Western Economic Developments
May 1996
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- The Twelfth District continued on a solid economic growth path in
the first quarter of 1996. As of March, District employment was 2.6
percent above its year-earlier level, and growth during the first quarter
of 1996 was slightly above that pace.
- California continued on a moderate growth path, as did Idaho, and
the Washington economy is improving after a somewhat weak 1995. Rapid
expansion continued in most of the remaining District states, with the
exceptions of Hawaii and Alaska.
- The semiconductor and computer manufacturing industries, along with
related sectors, play an important role in the District economy. Despite
the recent substantial slowdown in semiconductor sales, the prospects
for these industries remain favorable.
- During the first quarter of 1996, loan growth at a sample of large
District banks accelerated compared to the last quarter of 1995, and
growth in April was close to the first quarter pace. Accelerating real
estate loan growth is offsetting slower business loan growth in several
states, including California.
During the first quarter of 1996, the District economy continued to
expand at the solid pace established in mid-1995. As of March, District
payroll employment was 2.6 percent above its year-earlier level, and growth
during the first quarter of 1996 was slightly above that pace. California
performed well, expanding 1.9 percent at a yearly pace during the first
quarter of 1996; this is slower than in the second half of 1995, but it
probably is an underestimate of actual job growth. Consistent with solid
growth in the state, reports indicate reduced migration of Californians
to Oregon, a fast-growing neighbor state.
Elsewhere, the Washington economy is improving after a somewhat weak
1995, with a particularly strong showing in March, and Idaho continues
its moderated expansion. Although lingering weakness was evident in Hawaii
and to a lesser extent Alaska, rapid expansion continued in Nevada, Utah,
and Oregon. Employment growth in Arizona has accelerated to a rapid rate
after slowing somewhat during the middle of 1995; however, loan growth
in that state has weakened.
District growth continues to be led by the construction, service, and
trade sectors, with particularly fast growth in the wholesale component
of the latter. The activity in the wholesale sector and District international
trade reflects in part the expansion of manufacturing in the District.
Rapid manufacturing expansion in high-wage sectors has manifested itself
in substantial manufacturing wage gains in several states. For example,
a large and growing share of District employment is in semiconductor and
computer manufacturing and related activities.
The national semiconductor industry recently has experienced a sharp
downturn in its key sales indicator. This has raised concerns about the
health of that industry, and also the health of the computer industry--particularly
the segment that produces desktop computers for home and business use.
These industries play important roles in the District economy, due to
their share of output and employment, and the often high-wage jobs that
they provide. This is particularly true in California, where Silicon Valley
(in the southern part of the San Francisco Bay Area) has long been the
nations leading area for the development and production of semiconductors
and computers. In Southern California, Los Angeles and Orange Counties
also produce significant amounts of these products, as do other areas
in California and several other states in the District--notably Oregon,
Washington, Idaho, and Utah.
The magnitude of the semiconductor downswing at the national level is
depicted in the chart, which shows monthly values of the U.S. "book-to-bill"
ratio (seasonally adjusted and provided by the Semiconductor Industry
Association). U.S. "book-to-bill" is the ratio of semiconductor
orders to shipments, from U.S. manufacturers to U.S. purchasers. It is
a commonly used indicator of short-term domestic semiconductor industry
conditions.
After climbing to unusually high levels in the first half of 1995, the
book-to-bill declined slowly in the second half of 1995, and then dropped
precipitously during January-March of this year. Both the orders and shipments
components of the ratio dropped over this period. Concurrent with this
was substantial inventory accumulation at semiconductor and computer manufacturing
plants.
However, the book-to-bill ratio may overstate the decine in quantity
demanded because it is contaminated by price changes. In particular, when
memory prices are declining, new orders are placed at lower prices than
existing shipments, so that even with constant quantities sold the ratio
will decline.
Such price changes have occurred over the recent episode of book-to-bill
decline. Prices for a basic unit of standard computer memory--Dynamic
Random Access Memory, or "DRAM"--declined slightly (approximately
4 percent) between December 1995 and February 1996, and then dropped sharply
in March (by approximately 30 percent). Because the large price decline
lagged behind the initial large decline in book-to-bill by several months,
the price declines do not appear to fully explain the declining book-to-bill--i.e.,
the reduced book-to-bill is not entirely due to supply-driven decreases
in the price of semiconductors.
