Western Economic Developments
September 1996
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- The District economy has expanded more strongly thus far in 1996
than it did in 1995. In July, payroll employment was 3.2 percent above
its year earlier level, although growth for that month was somewhat
below the brisk pace recorded in the second quarter.
- Strong growth continued in California, with payroll employment expanding
at a 2 percent annualized pace on average in June and July. The Washington
economy, boosted by expansion at Boeing, accelerated noticeably in recent
months.
- Signs of slightly moderated growth have appeared in the fast growth
Intermountain states and Oregon. However, among all District states,
only Hawaii and to a lesser extent Alaska showed any significant weakness.
- Several District states have experienced sustained or increasing
labor market tightness. Average hourly wage figures reveal that the
associated labor shortages have had a noticeable effect on wage growth
in manufacturing, construction, and wholesale and retail trade in several
states.
The District economy expanded strongly in July but at a rate somewhat
below the very brisk pace in the second quarter. Payroll employment grew
3.6 percent at an annual rate in the second quarter and 2.7 percent at
an annual rate in July. Thus far in 1996, District employment has expanded
3.2 percent at an annual rate, compared to 2.7 percent during 1995. This
improvement largely has arisen from slightly accelerated growth in California
and strong acceleration in Washington, where employment growth during
1996 was at more than twice its 1995 pace.
Although job growth continued at rapid rates in most of the remaining
states in the District, employment and other economic indicators do not
point to fast growth as uniformly as they have over the past few years.
Arizona, Idaho, Nevada, Oregon, and Utah all exhibited signs of slight
slowing in recent months, including moderated growth in employment and
planned building activity. Furthermore, despite exhibiting some positive
economic indicators of late, Hawaii lost jobs in June and July, and employment
there remains below year-ago levels. The Alaskan economy also lost jobs
in July, but employment there is slightly above year-ago levels.
Much of the recent strengthening in the District has come from the manufacturing
sector. Employment growth in that sector has picked up substantially in
1996; after expanding at annual rates of 1.9 and 2.4 percent during the
first two quarters of 1996, annualized District manufacturing employment
growth was 5.1 percent in July. This acceleration largely is due to gains
in Washington state emanating from the resurgence at Boeing. Expansion
also occurred at a wide variety of California manufacturing firms, including
those involved in high-tech product lines such as network computer products
and also in more traditional industries such as metal products.
However, manufacturing employment in several smaller states that previously
had expanded rapidly--notably Idaho, Oregon, Nevada, and Utah--was flat
or declined in recent months. Some of this moderation appears attributable
to continued slack in the market for computer memory chips; evidence suggests
that Idaho, Utah, and Oregon all have experienced slower growth due to
this source of weakness. Also, District nondurable manufacturing in general
has grown more slowly than durable manufacturing, even prior to the resurgence
at Boeing.
Among other industry sectors, the services sector has been the largest
contributor to District employment expansion for some time. This sector
accounts for 30 percent of District employment, and thus far in 1996 it
accounted for approximately 50 percent of the 388 thousand District jobs
created. The finance, insurance, and real estate sector also has expanded
this year, at a 1.2 percent annualized pace. This is in sharp contrast
to previous years; employment in this sector decreased substantially in
1994 and was essentially flat in 1995. Construction employment has expanded
rapidly in 1996, at close to a 6 percent yearly pace, although growth
in planned building activity has slowed in the District. Government payrolls
have grown moderately, at just under a 1 percent pace, for the last 4
years.
On a less sanguine note, the District is now emerging from one of the
worst wildfire seasons on record, with over 5 million acres of land and
hundreds of houses burned nationwide, most of them in the 12th District.
This has caused substantial losses in public land resources and open space,
and significant expenditures by firfighting and related public agencies,
although dollar estimates of damage and public expenditures are not yet
available.
As of August, the national unemployment rate stood at 5.1 percent, which
indicates a tight national labor market. Although the District unemployment
rate was 6.4 percent in July, this represents substantial tightness in
the 12th District. In particular, the table shows the long-run average
and current unemployment rates in the District states, along with the
change in unemployment over the past year. The unemployment rate is below
its long-run trend in all states except Hawaii. Several fast-growing states
(particularly Utah and Nevada) have had low unemployment rates for a sustained
period of time, and increasing labor market tightness (as represented
by falling unemployment rates) is apparent in several states including
California and Washington. This labor market tightness may put upward
pressure on wages in the District.
