Western Economic Developments
July 1996
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- A wide variety of indicators suggest that economic growth in California
was strong in the first half of 1996. Statistics on the California labor
market, personal income, consumer spending, firm formation, and housing
markets all point to large gains in economic activity this year.
- Strength in business and real estate loan demand contributed to a
large increase in lending by California banks in April and May.
- Job growth accelerated recently in the fast-growing Intermountain
states of Nevada, Utah, and Idaho. Economic conditions in the Pacific
Northwestern states of Oregon and Washington also continued to improve.
However, the Alaskan and Hawaiian economies have weakened a bit in recent
months.
- In terms of job growth over the past year, the District contains
the four fastest-growing states in the nation: Nevada, Utah, Idaho and
Oregon. Arizona, California, and Washington also are growing faster
than the overall U.S.
Relatively rapid economic growth continued in most District states in
recent months. Employment growth was strong in California through May,
and other indicators pointed to further improvement in the state labor
market and a possible acceleration in the rate of economic growth. In
the Intermountain states of Nevada, Utah, and Idaho, job growth has accelerated
recently, making these three states the top-ranked in terms of employment
growth over the twelve months ending in April. Oregon payrolls continued
to expand quickly this spring, giving it the fourth ranking in terms of
trend job growth among U.S. states. Washington state employment growth
has picked up recently, to slightly above the national pace. In contrast,
economic conditions in Alaska and Hawaii deteriorated somewhat in recent
months, and the boom in Arizona moderated a bit.
Rapid population growth in parts of the West has strained the current
housing supply and created other infrastructure needs in a number of District
states. The resulting increase in building activity has contributed to
about a 6-1/2 percent increase in District construction sector employment
over the past twelve months. The wholesale and retail trade sectors, which
provide goods to the swelling number of households and businesses, also
have experienced rapid increases in payroll jobs. Among the components
of the fast-growing services sector, the job gains have been particularly
large at computer software developers and other business services providers.
Overall manufacturing payrolls--which are declining in the U.S. as a whole--have
been expanding in the District. Job growth over the past twelve months
in the District has fallen noticeably short of the national rate in only
a few major sectors; the weak employment sectors in the District include
the public utilities and financial service providers, where technological
change, deregulation and other competitive forces are leading to consolidation
and downsizing.
A wide variety of indicators suggest that economic growth in California
was strong in the first half of 1996, and the state is well-positioned
for fast growth in the second half of the year. The official estimates
of payroll employment growth show about a 3 percent average annual gain
in April and May, following a 2 percent increase in the first quarter.
Because this payroll employment series is benchmarked to the more comprehensive
employment counts from the unemployment insurance system only through
March, 1995, an upward adjustment should be applied for the likely undercount
of subsequent payroll job growth. Final, benchmarked estimates are likely
to show a gain of at least 3 percent at an annual rate in payroll employment
in the first half of 1996, which is the pace of job growth predicted by
the UCLA Business Forecasting Project for the year as a whole.
The California unemployment rate was estimated at 7.2 percent in May
and has fallen about 3/4 percentage point over the past twelve months.
Moreover, separate household survey questions on the reasons for unemployment
offer other indications of an improving labor market. An increasing share
of those who are unemployed have recently entered the labor force to search
for employment, in part because job opportunities now are more plentiful.
The fraction of those unemployed who are re-entrants to the labor force
jumped to about 40 percent in May, up 7 percentage points from a year
earlier. Correspondingly, if the rate of re-entrance to the labor force
had held steady in May at last year's level, the state unemployment rate
would have dropped another .5 percentage point last month. The flip-side
of the increase in job search activity is that the share of the unemployed
who are job losers fell to about 44 percent this May, down several percentage
points from last May. Separate data from the unemployment insurance (U.I.)
system corroborate the declining trend of job loss in the state. There
was a further drop-off in initial U.I. claims in May, and the U.I. insured
unemployment rate also continued to decline last month.
Personal income growth in California has been accelerating, and this
has helped buoy consumer spending in 1996. Overall state personal income
increased 6-1/2 percent last year, quite a bit faster than the 2.8 percent
increase in 1994. The more rapid gains in 1995 reflected a particularly
large pickup in non-labor income--dividends, interest and rent--but wage
and salary income growth also accelerated (to a 5 percent pace). Although
estimates of California personal income are not yet available for early
1996, there is indirect evidence that the acceleration of income growth
continued this year: the state government reports that income tax withholdings
in the first four months of 1996 were running 9 percent ahead of last
year's pace.
