Western Economic Developments
June 1997
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- Twelfth District economic activity has been vigorous thus far in
1997. Nonfarm payroll employment grew by 3 percent at an annual rate
during the first four months of the year, slightly below last years
pace but substantially above the corresponding national pace.
- During the first five months of this year, Californias economy maintained
the strong growth trend established in 1996. The state's yearly rate
of payroll job growth places it seventh in the national ranking, and
five other states in the District are in the top seven.
- District construction payroll growth accelerated to a very rapid
pace in early 1997, and the durable manufacturing sector remained vibrant.
- Conditions for District banks remained healthy in early 1997, although
asset quality has declined to some degree.
- Consumer price inflation has increased noticeably in the San Francisco
Bay Area in 1997. Other areas of the District with sustained growth,
high levels of resource utilization, and tight labor markets also are
at risk for increased inflation this year.
The Twelfth District economy has registered strong performance thus
far in 1997. Nonfarm payroll employment grew by 3 percent at an annual
rate during the first four months of the year. Although this is slightly
below last years 3.4 percent growth rate, it is substantially faster than
the national pace, and robust economic conditions are evident in most
areas of the District. As measured by the pace of annual growth in payroll
jobs, the District has six of the seven fastest-growing states in the
nation.
In California, employment expanded by 2.9 percent over the past 12 months,
which places the state seventh among all states. This represents 383,000
net new jobs created over the 12 months ending in April, just over half
of the District total. The states expansion thus far in 1997 reflects
a continuation of the strong growth trend established in 1996. This sustained
growth has served to strengthen economic conditions in areas that had
lagged behind the rest of the state. Employment growth in Los Angeles
County accelerated from 1.8 percent in 1996 to 2.3 percent at an annual
rate during the first four months of 1997, and the unemployment rate there
has declined substantially over the past year.
The other fast growth states in the District are Nevada, Arizona, Utah,
and Oregon, ranked first through fourth nationally, and Washington, which
is ranked sixth. Growth in the first four of these has slowed somewhat
thus far in 1997 compared to 1996. This may be due to tightening markets
for skilled labor and other resources and increased competition from California
as that states economy has improved. However, employment in each of these
fast growth states expanded by nearly 4 percent or more over the past
12 months.
In Washington, stepped up aircraft production at Boeing has continued
to create positive ripple effects in that state and elsewhere. This development
has combined with continued expansion by software designers to help Washington
move up the state growth rankings over the past year. Alaska's economy
picked up in recent months and has expanded moderately thus far in 1997.
Hawaii's economy remains weak, although flat employment growth during
the first four months of 1997 represents an improvement over the job losses
of the past several years.
The durable manufacturing sector has been a key contributor to the District's
vigorous economy; this sector has benefitted from developments at Boeing
and continued strong demand for high- tech products. District durable
manufacturing employment expanded at better than a 3-1/2 percent annual
rate over the past year-and-a-half, led by growth in high-tech machinery
and electronics but also in more traditional industrial sectors such as
machine tools and metal products.
Among other sectors, growth in nondurable manufacturing employment has
picked up in 1997, with strong growth in food processing employment in
California and several other states. The services sector continues to
contribute the bulk of new District jobs. Growth in construction payrolls
has accelerated to a torrid pace this year, due largely to expansion by
over 12 percent at an annual rate in California.
District Consumer Price Developments
Most major metropolitan areas in the District have experienced sustained
strong economic growth and currently have high levels of resource utilization
and tight labor markets. In several major urban areas, unemployment is
in the 3 to 4-1/2 percent range, and residential and commercial space
is scarce. These circumstances suggest the possibility of rising inflationary
pressures in the District.
Overall Inflation Trends
Table 1 lists Consumer Price Index (CPI, all items) inflation for selected
District cities and the U.S. for 1995, 1996, and the first five months
of 1997. All areas with strong or improving economies experienced a pick
up in consumer price inflation in 1996, while the rate of inflation slowed
last year in Anchorage and Honolulu, where overall economic conditions
are weaker. During the first five months of 1997, inflation accelerated
further in the San Francisco area but remained below 2 percent at an annual
rate in the Los Angeles area.
More detail on California inflation trends is provided in Figure 1,
which display annual rates of core inflation (CPI, all items minus food
and energy) for the U.S. and three California metropolitan areas. Relative
to a medium-run decline in the national rate, the recent trend in California
is upward. The most striking pattern in Figure 1 is a relatively steady
increase in San Francisco area inflation since mid-1994. Core inflation
in San Diego fell from late 1990 through mid-1995, but then increased
steadily through the end of 1996. Core inflation in the Los Angeles area
increased in late 1996, but came back down in early 1997.
Service Price Inflation
In the nation as a whole, service prices have been rising more rapidly
than commodity prices since at least the late 1980s. A similar pattern
is evident in the San Francisco and Los Angeles areas. Commodity price
inflation in these areas has been close to that in the U.S. as a whole,
due to the tendency for competition among suppliers to eliminate commodity
price differentials between different regions.