The primary and most reliable source of information on labor cost inflation
is the Employment Cost Index (ECI), which is based on reported compensation
for a fixed sample of occupations across a large number of private non-farm
and state and local government establishments. The total compensation
and wage and salary ECIs are available nationally and for broad U.S. regions.
The West region includes the states of Alaska, Arizona, California, Colorado,
Hawaii, Idaho, Montana, Nevada, New Mexico, Oregon, Utah, Washington,
and Wyoming. Of these, only Colorado, Montana, New Mexico, and Wyoming
are outside the 12th District. This index therefore provides useful information
regarding wage and compensation developments in the District.
The year-over-year percentage change in the quarterly Employment Cost
Indices for wages and salaries, for the U.S. as a whole and the Western
region, is shown in the chart. After increasing substantially at the end
of the 1980s expansion, then coming down in response to the early 1990s
recession, wage inflation at the national level generally has remained
in the 2.8 to 3.0 percent range since mid-1992. However, a slight upward
tilt in both national wage inflation and inflation in the western states
is evident in recent quarters. As of the second quarter of 1996, the national
and western indices stood 3.3 and 3.2 percent above their year earlier
levels.
The ECI figures are suggestive of increased wage pressure at both the
national level and in the West in the second quarter. Given the variation
in unemployment across states in the District, additional insights can
be gleaned from examining data on average hourly wages by state, which
are available through July. For the 12th District, data are available
for manufacturing employees in all states, and for construction and retail
employees in several states. These data are not seasonally adjusted, and
they pertain only to production or non-supervisory employees.
The next table shows growth in average manufacturing wages for the contiguous
District states and the U.S. The figures shown are the average 12-month
percentage change in manufacturing wages for the periods August 1994 to
July 1996, August 1994 to July 1995, August 1995 to January 1996, and
February 1996 to July 1996.
The rate of manufacturing wage growth varies from moderate to high across
the District states. However, all but one of the states listed show a
pick up in average manufacturing wage increases in 1996. The pick up is
particularly pronounced in Idaho and Washington, perhaps because each
is recovering from low wage growth in previous periods. The level and
degree of acceleration are striking in Nevada and Utah, two states that
have experienced prolonged labor market tightness and further tightening
over the past year. Manufacturing wage growth also has accelerated noticeably
in 1996 in Arizona and to a lesser extent California, although the level
of wage growth in both states is moderate. The one exception to the pattern
of acceleration is Oregon, where unemployment has increased by half a
percentage point over the last year and manufacturing employment growth
has slowed somewhat in 1996.
The acceleration in manufacturing wage growth documented in the table
suggests significant wage inflation for production workers in much of
the District. An alternative explanation is that manufacturing expansion
in these states is occurring disproportionately in sectors that use relatively
skilled and highly paid workers, so that rather than wage inflation occurring,
the figures reflect higher manufacturing labor productivity. This explanation
cannot be rejected definitively, particularly as an explanation of the
high levels of wage growth in several states. However, the acceleration
in 1996 does not appear to be explained by such composition effects, since
the pattern and timing of employment growth by manufacturing industry
sub-sectors is not suggestive of an accelerated shift toward high-wage
manufacturing industries in states such as Utah and Nevada in 1996.
Data also are available for construction workers and/or wholesale and
retail trade workers in several states, as shown in the table. Although
these figures do not suggest high wage growth and acceleration in 1996
as uniformly as the manufacturing figures do, they nonetheless reinforce
several conclusions implied by the manufacturing wage series. In particular,
wage growth has been high in Nevadas construction sector and Utahs trade
sector. Furthermore, wage growth in these sectors and in Nevadas trade
sector has accelerated substantially in 1996. Wage inflation also has
been strong for some time in Oregons construction sector, and it increased
further in 1996. In contrast, construction wage growth has come down in
Arizona, as have construction and trade wage growth in Idaho. In California,
construction wage growth has been moderate, although there has been an
acceleration in 1996. Retail sector wage growth is high in California,
although it has come down somewhat in 1996 compared to 1995.
