Western Economic Developments
May 1997
Please note: This version of Western Economic Developments
contains text only. To view the indicated graphs and tables, please
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- The District economy continued to expand at a rapid pace in recent
months. During the first quarter of 1997 payroll employment increased
by 3.3 percent, well ahead of the national pace of 2.3 percent.
- As measured by growth in nonfarm payroll employment over the past
12 months, the District is expanding nearly 50 percent more rapidly
than the nation as a whole.
- The District currently contains the four fastest growing states in
the nation, including Nevada, Arizona, Utah, and Oregon. Nevada remains
number one in this ranking. Brisk growth in California and Washington
has placed them among the ten fastest growing states in the nation.
- Construction and services continue to be the fastest growing sectors
in the District, but the manufacturing sector is becoming an increasingly
important contributor to the District's strong economic performance.
- Sustained economic growth is pushing down the District unemployment
rate. However, recent labor force growth is keeping some state unemployment
rates higher than they would be if the labor force were expanding at
previous trend rates.
The District economy continued to expand rapidly in recent months. District
nonfarm payroll employment expanded by 3.3 percent at an annual rate during
the first three months of 1997. The District currently contains the four
fastest growing states in the nation (Nevada, Arizona, Utah, and Oregon).
As measured by growth in employment over the past 12 months, the District
is expanding nearly 50 percent more rapidly than the nation as a whole.
In the District, only Alaska and Hawaii are expanding at a pace below
the national rate of 2.3 percent.
The construction and service sectors continued their rapid expansion
during the first quarter of 1997. Although the service sector continues
to be the primary job creator in the District, accounting for over 50
percent of all new jobs, growth in the manufacturing sector has been a
key contributor to the District's strength. After a slow start in January
manufacturing employment increased rapidly in February and March, bringing
annualized first quarter employment growth in the sector to 3.0 percent,
significantly above the national pace. All other major industrial sectors
also expanded in recent months.
California, now the ninth fastest growing state in the nation, contributed
over 54 percent of all District jobs created in the past 12 months. During
the first quarter of 1997 state payroll employment grew by 3.2 percent
at an annual rate, reducing the state unemployment rate to just 6 1/2
percent, a full percentage point below its year ago level. While the San
Francisco Bay Area continues to lead the state's expansion, economic conditions
are improving almost everywhere. The positive effects of sustained economic
growth can be seen in the real estate and construction industries. Office
and industrial vacancy rates are down throughout the state, and residential
construction permits as of March were 12 percent above their year earlier
level.
Despite slowing in recent months, Nevada, Arizona, Utah, and Oregon
are growing more rapidly than any other states in the nation. Nevada recorded
the strongest pace of employment growth, 7.0 percent over the past 12
months, while Arizona and Utah increased employment by more than 4.5 percent
at an annual rate. Year over year employment growth in Oregon remains
healthy at 3.5 percent. In Idaho, a surge in construction and retail trade
employment offset declines in manufacturing employment and kept the annual
pace of growth stable at about 3 percent. Both Hawaii and Alaska remained
sluggish in recent months, expanding by less than 1 percent at an annual
rate during the first quarter of 1997.
Sustained economic growth is pushing down the District unemployment
rate. Despite substantial variation in unemployment among District states,
the District-wide rate dropped by .5 percentage point between the fourth
quarter of 1996 and the first quarter of 1997. Within the District, recent
growth in the labor force has moderated the decline in some state unemployment
rates, keeping them higher than they would be if the labor force were
expanding at previous trend rates.
Labor Force Developments and Welfare Reform in
the United States and the Twelfth District
United States
Since September 1996, nearly 1.8 million individuals have joined the
labor force, boosting the labor force participation rate (the percentage
of the working-age men and women employed or seeking work) by .6 percentage
point to a record high 67 1/4 percent in March and April. Such a pick
up in labor force participation would not be surprising early in a recovery,
but after six years of economic growth, the recent jump in participation
was unanticipated. Moreover, this late into the recovery, it is unclear
who is entering the labor force so rapidly.