The sharp downturn in semiconductors was interpreted by some observers
as boding poorly for computer sales in 1996, because use in computers
accounts for an estimated 60 percent of the semiconductor market. To date,
however, little or no downturn in computer industry indicators has been
observed. The next chart shows the value (at 1992 prices) of monthly computer
orders and shipments at the national level for the period from January
1993 to March 1996. No slowdown is apparent. Furthermore, business investment
expenditures on computer equipment (not shown) accelerated in the first
quarter of 1996, after a very strong 1995.
The patterns identified above suggest that sales of computers and semiconductors
are not necessarily tightly linked over short periods of time. In general,
the semiconductor industry is subject to sharper swings than is the computer
industry. This arises due to the increasingly large investments and long
lead times needed until semiconductor manufacturing plants reach efficient
operating capacity. Combined with rapid expansion of worldwide semiconductor
markets, this causes new capacity to be built based on expected industry
growth, in an uncertain environment. Overestimation of this growth leads
to periods of excess capacity and overproduction. The resulting market
glut manifests itself in rising inventories at semiconductor and computer
firms, falling semiconductor prices, and reductions in the quantity and
value of orders.
Itappears that these normal industry cyclical pressures were present
in the recent semiconductor downturn, along with several other important
elements. Memory chip prices were very high during 1992-95, as growth
in worldwide demand outstripped supply; this caused computer makers to
conserve somewhat on memory. A change occurred with the introduction of
Windows 95 in mid-1995, which requires more memory than earlier operating
systems. Resulting growth in memory chip sales was expected to be particularly
strong, and semiconductor and computer firms planned accordingly.
However, sales of Windows 95 were not as strong as some computer and
semiconductor makers expected, nor was growth in related hardware sales.
In addition, substantial new semiconductor capacity came on-line worldwide
during 1995, and new chip technology became available recently, which
rapidly supplanted the old technology and led to excess inventories on
the latter. The net effect of these factors was a substantial glut in
the semiconductor market, without any apparent slowing in computer sales.
The resulting excess inventories of semiconductors were substantial, but
industry analysts expect them to be fully eliminated by the middle of
this year.
Precise data on the contribution of these sectors to District output
and income are not available. The best available data are payroll employment
data for several detailed industry sectors.
In California, a large number of jobs are in the "computer and
office equipment" and "electronic components and accessories"
sectors. These are Standard Industrial Classification (SIC) industries
357 and 367; semiconductors are a large share of the latter. As of March
1996, the state had over 200,000 jobs in these two categories, which is
almost 2 percent of total payroll employment. Employment in both indusries
grew rapidly over the past year, at a 5 percent rate for computer employment
and 8 percent rate for electronic components employment. However, slowing
occurred in the first quarter of 1996, to 1.9 percent in computers and
7 percent in electronic components (both at an annualized rate).
Furthermore, in California the electronics sector as a whole (SIC 36)
grew more slowly over the past year, but slowed less in the first quarter,
than did its components sub-sector (SIC 367). This is consistent with
the recent pattern in semiconductor output growth, which was very rapid
during 1995 but slowed substantially in early 1996. This pattern in semiconductor
output likely had a more pronounced effect on employment in the narrower
electronic components sector (SIC 367), in which semiconductor manufacturing
accounts for a large output share, than in the broad category (SIC 36),
where it accounts for a smaller output share.
Available figures reveal a similar pattern in Washington and Oregon.
Growth in computer employment and electronics employment was rapid over
the past year but slowed in the first quarter of 1996. The same is true
for the electronics sector in Utah. In contrast, electronics employment
growth in Idaho accelerated over the same period.
The semiconductor market slowdown nationally has not yet been reversed;
the preliminary April "book-to-bill" figure is approximately
at the low level established in March. This slowdown appears to have affected
the computer and electronics sectors in the District. Employment growth
in these sectors slowed in several states early in 1996.
As noted, however, the semiconductor glut is expected to be temporary,
and no slowdown in computer sales has been observed to date. Substantial
competitive pressure from domestic and international sources will continue
in these industries, which may affect the growth of specific firms in
some states. However, these sectors as a whole should continue to be a
source of strength for the District economy.
Total bank lending (adjusted for loan sales and reclassifications) accelerated
in most states in the District in the first quarter, according to a survey
of large banks. A resumption of growth in real estate loans, following
cutbacks during the second half of last year, contributed to the pickup,
as did acceleration in consumer loan growth. In contrast, business loan
growth declined to its lowest level since the fall of 1993. In April,
loan growth for the District excluding Nevada (where credit card institutions
substantially distort consumer loan figures) was slightly lower than during
the first quarter.