Although wages in California have not yet accelerated much beyond moderate
growth rates, state-level figures may mask developments occurring in different
areas of the state. In particular, the Los Angeles County labor market
continues to be somewhat weak, whereas other areas--notably the San Francisco
Bay Area--have substantially tighter labor markets. However, with the
exception of Orange County, which borders the Los Angeles/Long Beach SMSA
to the south, manufacturing wage increases have been weak to moderate
in most areas, with only limited indications of an acceleration in 1996.
Even the San Jose SMSA, which is in the heart of the Bay Areas "Silicon
Valley" high-tech center, recently has experienced average manufacturing
wage growth at a pace less rapid than in the U.S. as a whole.
Overall, these figures suggest high and accelerating wage increases
in Nevada and Utah, which have had low unemployment rates over a sustained
period. The evidence for high and accelerating wage increases is less
clear for other fast-growth states. However, wages in Idahos manufacturing
sector and Oregons construction sector have accelerated to high growth
levels in 1996. There also has been some pick up in wage inflation in
California and Washington, where growth has accelerated in 1996; the rate
of growth to date, however, remains moderate in California.
The Alaskan economy has been highly variable in recent
months but continues to expand at a slow pace on average. Following strong
second quarter growth of 3.5 percent at an annual rate, payroll employment
declined 4.0 percent at an annual rate in July, and job growth over the
past 12 months has only been 0.7 percent. The July downturn was broad
based, with all major sectors except manufacturing experiencing declines.
State manufacturing employment has fallen 7.5 percent over the last year,
but it recorded sizeable increases in June and July, despite flat employment
in the key seafood processing sector. Although this years salmon harvest
was good, the outlook for that industry is slightly downbeat, due to very
low salmon prices arising from stiff international competition.
Anchorage has fared better than the state as a whole over the last year,
and service and trade employment there grew during July. However, growth
there and in the remainder of the state has been hampered by accelerating
out-migration in recent years, including a loss of 9000 residents due
to net out-migration in 1995.
Oregons payroll employment jumped in July, after moderate
gains in the second quarter. July employment growth accelerated to 5.6
percent at an annual rate, nearly double the growth rate for the second
quarter. Job growth has been particularly strong in business and professional
services. Also, the manufacturing sector perked up in July, benefitting
from an increase in the demand for lumber and wood products, and from
recent strong growth in computer and electronics employment; the latter
occurred in spite of moderation arising from slack in the market for computer
memory chips. The unemployment rate remains low, at 5.3 percent in July,
but it has been slightly higher in 1996 than it was in 1995. Furthermore,
although construction employment growth accelerated sharply in July, growth
in the number of building permits has moderated.
Sustained strong economic growth has helped to fill the state coffers.
Currently, an excess of state personal and corporate income tax revenues
over the states legislative prediction is expected to produce a rebate
of approximately $275 million dollars in late 1997 under the states "2%
Kicker Law."
Growth in Washington continues to accelerate.
Payroll jobs expanded 2.7 percent over the past year, but at 3.4 and 5.6
percent rates during the second quarter and July, respectively. Although
growth has been broad-based, much is attributable to Boeings resurgence.
Manufacturing employment grew at annualized rates of 10.5 and 15.6 percent
in June and July, and growth in this sector during 1996 has completely
reversed the significant job losses of 1995. Boeing plans to add 13,200
jobs in total this year, 5000 more than previously announced. This alone
will increase state manufacturing employment by 4 percent during the year,
and salutary spillover effects on Boeings suppliers and other firms are
likely to be large. Expansion by software companies and computer makers
such as Intel also are fueling state growth, and the states strong business
climate has encouraged a recent upswing in planned nonresidential construction.
Arizona experienced solid economic growth in early
summer, albeit at a slower rate than in the first five months of the year.
Payroll employment increased at an average annual rate of about 2-1/2
percent in June and July, down from the 5 percent average pace earlier
in the year. Recently, construction employment gains have slowed noticeably,
and government payrolls have been trimmed. The Arizona unemployment rate
has remained near 5-1/4 percent in recent months, up about 1/2 percentage
point from the low point at the end of 1995.
A recent slowdown in labor force growth has helped prevent further increases
in the Arizona unemployment rate. Population growth has slowed to about
a 3 percent yearly pace. State demographers trace this to a smaller influx
of residents from other states and from abroad; net migration to Arizona
in the second quarter was estimated to be about 20,000 persons, down about
25 percent from the same period a year ago.