Near the beginning of an expansion increases in labor force participation
tend to be broad based across types of workers, reflecting the response
of a diverse pool of individuals to improving employment opportunities.
If labor force growth is broad based, any associated increase in unemployment
would reflect the presence of a heterogeneous pool of labor available
to meet employer demands. However, at this stage in the current expansion
broad based growth in the labor force is less expected. To gauge the ability
of new labor force entrants to supply employer demands and thus modify
wage pressures typically associated with tightening labor markets, it
is important to identify the groups and factors associated with the recent
uptick.
This examination is particularly important given the work participation
requirements embodied in the Personal Responsibility Act (1996). Welfare
reform became law in August of 1996, approximately the same time labor
force participation began to climb. If proactive welfare recipients are
responsible for the bulk of the recent increase in labor force participation,
we would expect this to exert upward pressure on the aggregate U.S. unemployment
rate, given the historic unemployment experience of the targeted populations
and the difficulty some former welfare recipients will have locating and
retaining jobs. Yet, because former welfare recipients are likely to compete,
at least initially, for a relatively narrow range of lower-skilled, low-wage
jobs, any corresponding boost to the unemployment rate is less likely
to be associated with diminishing wage pressures than if the additional
unemployment owed to other sources.
The aggregate labor force participation rate has trended upward over
the past several decades. Labor force participation has tended to slow
during recessions, as discouraged job seekers stop looking for work, and
pick up during recovery periods, as more individuals enter the labor force
to take advantage of increasing job opportunities. The rate of increase
in labor force participation flattened out during the recessions in the
1970s and 1980s and picked up in the initial stages of the recoveries
from these recessions. In contrast, the flattening out of labor force
participation in the 1990-91 recession was not followed by a pickup in
the initial stages of the recovery. In the second half of 1996, however,
labor force participation rates once again began to rise, reaching a record
high of 67 1/4 percent in March and April of this year.
To examine if and how the current pattern of labor force participation
differs from previous trends, it is useful to consider participation rates
by demographic sub-groups. The 1970 to 1990 upward trend in overall labor
force participation owed to increased participation by women. Between
1970 and 1990 the labor force participation rate of women increased by
about 14 percentage points to 57.5 percent, as increasing numbers of white
and black women entered the labor market. From 1970 to 1990, male labor
force participation gradually declined. During the first five years of
the 1990s, aggregate labor force participation was fairly constant as
the rate of growth of female labor force participation slowed substantially
to a pace that just offset the continued gradual decline in male labor
force participation.
Between 1995 and April 1997, the aggregate participation rate once again
began to increase. The recent pickup was broad based but particularly
large for teenagers, black women, and Hispanic individuals. Although individually
no particular demographic group exhibited large enough changes to affect
the aggregate unemployment rate, the combined effect likely was a notable
boost to unemployment. Taken together black women, Hispanics, and white
teenagers, all of whom have higher than average unemployment rates, accounted
for about 60 percent of the total growth in the labor force over the past
twelve months. Given that new entrants make up about 1.7 percent of the
current total labor force, and assuming that the unemployment experience
of the new entrants is about that of their labor market peers, the presence
of a disproportionate number of entrants with higher than average unemployment
experience could have added as much as one-tenth of a percentage point
to the national unemployment rate. If a large number of these recent labor
market entrants have come from the welfare population, where the probability
of unemployment is likely to be higher, the effect may be even larger.
Effects of Welfare Reform on Labor Force Participation
The Welfare Reform Act was signed into law in August of 1996. One of
the primary goals of welfare reform was to move beneficiaries from welfare
to work. To assess how much of the recent surge in the labor force has
been associated with these efforts, one can examine the labor supply behavior
of women maintaining families, the group most likely to be affected by
the reforms. Women in this group accounted for nearly 20 percent of the
total new labor market entrants over the past twelve months. If this entire
increase was assumed to be due to welfare reform, it would explain about
two-tenths of the total increase in labor force participation.