The prices of services, however, are tied more directly to local market
conditions. Service prices therefore have increased sharply in the San
Francisco area as the local economy has heated up. Figure 2 shows San
Francisco area inflation rates as measured by growth rates for the core
CPI, the CPI for shelter costs, and the CPI for services less shelter.
The consumer price of shelter (rent and owners equivalent rent) began
a pronounced upward rise in mid-1995. Except for slowed growth in mid-1996,
the yearly percentage growth rate in the CPI for shelter in the San Francisco
area accelerated from 1 percent as of July 1995 to 5.7 percent as of May
1997. Inflation in the CPI for services less shelter in the San Francisco
area also has accelerated, from about 2 percent as of mid-1996 to nearly
4 percent in early 1997. Examination of data for San Diego reveal a similar
increase in service price inflation there, from mid-1995 to the end of
1996.
In contrast, although general service and shelter price inflation in
the Los Angeles area increased in 1996, these rates came back down in
early 1997. The Los Angeles economy has rebounded substantially over the
past year, but employment in Los Angeles County has not yet attained its
pre-recession peak, and the area unemployment rate remains relatively
high. This continued slack appears to be holding down inflationary pressures
in the area.
Figure 3 shows that service price inflation has remained relatively
low in recent years in Seattle and Portland. However, commodity price
inflation increased substantially in these locales at the end of 1996,
perhaps due to increasingly costly supply lines in the Pacific Northwest.
Regional Inflation and Economic Activity
Most major metropolitan areas within the Twelfth District have experienced
strong growth, high levels of resource utilization, and tight labor markets
for the last several years. Markets for residential and commercial space
also are very tight in these areas. Although consumer price data are unavailable
for most areas in the District, examination of data for the San Francisco
area should shed insights into the likely inflation experience of other
areas with highly active economies in 1997.
Figure 4 shows the core inflation and unemployment rates for the San
Francisco area. The unemployment rate is used as a reflection of sustained
growth and high levels of resource utilization. The area unemployment
rate reached a peak and began to decline in early 1993. The core inflation
rate continued to decline until about mid-1994 and since then has risen
substantially. Figure 4 suggests a positive relationship between the strength
of local economic conditions and the rate of consumer price increases
in the San Francisco Bay Area. This link between local economic conditions
and local prices suggests that other areas of the District with sustained
high levels of economic activity also may be at risk for increased consumer
price inflation in 1997.
Economic activity in Alaska picked up a bit in early 1997. Payroll
employment increased at a 1-1/2 percent average annual pace in the first
four months of the year, following little change in 1996 and 1995. Strong
hiring this year in the seafood processing industry accounted for all
of the recent net employment gains. In contrast, construction employment
began to drop back in early 1997, and mining sector employment has continued
to decline.
Extraction of crude oil and natural gas from Alaskas North Slope fields
has trended down since 1988, and mining sector employment has dropped
commensurately. Oil-related state government revenues have been held down
by the decline in extraction activity. The reduction in state government
revenues had been offset recently by a price rise in world oil markets
and a high return on equity-related investments by the Alaska permanent
fund in 1996. Subsequently, however, oil prices have fallen substantially,
which will hold down state government revenues this year.
The rapid pace of economic growth in Oregon slowed a little in
early 1997, but the state economy continues to be among the four fastest
growing in the nation as measured by yearly employment growth. Payroll
employment increased at about a 3 percent annual pace in the first four
months of the year, down from about a 4 percent rate in each of the three
preceding years. Construction employment had posted double-digit gains
each year during 1994-96 but has been flat so far this year. Employment
growth also has slowed in other population-oriented sectors such as services
and wholesale and retail trade.
Estimates from the U.S. Bureau of the Census show that Oregon population
growth slowed from about a 2 percent average annual rate in 1991-94 to
a 1-3/4 percent average annual rate in 1995 and 1996. The Oregon state
governments Office of Economic Analysis projects that population growth
will slow a little further over the next few years but remain above a
1-1/2 percent pace.
The Washington state economy strengthened substantially in 1996
and continued to grow fast in early 1997. Payroll employment increased
at a 2-3/4 percent annual pace in the first four months of this year,
following a 3.4 percent gain in 1996. Last year's fast growth was largely
attributable to a 20 percent jump in aircraft industry employment and
large gains at computer software and hardware companies. Although computer
industry employment continued to grow rapidly in early 1997, the pace
of hiring in the aircraft industry has slowed substantially.
The additional jobs have attracted new residents to the state and fueled
housing demand. Accordingly, home prices posted solid gains in 1996 and
made residential construction more attractive. Building permits for homes
have remained at relatively high levels in early 1997, and construction
employment in Washington has increased at about a 5 percent annual pace
so far this year, only slightly slower than in 1996. Despite the continuing
inflow of new residents, expansion of the state labor force has not quite
kept up with employment growth. The Washington unemployment rate fell
1-1/2 percentage points over the past twelve months, to 5.1 percent as
of April.
The fast pace of economic growth in Arizona slowed a little in
early 1997. Payroll employment grew at a 3-1/4 percent average annual
pace in the first four months of this year, down from nearly a 5-1/2 percent
pace in 1996. Employment in the construction and government sectors edged
down so far this year, following 4 percent gains last year. Growth in
service sector employment also slowed substantially, as hotels stopped
hiring on net and the torrid pace of employment growth at business service
firms slowed.
