Western Economic Developments
December 1996
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- California's pace of job creation continues to exceed the national
rate, and the state unemployment rate is trending downward.
- The Intermountain states of Arizona, Idaho, Nevada, and Utah are
the top tier among U.S. states in terms of the pace of job creation
in the twelve months ending in October.
- Employment growth in Washington state has accelerated to a 4 percent
pace this year, equaling the rate of job growth in Oregon. The Pacific
Northwest is the second-fastest growing region in the country, closely
behind the Intermountain states.
- Residential real estate markets have been strong in the Intermountain
and Pacific Northwestern states. In California, home sales volumes and
prices have been weak until recently, discouraging homebuilding and
undermining the consumer spending of homeowners with negative equity.
However, California real estate market conditions have improved recently,
particularly in the San Francisco Bay area.
Relatively rapid economic growth continued in the District this fall.
The California economy continued to expand slightly faster than the moderate
national pace, and the boom continued in the Intermountain and Pacific
Northwest states. Through the twelve months ending in October, the four
Intermountain states of Nevada, Utah, Arizona, and Idaho were the fastest
growing in the United States, with payroll employment growth in the 4-1/2
percent to 6 percent per year range. At a 4 percent pace of job growth,
the Pacific Northwestern states of Oregon and Washington ranked fifth
and sixth, respectively. Hawaii lost about 1 percent of its payroll jobs
over the past year, as this slight contraction continued through the fall.
Slow growth continued in Alaska.
Overall District employment increased at an average annual pace of 2-3/4
percent in September and October, well above the roughly 1 percent rate
for the overall U.S. Payroll jobs in California expanded at a 3 percent
pace. Among the Intermountain states, Nevada continued to be the fastest
growing, at a 5 percent average annual pace of job growth in September
and October. For these two months, the pace of employment gains in Arizona,
Idaho, and Utah was less rapid than earlier in 1996, but given the very
large increases this summer, the underlying trend appears to be one of
only a slight slowing from a very rapid pace. Washington state job growth
has accelerated to a 4 percent pace over the last twelve months, largely
owing to hiring by major aerospace and software employers. Oregon's pace
of employment growth has held steady at near 4 percent recently.
Given the rapid 3-1/4 percent rate of District job growth over the twelve
months ending in October, the District unemployment rate fell about percentage
point over this period to 6-1/4 percent currently. Labor markets are relatively
tight in the Intermountain and Pacific Northwestern states, where current
unemployment rates are a few percentage points below the long-run average
unemployment rates for those states. The California labor market also
has tightened enough to bring the state unemployment rate down about 1
percentage point over the past year to 6.9 percent in October.
The relatively fast growth in District jobs over the past year owes
to large increases in several major sectors. Manufacturing employment
has increased about 3 percent over the past twelve months in District
states, whereas national manufacturing employment edged down about 3/4
percent over this period. The relatively rapid growth in District manufacturing
employment largely is due to increasing aerospace employment in Washington
state and increasing computer and electronics employment in many parts
of the District. Service sector jobs in the District have increased at
about a 4-1/2 percent pace. District construction employment growth has
held steady at a rapid 6-1/2 percent rate, as a slight pickup in California
offset a bit of moderation in some of the fastest growing states.
For the past few years, strong residential real estate markets and increasing
levels of residential construction have been contributing to the fast
pace of expansion in the Intermountain and Pacific Northwestern states.
In California, residential real estate markets generally remained depressed
until recently, and residential construction remained low this year, well
after the overall economic recovery in the state was firmly established.
However, California appears poised for improvement in real estate and
construction in 1997.
Home Sales Volumes
The pace of home sales in the Pacific Northwest and Intermountain states
has trended up fast in the last several years. This largely reflects the
underlying economic and population dynamics which make these regions among
the fastest-growing in the country.
The pattern differs for California. During the 1990-91 recession, the
drop-off in California home sales was more precipitous than for most areas
of the country, and state home sales remained at the lower level through
1993. The moderate pickup in California home sales in 1994 was short-lived,
as a dropback in 1995 reversed the 1994 sales gains. Through the first
three quarters of 1996, California existing home sales increased about
23 percent relative to a year earlier. Sales of new homes also have increased
in California this year, albeit less rapidly than sales of existing homes.
Home sales have increased faster in the San Francisco Bay area than in
the Los Angeles area.
Sales of new and existing homes in California remain well below the
late 1980s peak, predominantly due to fewer sales in Los Angeles County.
Three features of the current state of the California economy help explain
the low level of home sales. First, despite recent economic growth, some
potential buyers still have a high level of uncertainty about future income.