As in the case of black women and Hispanics, women maintaining families
have higher than average unemployment rates. The Figure shows unemployment
rates and labor force levels for single women with families between July
1995 and March 1997. The number of women with families participating in
the labor force has increased rapidly since August, the month the welfare
reform bill was signed. The labor force growth rate for women maintaining
families increased from 2.4 percent between July 1995 and July 1996, to
6.5 percent at an annual rate over subsequent months. As the Figure illustrates,
as their numbers have grown so has their unemployment rate. Currently
the unemployment rate for women maintaining families mirrors that of black
men and women and is more than twice the unemployment rate for married
women. As the deadline for enforcing the federal welfare to work targets
nears, the number of single women with families entering the labor market
is likely to increase.
Future Effects of Welfare Reform on Labor Force
Participation
Although the welfare reform bill was enacted in August 1996, some of
its most important requirements will go into effect in July of this year.
Among the hurdles that states must clear by July 1997 is a 25 percent
reduction, from 1995 levels, in their welfare caseloads. The goal of this
caseload reduction is to move current welfare recipients into the labor
market. Although, to date, there is no direct evidence that all those
who move off the rolls move into the labor force, the remaining analysis
assumes that this transition occurs.
Given this assumption, the future effects of federal welfare reform
on labor force growth can be estimated by calculating the number of public
assistance recipients who will need to enter the labor market in order
to meet the caseload reduction requirements. As of 1995, there were approximately
3.8 million adult women receiving AFDC benefits in the U.S. (see table).
Thus, to meet the 25 percent work participation goal an estimated 940,000
of these individuals will need to be in the labor market by July 1997.
1 The combination of strong economic growth and proactive behavior
on the part of individuals and states has already reduced the total U.S.
caseload, so that as of January 1997 just over 300,000 additional women
needed to enter the labor market to meet the July deadline. Other things
equal, this represents a .2 percentage point increase in overall labor
force participation between January and July.
Twelfth District
For most states in the Twelfth District current labor force participation
estimates are not available. However, data on total labor force growth,
which reflect both population growth and increased participation, indicate
that, like the U.S., most states in the District experienced a recent
surge in their respective labor forces. Although data on the demographic
characteristics of new entrants by state are not readily available, a
sense of the magnitude of additional welfare related entry can be gained
from examining the number of remaining welfare recipients who must move
into the labor market by the July 1997 deadline.
The Table shows that many District states are further along in meeting
the work participation goals than the nation. Current estimated caseloads
in Nevada, Oregon, and Utah are already below the target levels and only
minor additional reductions are required in Arizona and Idaho. 2
In contrast, for California and Washington, meeting the 1997 welfare work
participation requirements is likely to have a significant effect on their
respective labor forces. In California, an estimated 113,700 adult women
need to enter the labor market to meet the July 1997 federal caseload
reduction target. If all of these women were to enter the labor force,
aggregate participation at current population levels would increase by
.5 percentage points between January and July. In California, the effect
on the overall unemployment rate of the introduction of a relatively low-skilled,
high-unemployment group into the labor force is likely to be even larger
than in the nation as a whole, due to the state's large welfare caseload
and slow start in the transition process.
Payroll employment in Alaska increased slightly in
March, offsetting declines in January and February and keeping total employment
just above its year earlier level. However, growth in Alaska remains sluggish.
During the first quarter of 1997 payroll employment expanded by less than
.5 percent at an annual rate, making it one of the slowest growing states
in the nation. Modest gains (1,600 jobs) in the manufacturing, transportation,
and service sectors over the period mostly were offset by job losses in
construction and mining (1,400 jobs).