The U.S. Department of Commerce's estimates show a burst in California
retail sales in the first quarter of 1996, when state retail sales are
estimated to have been 7 percent higher than a year earlier. State government
figures on taxable sales from retail stores and other establishments show
an even larger increase in the first quarter; taxable sales were 8-1/2
percent above a year earlier. The 7 and 8-1/2 percent year-over-year increases
in first-quarter 1996 retail and taxable sales follow 1995 gains of 4
percent and 5 percent, respectively, so the recent pace represents quite
a pickup in consumer spending growth.
The pace of business firm formation in California also appears to have
accelerated in recent months. Estimates from the California state government
show that the number of new business incorporations in the first four
months of 1996 increased 10-1/2 percent relative to the same period a
year earlier, following a slight decline in 1995.
The California housing market has been improving. The volume of existing
home sales was quite high in early 1996. For the state as a whole, the
California Association of Realtors (C.A.R.) reports a 16-1/2 percent increase
in home sales volume in the first quarter, relative to a year earlier.
The largest gains were in the San Francisco Bay Area, where sales were
almost 25 percent higher than a year earlier, and Los Angeles area home
sales also posted double-digit increases in the first quarter. More recently,
strong sales volumes in Southern California continued; according to statistics
from Data Quick, the cumulative pace of Southern California home sales
through May of this year was up about 25 percent relative to a year earlier,
which is the highest level of home sales volume since 1990.
California residential real estate values are increasing now. In the
San Francisco Bay Area, the median single-family home price increased
about 3 percent over the year ending in the first quarter. In Los Angeles,
the C.A.R. median home price estimate has not yet shown an upturn, but
other evidence suggests that residential real estate values have bottomed
out. For one, as reported by the UCLA Business Forecasting group, the
history of individual home sales in the Los Angeles area shows that prices
have just recently stabilized in most subareas of Los Angeles, including
the high-priced neighborhoods with the largest runups in house prices
in the late 1980s and the largest declines in the 1990s. Second, rental
values for single-family houses in Los Angeles are beginning to increase
again; the CPI index of owners' equivalent rent for Los Angeles increased
at a 1 percent annual rate in the first five months of 1996, an acceleration
from virtually no change in 1994 and from about a ½ percent increase
in 1995. For San Francisco, owners equivalent rents have accelerated to
about a 2 percent annual pace so far in 1996.
The market for apartments also is reported to be very tight in much
of the San Francisco Bay Area; the latest available estimates from the
Census Bureau show a drop in the San Francisco rental vacancy rate to
3.8 percent in 1994, and anecdotal reports suggest that the market has
tightened substantially since then. For Los Angeles, the evidence of a
tightening multi-family market is quantitative: as an indicator of vacancies,
the Real Estate Research Council monitors the number of idle electric
meters in multi-unit dwellings, and this series moved down to 5.0 percent
in March, 1996, after peaking at 5.6 percent in mid-1994.
The recent pickup in housing market fundamentals in California has not
yet translated into much of an increase in residential building activity.
Over the course of the 1990 to 1993 recession in the state, the total
number of building permits issued for new residential construction fell
from about 20,000 units per month to about 7,000 units per month, and
total permits generally have remained in the 6,000 to 9,000 unit range
since 1993. In the first four months of 1996, building permits were issued
for an average of 7,000 housing units per month, a large increase relative
to the weak early-year pace in 1995, but still only about one-third of
the pre-recession level. California is well-positioned for fast growth
in residential construction later this year or in 1997.
Total bank lending (adjusted for loan
sales and reclassifications) in the District outside of California and
Nevada (where credit card institutions significantly distort consumer
loan figures) slowed in April and May from the first quarter, according
to a survey of large banks. Cutbacks in business loans outstanding, as
well as declines in real estate loan growth, contributed to the overall
lending slowdown.
In contrast, in California, the annualized rate of adjusted loan growth
jumped to an average 19.5 percent in April and May, from 8.6 percent in
the first quarter. Vigorous growth in business loans outstanding in May,
in addition to double-digit growth in real estate loans in April and May,
contributed to the acceleration in total lending. On average, consumer
loan growth fell slightly in April and May.
