continues to center
on the construction and small but important durable manufacturing sectors.
The construction sector should remain strong, as both residential permits
and the value of nonresidential construction awards have been high in
recent months (although the latter fell in January).
Available data suggest that the key gaming sector continues to expand,
but at a pace less rapid than the state economy as a whole. Annual employment
in the hotels and amusement sector--which accounts for one-fourth of state
employment--increased by 5.2 percent over the 12 months ending in January,
albeit with a surge in that month. Growth in hotel and amusement employment
during 1995 was more rapid in the Reno area than in Las Vegas.
Utah trails only Nevada in its employment growth
rate. State payroll employment growth stood at 5.5 percent for the 12
months ending in January. This growth has been led by the service sector,
which accounted for approximately 1/2 of the jobs created during 1995.
However, total state employment gains for January were only moderate;
combined with an estimated surge in the state labor force, this increased
the state unemployment rate from 2.8 percent in December to 3.1 percent
in January.
Durable manufacturing is a key sector in the state. Led by fabricated
metals, industrial machinery, and electronics, durable manufacturing employment
expanded by 4.6 percent during the past year. However, despite 9 percent
growth in the 12 months to January 1996, the electronics sector contracted
by about 5 percent during the fourth quarter of 1995 through January 1996.
Also, perceived overcapacity in the semiconductor industry recently led
to suspended construction of a $2.5 billion semiconductor manufacturing
plant in Utah, which will limit additional employment expansion in this
sector. This may also limit state construction employment growth, which
has been very strong over 1995 but which contracted moderately between
December and January.
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