Given the relatively high level of unemployment in the state, potential
buyers know that if they lose their job, they might need a long time to
find a suitable new job. The slack in the labor market is particularly
evident in Los Angeles County. Second, the number of household formations
in California has been low, owing to the large net out-migration of California
residents to other states and to the changing composition of California's
population. The fastest-growing segments of the California population
are young people and immigrants, groups which tend to be in large households.
Third, the cost of owning a home in California remains relatively high,
particularly if buyers need to worry about possible continued depreciation
of home values.
In gauging the outlook for California home sales, near-term population
dynamics provide some grounds for optimism, as the out-migration from
California to other states is slowing. Also, the dynamics of the user
cost of home ownership in California appear to be improving.
The user cost of owning a house depends greatly on the mortgage interest
rate, the level of the house price, and the rate of expected capital gains
(or losses) over the period the house is owned. Mortgage interest rates
have been relatively stable lately. The current level of housing prices
in California is quite high relative to other states, but not necessarily
out of line with fundamental values. Most importantly, declining house
prices in the state over the past several years have let potential California
homeowners to question whether owner-occupied housing is a good investment.
A recent change in this dynamic likely is beginning to restore expectations
of moderate capital gains, decrease the user cost of housing in California,
and bring forth additional increases in housing demand.
Housing Prices
California experienced a "speculative bubble" in housing prices
which appears to have finally completed its course. Between 1980 and 1987,
California housing prices appreciated at about the same moderate rate
as in the overall U.S., but in 1988 and 1989 California home prices jumped
up sharply (chart 1). It would be difficult to rationalize the jumps of
roughly 15 percent in 1988 and 20 percent in 1989 in California home prices
without assuming that home buyers in that period expected further price
appreciation in subsequent years. However, housing price increases slowed
in 1990, and as the recession deepened in the state in 1991, prices began
to fall. As California house prices declined further during 1992 through
1995, house prices appreciated in the U.S. as a whole. Given the declines
in California and appreciation elsewhere, the "bubble" in California
house prices has dissipated in the sense that the cumulative rates of
appreciation since 1980 are roughly equivalent for California and the
rest of the U.S. House prices roughly have doubled since 1980 in California
and in the U.S. as a whole (Chart 1).
In the first three quarters of 1996, slight gains were recorded, on
average, in several broad measures of California house prices, including
the repeat sales index shown in Chart 1 and the California Association
of Realtors tabulations of median home prices. The realtors' data show
a substantial recent pickup in San Francisco Bay Area home prices, but
prices in Los Angeles County continued to decline a bit. Within California,
much of the loss of home equity since the beginning of the decade has
been in the Los Angeles area. The median Los Angeles County home price
is about 20 percent below its early 1990s peak, whereas the San Francisco
Bay Area median home price has surpassed the previous peak.
Housing Vacancies
The above discussion focusses on changes in housing demand. Increases
in housing demand tend to cause large price increases if supply is relatively
inelastic. The elasticity of supply depends on the extent of current housing
vacancies (and on builders' ability and willingness to develop new residential
projects).
For the District's Pacific Northwestern and Intermountain states, the
rental housing vacancy rate has been trending down since the mid-1980s,
according to the U.S. Bureau of the Census estimates available for 1986
through 1995 (Chart 2). The California rental vacancy rate trended up
through 1995 and was 8-1/2 percent in that year, about 1 percentage point
above the national average. Metropolitan area detail available in the
Census survey shows that the up trend and high level of the California
rental vacancy rate was due to the overhang of rental units in the Los
Angeles area, particularly in Los Angeles County. In contrast, the San
Francisco Bay Area rental vacancy rate declined in 1995 to about 5.8 percent,
almost 2 percentage points below the national average. Industry sources
suggest that since 1995 the San Francisco Bay Area rental vacancy rate
has fallen further, and the Los Angeles Area rental vacancy rate has stabilized.
Vacancy rates for homeowner units show a similar geographic pattern
as rental vacancy rates in most respects (Chart 3). The California homeowner
vacancy rate trended up through 1995 and exceeded the U.S. average, owing
to increasing vacancies in the Los Angeles area which were only partly
offset by declines in the San Francisco Bay Area. Elsewhere in the District,
the homeowner vacancy rate in 1995 was below that for the U.S. as a whole.
However, the homeowner vacancy rate for this group of Intermountain and
Pacific Northwestern states was trending up in 1994 and 1995, suggesting
that pace of owner-unit construction was more than adequate to meet the
increasing demand for new homes in those years.
Residential Construction
In the Intermountain and Pacific Northwestern states, builders constructed
housing units at about a 200,000 unit annual rate in the first ten months
of 1996 (Chart 4). The volume of construction increased about 13 percent
relative to a year earlier, faster than the growth rate in residential
construction for the U.S. as a whole. In recent months, residential construction
has slowed in the Intermountain and Pacific Northwestern states.