In addition to the monthly large bank data, quarterly data for all banks
in each of the individual District states are available through the first
quarter. These data show positive and accelerating growth in loans outstanding
in Alaska in the first quarter, and strong and steady growth in Utah.
In contrast, contractions in total loans were seen in Hawaii, Idaho, Nevada,
and Oregon in the first quarter. Oregon s cutback in lending was the first
in three years and stemmed from contractions in real estate and consumer
loans.
First-quarter earnings in all states in the District were good, with banks
reporting healthy to very strong return on assets (ROA) and return on
equity. ROA for the banks in the District averaged 1.36 percent, compared
to 1.12 percent for banks nationally.
Asset quality for most banks in the District was good, with the average
ratio of past-due loans to total loans lower than or only slightly above
that seen in the nation as a whole in the first quarter. However, banks
in Alaska and Hawaii, where the economies have been sluggish relative
to the rest of the District, showed somewhat higher past-due ratios.
Alaska's economy has weakened so far this year. The
employment count fell again in April and is now only 0.4 percent above
its year-earlier level. During the past year, Alaska's manufacturing sector
has lost over 7 percent of its jobs, due primarily to reduced employment
in seafood processing and lumber. In contrast, the number of jobs has
grown 3 percent or more in both the mining and service sectors during
the past year. In most of the state s other major sectors, employment
has fluctuated in recent months, but there is no clear trend.
Construction activity in Alaska has edged down so far this year from
the peak levels attained after large gains last year. This pattern is
evident in the construction employment figures, which show a 5-3/4 percent
gain in 1995, followed by slight declines in early 1996. Also, residential
construction permit issuance and nonresidential contract awards have been
flat to down slightly in recent months. Looking ahead, residential building
activity is expected to pick up as a result of the recent fire in the
Mat-Su Valley north of Anchorage, which reportedly burned over 36,000
acres and destroyed about 300 buildings, including businesses, primary
residences and recreational cabins.
Oregon's economy continues to perform very well, with
the overall pace of payroll job growth remaining near 4 percent at an
annual rate in recent months. Employment gains have been broad-based,
but the construction sector has been especially strong. The number of
construction jobs in April was up 12.1 percent from a year earlier, reflecting
many government and private projects moving into construction phase this
summer. The service sector has expanded its job count by 9 percent during
the past year, with especially rapid growth in amusement and recreational
services, health services, and business services. Robust growth also is
reported for the trade sector, where employment has risen 4.5 percent
during the past year. Job losses in nondurable goods industries pushed
manufacturing employment down in April; however, several durable goods
manufacturing industries have experienced growth rates of greater than
5 percent during the past twelve months, including electronics, transportation
equipment, logging and industrial machinery.
While construction billing volumes and employment currently are very
strong, the longer-term outlook for construction in Oregon is less robust.
The strain on local resources from the high level of current construction
activity is putting upward pressure on labor and materials costs, forcing
increases in construction budgets or scaling back in the scope of planned
projects.
Economic activity in Washington has picked up in recent
months. On average, payroll employment increased at about a 4 percent
annual rate in March and April, after little change in the first two months
of the year. Cumulatively, most of the job gains this year have been in
the services and finance, insurance, and real estate sectors. Transportation
employment is down a bit since the end of last year, and overall manufacturing
employment is little changed.
The residential real estate market in the state continues to be active.
Home resales for the first quarter of 1996 were relatively high and have
increased about 10 percent relative to the same period a year ago.
Employment growth in Arizona was moderate in early
spring, after posting large gains in 1995 and the beginning of 1996. The
rapid gains through February included a 6 percent expansion of construction
jobs and a 5 percent increase in service sector jobs, relative to a year
earlier. In March and April, the service sector job growth slowed, construction
employment retraced a little of the earlier huge gains, and employment
in finance, insurance and real estate edged down. Nevertheless, the Arizona
labor market is tight, with a 4.8 percent unemployment rate in April,
down 0.6 percentage point from a year earlier.
Among other economic indicators, Arizona retail sales slowed at the
beginning of the year, after a very strong Christmas season. Residential
building permit issuance has been strong in 1996. Also, first-quarter
1996 existing home sales were up 25 percent relative to a year earlier,
and median home prices in Phoenix have increased 10 percent over this
four-quarter period.