In California, the annualized rate of adjusted loan growth averaged
8.6 percent in the first quarter of 1996, down only slightly from the
fourth quarters 9.0 percent pace, but well below last summers peak of
18.7 percent. A decline in business loan growth in the first quarter contributd
to the slight cutback in total lending. However, real estate loans grew
solidly in the first quarter, following a contraction in the fourth quarter
of last year. In April, annualized loan growth increased somewhat, to
10.7 percent. Like California, but in contrast to the District as a whole,
Arizona is showing a slowdown in lending. Adjusted loan growth in Arizona
declined to an average annualized rate of 9.1 percent in the first quarter,
from 12.4 percent in the fourth quarter of last year. In April, loan growth
decreased again, to 7.6 percent at an annual rate. A decline in real estate
loan growth in the first quarter contributed to the slowdown. In addition,
business lending contracted in the first quarter, following robust growth
during the second half of last year, and consumer loans outstanding continued
to decline.
In Alaska, the number of jobs in March was up 1 percent from a year
earlier, despite a net decline between November and March. Mining, construction
and manufacturing employment have been volatile in recent months; although
all three sectors suffered significant job declines in March, each expanded
overall during the past year. The slowing in construction employment growth
is likely to continue. Residential permits declined sharply in the first
quarter after increasing during the second half of 1995, and non-residential
construction awards remain at low levels. In contrast, yearly growth in
service employment was at a relatively robust 2.8 percent in March, although
this rate has slowed substantially over the past year.
Recent legislation has improved the outlook for the states oil industry.
In April, the federal government gave formal clearance for exportation
of Alaskan North Slope crude oil, ending a ban imposed in 1973. The U.S.
Energy Department expects a significant increase in Alaskan oil production,
which will improve revenue flows to the state government.
Labor markets in Oregon remain strong. The state posted a steady gain
in March, and the number of jobs is 4.0 percent above its year- earlier
level. Construction employment fell sharply in March, but this only partially
offsets large increases in January and February. Employment growth in
the trade and service sectors also accelerated in the first quarter of
1996, and the state unemployment rate has been lower than its national
counterpart for 30 consecutive months.
Slowed domestic migration to the state should help to keep unemployment
low, although it may also reduce employment growth. The number of out-of-state
drivers licenses exchanged during March was reportedly down 1.5 percent
overall relative to a year earlier, and down 12 percent for transfers
from California to Oregon. Elsewhere, a survey of automobile dealers in
the Portland area indicates that sales are slowing. The recent spike in
gasoline prices may temporarily exacerbate this, since trucks with low
gas mileage constitute a significant share of sales in the state.
Economic conditions in Washington appear to be improving after a somewhat
slow 1995. Payroll employment recorded strong gains in February and March,
and the March figure is 1.3 percent above its year earlier level. Every
major sector added to payrolls in March, and the construction, service,
and finance sectors registered strong job gains between the fourth quarter
of 1995 and the first quarter of 1996. Although state manufacturing employment
has been declining, Boeing announced in April that it plans to hire 6,700
workers in Washington state this year. Current estimates indicate that
Boeing will produce 215 planes in 1996, 318 in 1997, and 370 in 1998,
compared to 206 in 1995.
Federal funding cuts and restructuring efforts at the Hanford nuclear
facility have weakened economic conditions in the southeastern part of
the state. In March, Hanford-related employment was down 18.2 percent
from its year-earlier level. As a result of the Hanford layoffs, the state
Revenue Department recently designated the area as distressed, which enables
the use of special tax incentives to attract new business and support
growth at existing firms.
After slowing in the middle of 1995, employment growth in Arizona averaged
almost 6 percent at an annual rate during November 1995 through March
1996, and the unemployment rate hovered below 5 percent over the same
period. Most of the recent job gains have been in the trade and services
sectors. Within the trade sector, wholesaler activity and job growth has
been strong, owing partly to a pickup in manufacturing production in the
state, and recent rapid expansion in retail employment has been propelled
in part by rapid population growth during the past few years.
U.S. Census Bureau figures indicate a 15 percent gain in Arizonas population
between 1990 and 1995. More than half of this increase was due to the
migration of residents from other U.S. states, while immigration from
abroad played a smaller role. Arizona has a large and increasing number
of elderly residents, which is boosting the demand for medical services
in the state.