The California economy improved further in recent
months. After a large increase in May, payroll employment increased in
June and July by about 2-1/2 percent at an annual rate, which is 1/2 percentage
point higher than the pace in the first four months of the year. In recent
months, construction and manufacturing employment growth both accelerated.
Among services, some of the most rapid job gains continued to be in the
motion picture industry and in business services, which includes software
development.
The growth in business services jobs has been particularly rapid in
the San Francisco Bay Area, where employment in this industry increased
17-1/2 percent during the past year. The 5 percent pace of manufacturing
employment gains in the Bay Area also is notable and includes rapid gains
in the electronics, computers, and other industrial machinery and equipment
sectors. The Bay Area unemployment rate has dropped about 1-1/2 percentage
points over the past twelve months to 4.3 percent in July.
In contrast, the Los Angeles Area unemployment rate edged down only
a quarter point to 7-1/4 percent over the same period, as a slight increase
in unemployment in Los Angeles County partly offset declining unemployment
rates in surrounding counties. The latest report on drivers license address
changes from the California Department of Motor Vehicles reveals that
these surrounding counties--Orange, Riverside, San Bernardino, and Ventura--and
other states continue to attract a substantial number of residents from
Los Angeles County. In contrast, the report suggests that for the state
as a whole, net migration to other states slowed substantially in the
most recent fiscal year.
The labor market in Hawaii remains weak. Non-agricultural
employment fell
2-1/2 percent at an annual rate in June and July, reversing slight gains
during February through May. The unemployment rate has remained near 6
percent, which is about 1 percentage point above the long-run average
unemployment rate in Hawaii.
However, other indicators of Hawaii economic activity have improved
this year. Through May, cumulative state gross business receipts increased
3.8 percent and the visitor count increased 4.3 percent relative to the
same period in 1995.
The Idaho economy slowed somewhat in July, following torrid second
quarter growth. Although employment in most sectors expanded at a healthy
pace in July, total payroll employment was flat, due to flat manufacturing
employment growth and government employment cutbacks. Given continued
weakness in the computer memory chip market, employment in the electronics
sector has declined in recent months, and further cuts are likely later
this year. However, total payroll employment in July was 5.6 percent higher
than a year earlier, and the unemployment rate continues to hover around
5.0 percent.
Other indicators of state economic activity also tell a mixed story.
State income tax revenues were above projections during the first half
of the year, but were offset by reduced corporate tax receipts. Automobile
sales were 12 percent above 1995 levels for the first 7 months of the
year. Although single-family housing starts have been high, multi-family
residential and commercial construction activity are down relative to
1995 levels.
In Nevada, employment growth has been holding steady at a rapid
pace (around 7 percent annualized) for the past year, although signs of
slight moderation have appeared of late. Manufacturing employment growth
has slowed substantially this year, and manufacturing payrolls declined
in July. In contrast, both wholesale and retail trade continue to create
large numbers of jobs in the state, and the state unemployment rate stood
at a very low 4.8 percent in July. However, employment in services--which
include the hotel and gaming sectors--contracted in July, and overall
employment performance for the month would have been weak were it not
for a large increase in local government employment.
Commercial and residential development signals in the state are mixed.
Although both residential and nonresidential construction are continuing
at high rates, construction employment growth has been highly variable
and thus far in 1996 remains below the pace of previous years. However,
the states rapid population and income growth continues to fuel commercial
development plans in many areas, including plans for significant expansion
of supermarket stores in the Reno area.
Utahs economic expansion continued at a rapid rate, although
it has been uneven in recent months. Payroll employment expanded at a
5.5 to 6 percent rate during the last 3 quarters, but the July expansion
was at half that rate. Manufacturing employment declined in July, and
construction payrolls have varied substantially but registered no net
job growth during March-July. In contrast, perhaps spurred by strong income
and spending growth in the state, retail job expansion has been rapid
in recent months. Furthermore, the state unemployment rate dropped from
3.4 percent in June to 3.1 percent in July.
The real estate sector also reflects the cumulative impact of a strong
state economy for several years. The state is characterized by high rates
of home ownership, and new home building and purchasing continue at impressive
rates. Housing price appreciation has been rapid in the state, however,
and affordability indices (based on a combination of home prices, interest
rates, and incomes) have declined.
1Due to temporary inavailability of statistical
data, the Financial Conditions section does not appear in this issue of
Western Economic Developments and will not reappear until further notice.
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