In California, residential construction permit issuance increased slightly
in 1996, but the current pace still is less than 100,000 units per year,
compared with a 1986 peak of almost 300,000 housing units per year. Most
of this 200,000 unit swing in the pace of home-building took place in
the Los Angeles area, where the current residential building pace is about
35,000 unites per year, down from a peak of 160,000 units in 1986.
Summary
In the District Intermountain and Pacific Northwest states, real estate
sales volumes and the level of residential construction appear likely
to remain high in 1997, but it is not clear whether the current fast pace
of increase in residential construction is sustainable. The one exception
to this generalization is Washington state, where residential construction
dropped back noticeably during 1995, as Boeing downsized, and housing
construction now is picking up as the increased aerospace activity ripples
through the rest of the state economy.
For California, a pickup in real estate markets and residential construction
appears likely to contribute noticeably to state economic growth in 1997
and perhaps even more so in 1998. Home sales are likely to be boosted
in the near-term by a pickup in population growth and household formations.
Also, the "bubble" in California house prices appears to have
been deflated, and prices are beginning to increase in some areas. The
change in housing price dynamics is likely to restor expectations of moderate
capital gains, decrease the user cost of housing in California, and bring
forth additional increases in housing demand. Nevertheless, the extent
of a pickup in California residential construction next year likely will
be limited by the fact that the turnaround in the Los Angeles area housing
market lags other areas of the state.
Economic activity in Alaska grew slowly in recent months.
Payroll employment edged up less than 1 percent at an annual rate in the
third quarter and was little changed in October. The October level of
employment is only about 3/4 percent above a year earlier. Over this period,
declines in manufacturing and mining employment offset most of the moderate
gains in the services and wholesale and retail trade sectors.
Among manufacturing industries, lumber and wood products employment
is down relative to a year earlier, and employment at seafood processors
has been flat. International competition and bountiful domestic harvests
have kept salmon prices low. Weak prices and increased competition also
have hurt profits in the Alaskan pulp and paper industry. Last month,
Louisiana-Pacific announced that it would close its pulp mill in Ketchikan
in March 1997, removing a sizeable fraction of the manufacturing jobs
in the area.
Relatively fast economic growth continued in Oregon
in recent months. Payroll employment increased at an average annual rate
of 3-1/2 percent in September and October, almost as fast as the 4 percent
pace for the twelve months ending in October. Construction employment
growth has been fueled by a pickup in residential construction and by
the building of several large high-tech manufacturing facilities. Apart
from construction, services remain the fastest growing sector in the Oregon
economy; services employment increased 7 percent over the past twelve
months. Business and professional service industries have added nearly
10,000 new jobs since December. Furthermore, nearly all other sectors
in the economy are growing; among major sectors, only government employment
is down over the past year.
The outlook is mixed for industries in Oregon's forest products sector.
Employment in the lumber and wood products industry group stabilized this
year at around 50,000 jobs, after declining sharply in 1995. Recently,
lumber prices surged about 60 percent from mid-1995 lows, but this has
not yet translated into noticeable increases in Oregon lumber employment.
In the Oregon pulp, paper and allied products industries, employment declined
about 5 percent in 1996 to roughly 8,500 jobs as of October. Pulp prices
fell about 50 percent between mid-1995 and early 1996 and only regained
a small portion of the decline in subsequent months.
Economic growth in Washington has picked up. In the
twelve months ending in October, payroll employment increased 4 percent,
and the state unemployment rate fell about percentage point to 5.8 percent.
Much of the recent job gains have been in aerospace manufacturing, but
business service employment also has increased substantially.
Although construction employment increased only 1-1/2 percent over the
past year, further gains may lie ahead. Awards for non-residential construction
contracts were very high during the three months ending in October. For
residential housing units, vacancy rates reportedly are down, particularly
in Seattle. State personal income growth has been strong, owing to increased
employment and gains in average hourly earnings. The National Association
of Home Builders recently found that Seattle residents with income at
the margin could afford 59 percent of all homes in the area. This percentage
is well above that recorded for neighboring states.
Relatively strong economic growth continued in Arizona
this fall. Payroll employment increased at an average annual rate of about
4 percent in the three months ending in October, which is about equal
to the pace for 1996 as a whole. Job growth picked up slightly this year,
following a 3-3/4 percent gain in 1995 and a torrid 7 percent pace in
1993 and 1994. Construction employment growth settled down to a more sustainable
5 percent pace in 1995 and 1996, following gains of 21 percent and 17
percent in 1993 and 1994. The manufacturing sector has been a more steady
source of job growth in the state, with gains in the 3 to 5 percent range
for each of the last four years. Service sector job growth also has been
rapid and relatively steady.