As resource related industries, such as oil, mining, and timber have
weakened, Alaska has begun to look for other ways to capitalize on its
land resources. The Alaska Aerospace Development Corporation (AADC) has
proposed two alternative land-use projects: the Kodiak Launch Complex
and the Fairbanks Satellite Ground Control Station Space Park. The Kodiak
launch site would be a satellite launch facility for commercial and military
use, while the Fairbanks Ground Control Station would provide ground command
and control facilities for the expanding commercial satellite industry.
Oregon's fast paced economic expansion cooled slightly
during the first quarter of 1997. Employment growth in Oregon slowed to
just 2 1/4 percent, compared with approximately 4 percent growth during
the past three years. The slowdown was broad based, affecting all but
the manufacturing, government, and transportation sectors. The only decline
in employment occurred in construction, which lost 2,400 jobs between
February and March; however, employment in this sector remains well above
year earlier levels. Other sectors of the Oregon economy continued to
expand, but at a more moderate pace than previously. The slowdown pushed
unemployment in the state up to 5.8 percent in March, slightly above its
year ago level.
Sustained expansions in high-tech manufacturing are bringing material
suppliers to Oregon, but the high price of land in Portland reportedly
is pushing some of this growth to other parts of the state. BOC Gases,
which manufactures purified gases used in micro-chip production, recently
announced plans to build a plant in Medford. When completed the plant
will employ 50 workers.
Economic growth in Washington continued at a
rapid pace in recent months. Large gains in Washington's manufacturing
and service sectors have helped lower the state's unemployment rate to
4.9 percent, a decrease of more than 1 1/2 percentage points in the last
twelve months. Spurred by expansions at Boeing and its suppliers, manufacturing
employment has grown nearly 7 percent over the past year. Together, Washington's
manufacturing and service sectors added over 47,000 jobs in the last twelve
months, representing more than 60 percent of total job growth over the
year. Washington now ranks 7th in the nation in overall job growth.
In the Puget Sound area, Boeing continues to bolster its payrolls to
meet orders for new aircraft. Boeing added nearly 3,000 workers to its
Washington sites during the first quarter of 1997. The Boeing hiring spree
and sustained growth at Microsoft are creating stiff competition in the
labor market. Employers in the area reportedly are offering finders' fees
to current employees and giving signing bonuses to new hires in an attempt
to recruit workers.
The Arizona economy grew rapidly in recent months.
Total payroll employment increased at an annual rate of about 4 1/2 percent
in the first quarter of 1997. The March figure represents an employment
increase of nearly 5 percent over the previous year, ranking Arizona second
only to Nevada in overall job growth. Furthermore, the state unemployment
rate was 5.1 percent in March, down from 5.3 percent one year ago. Growth
in recent months was supported by a substantial acceleration in the durable
manufacturing sector, particularly among producers of metal products and
machinery (including electronics). The trade and finance, insurance, and
real estate sectors also grew rapidly in the first quarter.
In contrast, construction activity has slowed in the state. Total construction
awards declined over the past year, and construction jobs were lost at
a 4.3 percent annual pace during the first quarter of 1997. Construction
activity had been spurred in recent years by rapid growth in the state
population, but available estimates suggest that state population growth
is likely to have peaked sometime in 1996.
California continued on a strong growth path, expanding
3.2 percent at an annual rate during the first quarter of 1997. Job growth
was 3 percent over the past year or 385,000 jobs. This yearly growth rate
places California ninth among all states. Over the same period, the state's
unemployment rate fell a percentage point, to 6 1/2 percent. The state's
manufacturing sector has been a key source of economic strength in the
state. In addition to ongoing expansion among producers of high-tech products,
growth in this sector recently was boosted by rapid expansion in the food
products sector and the motion picture industry.
The state's construction sector surged in early 1997, expanding by nearly
18 percent at an annual rate in the first quarter, and appears poised
for further expansion. Residential construction permits statewide are
up about 12 percent from a year ago. Although they remain well below pre-recession
levels, signs of recovery in residential markets continue to appear. For
example, in the San Francisco Bay Area, median home prices rose about
7 percent over the past year.