Economic growth in California continues to outpace that in the nation
as a whole. Estimated state payroll employment growth in February and
March averaged 2 percent at an annual rate, which is below the revised
1995 pace but probably is an underestimate of actual job growth. In addition
to a likely undercount of jobs created in start-up firms, seasonal adjustment
difficulties--due to the large weather-related disruptions last year--appear
to have distorted the recent monthly data and exaggerated a reported decline
in construction employment since January. Among other indicators of building
activity, residential permits are not declining but remain relatively
low, and there has been some slowing of nonresidential construction awards.
The civilian unemployment rate has edged down since late 1995, as has
the rate of job loss as measured by initial claims for unemployment insurance
payments.
The degree of labor market slack differs across subregions of the vast
state. In the San Francisco Bay area, the civilian unemployment rate is
declining and now is below 5 percent, compared to about 6 percent in San
Diego and 7.5 percent in the greater Los Angeles area. Los Angeles still-struggling
economy now faces additional restraint from disruption of trucking activity
due to a labor dispute at the Ports of Los Angeles and Long Beach. On
the brighter side for that region, orders for McDonnell Douglas civilian
aircraft picked up sharply in late 1995 and remained healthy in the first
quarter of this year.
The deterioration in general economic conditions in Hawaii appears near
an end, but official labor market indicators do not yet show recovery,
and other indicators of economic health are mixed. Payroll employment
has been essentially constant in recent months, after falling about 1.5
percent in 1995. Two upbeat indicators are a strong increase in tourism
traffic and improved retail sales growth in recent months. However, the
recent jump in jet fuel prices is a downbeat development that likely will
increase the cost of traveling to Hawaii, at least temporarily. Official
labor market indicators show the unemployment rate holding steady at 6
percent, which is high given the prevalence of multiple job-holding in
the Hawaiian labor market.
The Idaho economy continues to expand at the moderated pace established
in the middle of 1995. Yearly growth in payroll employment was 2.5 percent
as of March, with a substantial increase in that month after weak growth
in January and February. The March surge helped to hold the unemployment
rate around 5 percent, where it has been since declining from 5.4 percent
in December. Recent employment growth has been led primarily by growth
in construction and durable manufacturing. State manufacturing strength
is also reflected in a remarkable 14 percent increase in average manufacturing
wages during the past year. In contrast, both the government and finance
sectors have experienced employment declines of late.
Conditions are mixed in the states construction and real estate sectors.
Commercial construction activity and construction and sales of single
family homes remain high. However, both the multi-family residential market
and the rental market have softened noticeably, with vacancy rates that
have increased to levels several points higher than the nationwide average.
Nevada's employment growth rate has been the fastest in the nation for
several years now. As of March, annual state payroll employment growth
stood at 7.3 percent, and the unemployment rate dropped to 4.6 percent
after hovering around 5 percent since October. Employment in the trade
and finance sectors surged in March, but the government sector, which
grew at 3.1 percent in the 12 months leading to March, lost jobs in February
and March after a substantial gain in January. Overall employment growth
has been broad-based over the past year, and average manufacturing wages
increased by 7.8 percent during the past year.
The strongest job gains continue to be in construction, where employment
grew 18.4 percent during the 12 months ending in March. Residential construction
has accelerated in recent months, and recent commercial developments in
Las Vegas include the opening of an elaborate hotel/casino and plans for
two more major hotel/casinos to open later this year. Additional new commercial
projects valued at more than $2 billion are scheduled to be completed
in Las Vegas by 1998.
Rapid economic expansion also continues in Utah. Yearly employment growth
as of March was 5.3 percent. After some slowing around the turn of the
year, employment growth was strong in February and March, led by large
gains in the construction, durable manufacturing, and finance sectors.
The gains in durable manufacturing employment came largely from the industrial
machinery and electronics sectors, which for now helps to mitigate concerns
that these sectors would be hit hard by the glut in the national semiconductor
market.
One concern in the state is over the very tight labor market. The unemployment
rate recently declined from an already very low 3.5 percent in October
to nearly 3 percent during December-March. Employers face substantial
constraints in hiring workers. Population growth in the state has been
rapid, but is being fueled as much by high birth rates as by in-migration
of workers, and Californias economic recovery is likely to slow the latter.
Despite these concerns, manufacturing wage growth was a solid but not
remarkable 4.4 percent for the 12 months ending in March.
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