Most of the slowing in Arizona construction employment growth is attributable
to moderation in the pace of residential building, after a bulge near
the beginning of this year. Non-residential construction awards have continued
strong in recent months. Office vacancy rates in metropolitan Phoenix
and Tucson have dropped sharply in the past two years and now are near
11 percent, which is a few percentage points below the national average.
However, vacancy rates for industrial space in these Arizona metropolitan
areas have been trending up and currently are above the national average.
The California economy continued to expand slightly
faster than the moderate national pace this fall. State payroll employment
is estimated to have increased at an average annual rate of 3 percent
in September and October, which brings the average rate of employment
growth in 1996 through October to 2-3/4 percent. The 1996 pace is about
percentage point faster than the 1995 pace. In comparison, employment
growth accelerated about 1-3/4 percentage points in 1994, the first full
year of recovery in California, and percentage point in 1995. A rebound
in manufacturing was the key to the initial stages of the California recovery,
and manufacturing employment growth continued to accelerate in 1996. Growth
in overall government sector employment also picked up significantly this
year, despite the continued loss of federal government jobs. Almost all
of the roughly 40,000 jobs added to local government payrolls so far this
year have been for education, largely reflecting increased transfers of
state revenues for the purpose of adding teachers.
California state government general fund revenues increased 8 percent
in the 1995-96 fiscal year, which ended this past June. Revenues continued
increasing in the second half of 1996. Assuming continued state economic
expansion in 1997, the state Legislative Analyst's Office (LAO) recently
estimated that for the 1996-97 fiscal year as a whole, general fund revenues
will increase about 5 percent. California law (Proposition 98) mandates
that a large share of increased revenues go to schools, and the LAO estimates
that K-14 education spending will increase at an average annual rate of
over 9 percent in the current and two subsequent fiscal years.
Despite the recent firming in tourism activity, Hawaii's
economy continued to contract in recent months. About 4,500 payroll jobs
were lost during the first ten months of the year. More than half of the
job losses were in the beleaguered construction sector. Government sector
employment also has continued to contract. Most of the lost federal jobs
were of Navy personnel. State government payrolls also have been trimmed.
Growth in Idaho has been rapid thus far in 1996, although
the torrid second quarter pace was not sustained in the third quarter
and October. The latest figures put total payroll employment 4.4 percent
above its year earlier level, although it fell back somewhat in September
and October. The most noticeable employment declines were in durable manufacturing,
particularly in the state's electronics sector, which is still experiencing
lingering effects of weakness earlier this year in the computer memory
chip market. Despite the general slowing, several sectors -- wholesale
trade most noticeably -- have performed well in recent months, and the
state unemployment rate came down 0.2 percentage point in October, to
4.8 percent.
The memory chip slowdown affects other areas of the state economy through
the government budget. Growth in state general fund revenues is expected
to decelerate this fiscal year, due to decreased business tax revenues.
Among other factors, Micron Technology, the state's large memory chip
maker based in Boise, had accounted for a large fraction of state corporate
income taxes in the past, and the decline in memory chip prices and sales
recently has lowered company profits.
Nevada continues to post larger year-over-year payroll
employment gains than any other state. However, the 12-month growth rate
has declined from about 8 percent at the start of the year to 6.2 percent
as of October. Moderation has been most evident in the key hotel and amusement
sector, which accounts for over half of the state's service sector jobs;
this sector has lost jobs on net during the last 4 months. In contrast,
growth picked up over the last few months in the manufacturing sector,
and construction employment grew rapidly. Furthermore, employment in the
retail trade sector has expanded rapidly throughout 1996 and accelerated
during the third quarter. The state unemployment rate dropped slightly
in October, to 5.2 percent.
Construction activity should continue to spur the state economy. Nonresidential
permits have been at high levels during 1996, with substantial new hotel
and casino construction underway. Despite some downturn in recent months,
residential construction permit issuance is at high levels.
Utah's expansion also has moderated somewhat in recent
months, although the state's labor and housing markets continue to be
very tight. Payroll employment has expanded by 5.2 percent over the past
year, down from the 5-1/2 to 6 percent pace of the past several years.
This slight slowdown has been broad-based, with one key exception being
rapid expansion in durable manufacturing employment. Also, after shrinking
during the second quarter, during the subsequent four months construction
employment growth returned to a very rapid pace, approximately 15 percent
at an annual rate. Overall rapid job growth has held the state's unemployment
rate down around 3 percent in recent months.
The large number of new and existing residents who are demanding homes
has kept residential construction high. One downside to the state's very
strong housing market, however, is declining affordability for those at
the median income level. For example, available estimates suggest that
home prices have appreciated more than 20 percent in the Salt Lake City
area, and that affordability is at its lowest level there since 1981.
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