Economic growth in California is accelerating.
The estimates of payroll employment growth show about a 3 percent average
annual gain in April and May, following a 2 percent increase in the first
quarter. Employment growth at wholesale and retail trade establishments
has been strong, and over the past twelve months the pace of job gains
has exceeded 4 percent in each of the construction and service sectors.
Among services, some of the largest job increases have been in the business
services area, an industry group which includes consulting services and
other establishments developing computer software, such as applications
for the fast-growing World Wide Web. Many of these establishments are
in what has been loosely defined as the "multimedia" business,
providing information or entertainment content through a multiplicity
of media, such as text, graphics and sound. The UCLA Business Forecasting
Project recently reported on various attempts to measure activity in this
new, rapidly growing line of business. For example, the Multimedia
Yearbook shows that 30 percent of all its listed multi-media firms
are in California, with the second largest concentration of 11 percent
in New York state. Most of the more than 900 multimedia firms in California
are in the San Francisco area.
Payroll employment continues to contract in Hawaii.
Employment fell about 1 percent over the twelve months ending in April,
with much of the decline coming in recent months. About one-half of the
2,300 jobs lost between January and April were in the construction sector.
However, the weakness in employment is broad-based. The manufacturing,
transportation, and finance, insurance and real estate sectors also have
shed jobs this year, and services sector employment is flat.
The decline in construction employment reflects weakness in both residential
and non-residential building. In recent months, contract awards for nonresidential
projects have remained well below year-earlier levels, and residential
housing permits continued a downward march. The market for existing homes
is too weak to support much residential building. Sales of existing homes
fell to about 10,000 units last year and remained at this lower level
through the first quarter of this year.
The Idaho economy accelerated substantially in recent
months. Payroll employment growth surged to an average annual rate of
10 percent in March and April. The April jobs tally was 4.4 percent above
its year-earlier level, which places Idaho third in the employment growth
ranking of U.S. states. The state's unemployment rate declined 0.3 percentage
point to 4.8 percent in April, despite rapid recent growth in the state
labor force.
The recent employment surge was led by the construction sector, where
job growth was approximately 27 percent at an annual rate during the first
four months of 1996, reflecting high current building activity. Durable
manufacturing employment also continues to expand rapidly, led by the
industrial equipment and electronics sectors. The state's electronics
sector continues to perform well despite the slowdown in semiconductor
sales, perhaps because it is diversified beyond chip manufacturing. Currently,
a major manufacturer of computer memory chips in the state is expanding
its high-tech product line to diversify further the risk associated with
the volatile memory chip market.
Nevada's stellar pace of growth picked up further.
Payroll employment increased at about a 7-1/2 percent average annual rate
so far in 1996, up from the 7 percent gain in 1995. Construction employment
continues to lead the way, followed by trade and service employment growth.
However, previously torrid manufacturing employment growth slowed somewhat
in early 1996, with an actual decline in April. Some restraint on manufacturing
expansion may be arising from pronounced wage growth; average wages in
the state's manufacturing sector grew nearly 10 percent during the 12
months ending in April.
The key contribution to the state s rapid expansion is commercial development
aimed at the tourist and this shows no signs of deceleration, particularly
in Las Vegas. In April, overall nonresidential construction awards in
Nevada jumped sharply, owing to the start of a $950 million dollar hotel/casino
facility in Las Vegas.
Growth in Utah has returned to very rapid rates after
a slight deceleration around the turn of the year. Jumps in employment
of about 9 percent at an annual rate in each of March and April left the
number of jobs on state payrolls about 6 percent above a year earlier.
Recent growth has been particularly strong in the construction and manufacturing
sectors. Furthermore, government employment growth accelerated markedly
in early 1996. This may reflect substantial current and planned growth
in state government expenditures, for which Utah is expected to be ranked
near the top of the nation in 1996 and 1997.
Among other indicators, taxable sales increased notably in early 1996,
following two years of strong growth. Commercial building vacancy rates
are very low in most areas of the state, and $2 billion worth of new commercial
building projects reportedly are planned. In the state's tourist sector,
ski areas recovered from light early season snowfalls to post the second
strongest ticket sales on record, and during early 1996 visits to national
park sites were well above 1995 levels.
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