Among the states largest metropolitan areas, Phoenix has been growing
faster than Tucson. The Phoenix area population grew about 3-1/2 percent
in 1996, and payroll employment increased at roughly twice that rate.
The Phoenix unemployment rate has fallen about 1/2 percentage point over
the past twelve months and now is down to about 3 percent. The Tucson
unemployment rate also has fallen nearly to 3 percent, but employment
and population growth in Tucson have been slower than in Phoenix.
California has sustained a relatively fast rate of economic growth
in 1997. Payroll employment grew by about 3 percent at an annual rate
in the first five months of the year, continuing the accelerated 1996
pace. Government sector and construction employment growth have picked
up this year, and manufacturing and service sector payrolls continued
to expand rapidly. Employment at real estate firms also began to increase
in early 1997, after several years of decline. However, insurance firms
and depository institutions in California continued to reduce employment
in response to structural changes in those industries.
Several years of solid economic growth have raised state government
revenue substantially, and the new state budget earmarks some of the increased
revenues for hiring of teachers and sharing with counties. Such initiatives
help transmit the economic strength of the San Francisco Bay Area, San
Diego, and Orange County to other parts of the state which have been growing
more slowly. Employment growth in Los Angeles County picked up in early
1997, and the unemployment rate there has fallen about 1-1/2 percentage
points over the past twelve months, to 6.8 percent in May. The overall
state unemployment rate is 6.3 percent, down 1 percentage point from a
year earlier.
Hawaii's economy continues to be weak. Payroll employment was
little changed in the first four months of 1997, as large declines in
construction and real estate industry jobs were offset by gains in the
services and state and local government sectors. Local government employment
has been expanding at nearly a 2 percent annualized pace for the past
1-1/2 years. State government employment fell sharply in 1995, edged down
further in 1996, and posted a moderate gain in early 1997.
Construction industry payrolls in Hawaii have fallen by about one-third
since the beginning of 1993, with no end to this decline in sight. Existing
home sales in the state have been stuck at a lw level since 1994. Although
the median price of homes in Honolulu remains high, a steady drop over
the past 3 years has reduced prices by nearly 13 percent. Furthermore,
rental housing and office vacancy rates in Honolulu have remained at relatively
high levels over the past several years.
Employment growth in Idaho has slowed slightly in 1997 compared
to 1996, but the states economic expansion continues at a good pace. Nonfarm
payroll employment expanded by 2.5 percent over the past 12 months and
2.2 percent at an annual rate during the first four months of 1997. This
expansion appears well tailored to state labor availability: the state
unemployment rate has remained relatively stable over the past 2 years,
registering 5.1 percent in April. Strong growth in construction employment
thus far in 1997 has provided a sharply positive contrast to zero growth
in 1996. The immediate Boise area has fared particularly well in recent
months, with rapid employment expansion in all major sectors.
In contrast, Idaho's key potato industry recently has been hurt by stiff
competition from the Midwest and Canada. The commodity price of Idaho
potatoes has been approximately halved over the past year. Companies such
as J.R. Simplot, which produces french fries for McDonalds, have been
forced to cut back production, close plants, and downsize at various sites
in the state.
Nevada's rapid economic expansion has continued in 1997, albeit
with a deceleration relative to the sizzling pace recorded in 1996. The
state still leads the nation in its yearly rate of payroll job creation,
but growth during the first 4 months of 1997 was 5.7 percent at an annual
pace, compared to 7.7 percent during 1996. Deceleration has been most
noticeable in the manufacturing sector, where employment growth has been
below 1 percent at an annual pace during the last four months. All other
major sectors, however, have expanded at a strong pace thus far in 1997,
and the state unemployment rate has plunged a full percentage point this
year, to 4.5 percent.
A recent study by the Nevada Department of Administration suggests that
the state's gaming market has evolved and broadened into a "gaming/leisure"
market. The trade and transportation sectors have benefitted from the
resulting shift toward broader tourism and entertainment activities. Over
the past 12 months, employment in the wholesale and retail trade sectors
expanded by 5.6 and 8.4 percent, respectively, and employment in the transportation
by air sector increased 9.3 percent.
Growth in Utah has been strong thus far in 1997, although it
too has fallen below its previously torrid pace. Payroll employment expanded
by 3 percent at an annual rate during the first four months of 1997, and
year-over-year growth of 4.1 percent ranks Utah third among all states.
The services sector has been Utah's largest and most consistent source
of job creation for the past few years, and this sector expanded nearly
7 percent at an annual pace during the first four months of 1997. Although
manufacturing employment has declined slightly in 1997, payrolls in the
trade, transportation, and communications sectors have expanded substantially,
and the state unemployment rate remains around 3 percent.
Construction employment in Utah has declined this year, but several
long-term construction projects have begun or are slated to commence shortly.
Over a billion dollars worth of infrastructure, including new highways
and bridges, is scheduled to be built in and around Salt Lake City. These
and other projects should help to bolster Utah's construction payrolls
in the face of declining numbers of new residential construction permits.
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