The market for commercial real estate also is tightening in many areas
of the state. Office and industrial vacancy rates in the San Francisco
metropolitan area were in the 7-8 percent range in the fourth quarter
of 1996. In Los Angeles County, commercial rental rates have risen noticeably
and vacancy rates have fallen over the past year.
Payroll employment in Hawaii edged up in the
first quarter of 1997, reversing a small portion of job losses from the
last 2 years. Recent gains were concentrated in the services and trade
sectors. However, total employment remains 1,700 jobs below its year earlier
level. The construction industry lost nearly 2,000 jobs over the past
year. This shrinkage accelerated in the first quarter of 1997, and residential
construction permits are well below their level from a year ago.
Furthermore, the state's important tourism industry slowed in recent
months, due in part to the earlier strength of the dollar relative to
the yen and the corresponding reduced purchasing power of Japanese visitors.
Idaho's economic growth accelerated in recent months.
Total payroll employment grew nearly 3 1/2 percent at an annual rate during
the first quarter of 1997. The largest gains were in the construction
sector, which expanded at a 15 percent yearly rate, due in part to a sharp
increase in residential construction. Employment growth in retail trade
also accelerated noticeably this year. In contrast, employment among public
utilities and in state and local government shrank during the first quarter.
In 1996, the nominal value of exports from Idaho declined by 11 percent,
after expanding at better than a 23 percent pace each of the preceding
two years. Exports of transportation equipment, computer chips, and paper
products fell substantially, causing employment reductions in the latter
two industries. Employment in the electronics sector was down 1 percent
from last March, while payrolls in paper and allied products fell by 4.5
percent over the same period.
Nevada still leads the nation in its rate of job creation,
with year-over-year payroll employment growth of 7 percent. However, growth
thus far in 1997, although rapid, has been below the state's 1996 pace.
Both the manufacturing and government sectors have contributed to tempered
growth in recent months. The most noticeable slowing has been in the state's
construction sector, which expanded at better than a 15 percent rate over
the past 3 years but grew by just 6 percent at an annual rate during the
first 3 months of 1997. This slowdown is reflected in the number and value
of new building permits, which remain well below the high levels attained
in early 1996. In contrast, service sector growth has accelerated, spurred
by surging growth in business services.
Despite sizzling employment growth over the past several years, rapid
expansion in the state's population and labor force has kept Nevada's
unemployment rate near the corresponding national rate. However, the state
unemployment rate dropped sharply in January, from 5.5 percent to 4.6
percent, and fell further (to 4.4 percent) as of March. This suggests
substantial tightening in the state labor market, which may now be constraining
growth.
Job growth in Utah continued at a robust pace in recent
months. Over the past year, payroll employment in Utah expanded by 4 1/2
percent, placing it third among all states. Recent employment gains have
been concentrated in the service-producing industries, with substantial
gains in all service-producing sectors except government. Furthermore,
despite a recent acceleration in already rapid growth in the state labor
force, the unemployment rate fell by .4 percentage point in March, to
2.8 percent. In contrast, construction activity has slowed further. After
relatively weak growth in 1996, employment in this sector fell during
the first quarter of 1997, and residential building permits have declined
noticeably over the past year.
Given rapid population growth, Utah's service-producing industries have
become increasingly important to the state's economic expansion, especially
as employment growth in the goods-producing industries of construction
and manufacturing has slowed. Service-producing industries account for
80 percent of Utah's total nonfarm employment, and the services sector
alone accounted for nearly half of all jobs created in the state since
the beginning of 1996.
1The number of female adult AFDC recipients in January 1997
was estimated from data on all recipients. Estimates assume that the fraction
of female adult recipients relative to the population of all recipients
remained constant over the period of analysis.
2A small number of individuals other than adult female AFDC
recipients will be required to leave the welfare rolls by July 1997.Therefore,
states which have met their targets for the female AFDC population may
have additional labor force entry from other affected populations.
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