Western Economic Developments
September 1997
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- The District had the five fastest-growing states in the nation over
the past twelve months.
- The Intermountain states of Nevada, Arizona, and Utah were the three
fastest-growing states over this year-long period. In recent months,
job growth in Nevada continued at a torrid 6 percent average annual
pace, and Utah continued to post about a 4 percent gain. However, employment
growth in Arizona slowed this summer.
- Washington now is the fourth-fastest growing state in the nation,
owing largely to a pickup in aerospace industry employment.
- Oregons economy continued to expand rapidly, albeit slightly slower
than in 1996.
- In the first half of 1997, exports from the District continued to
grow rapidly, with a pickup in aircraft exports from Washington state
largely offsetting slowed growth in California exports of high-tech
products to Asia.
Strong economic growth continued in the District this summer. The District
payroll job count advanced at an average annual rate of 2.8 percent in
June and July, similar to the pace over the preceding twelve months. Employment
growth continued to outpace the rapid rate of expansion in the District
labor force; the District unemployment rate edged down this summer and
has fallen about 1 percentage point over the past twelve months to 5½
percent in July.
Construction employment continued to expand rapidly in many District
states in recent months. Overall District manufacturing employment also
continued to increase, but the expansion was less geographically broad-based
than the growth in construction. For manufacturing, job gains were concentrated
in the Washington aerospace industry and Arizona and California high-tech
equipment industries. In California, employment in the real estate and
local government sectors also has picked up noticeably in recent months.
Among District states, Washington state payrolls expanded most rapidly
in June and July, at about a 7 percent average annual rate. The booming
Washington aerospace industry hired thousands of additional workers in
recent months, raising employment in that sector by 23 percent relative
to a year earlier. Job growth in Nevada continued at a torrid 6 percent
average annual pace in recent months, and the pace of expansion in Oregon
and Utah remained rapid at about 4 percent at an annual rate. Californias
recent pace of employment growth has been in the 2 percent range. In Arizona,
employment growth slowed to about 1 percent at an annual rate early this
summer, and growth also was slow in Idaho and Alaska. Economic conditions
in Hawaii continued to be weak.
Rapidly growing exports were a major source of strength in the District
economy in 1994 and 1995. However, District export growth slowed sharply
last year and remained moderate through the first half of 1997, largely
owing to a slowdown in exports from California. The stimulus to California
exports from rapidly growing Asian markets and from those countries push
to develop additional electronics and computer manufacturing capacity
appears to have waned.
Recent Developments in District Exports
District exports accelerated to a 12.3 percent rate of increase in 1995,
slowed to an 8 percent rate in 1996, and picked up slightly to a 9.8 percent
annual rate of increase in the first half of 1997. About three-fifths
of District exports originate in California, where export growth in 1995
and 1996 mimicked the overall District pattern of accelerating through
1995 and slowing last year. However, in the first half of 1997 exports
from California slowed further, resulting in a level only 2½ percent
above a year earlier.
About one-fifth of District exports are from Washington state, primarily
Boeing aircraft. In 1996, a pickup in exports from Washington state partly
offset the slowing exports from California and other District states.
The ramp-up of Washington state exports accelerated in early 1997.
The remaining one-fifth of District exports from the other states in
the District are a heterogeneous mix of products. Manufacturers of high-tech
goods have a noticeable presence in Oregon, Arizona, Utah, and Idaho,
but agricultural commodities and forest products also are important exports
for some of these states. Alaskas primary exports are seafood, forest
products, and petroleum-related commodities. Given this diverse commodity
mix, the growth rate of exports from District states other than California
and Washington has tended to be similar to the growth rate of overall
U.S. exports in recent years.
Developments Abroad and the Impact on U.S. Exports
In nominal terms, U.S. exports slowed to about a 7 percent pace in 1996
and picked back up to a 9½ percent gain in the first half of 1997.
To a large extent these swings reflect the changing pace of economic growth
in our major trading partners. In Canada and Western Europe, which jointly
account for about 40 percent of U.S. exports, real GDP growth slowed to
below a 2 percent pace in 1996 and then picked up in the first half of
1997. U.S. exports to these foreign markets exhibited a similar swing,
slowing from growth in excess of 11 percent in 1995 to about 5½ percent
in 1996, before picking up again to double-digit export growth rates in
the first half of this year.
With the abrupt devaluation of the Mexican peso in December 1994, the
business cycle in Mexico has been quite different from that in Canada
and Europe. Exports from the U.S. to Mexico plunged by about 9 percent
in 1995, as Mexicos real GDP fell about 6 percent that year. However,
in 1996 and the first half of 1997, real GDP in Mexico increased at about
a 5 percent annual rate, and U.S. exports to Mexico have rebounded sharply,
at about a 23 percent annual rate.
In contrast, U.S. exports to Asia-Pacific Economic Cooperation (APEC)
countries outside North America slowed substantially in 1996 and did not
pick up in the first half of 1997. Much of the weakness has been in exports
to Japan. U.S. exports to Japan slowed from a 20 percent gain in 1995
to a 5 percent rate of increase in 1996 and actually declined at a 2.6
percent annual rate in the first half of this year. The terms of U.S.
trade with Japan began turning against U.S. producers in mid-1995, when
the U.S. dollar began to appreciate strongly against the Japanese yen
at rate which did not merely reflect inflation differentials. The dollar-yen
exchange rate now is about 43 percent above the mid-1995 low point. The
depreciation of the yen has been helped along by the Bank of Japans effort
to stimulate an economy which has been weak for about five years now;
Japanese monetary authorities have lowered short-term interest rates to
almost zero, making the corresponding yen-denominated investments less
attractive.
Japanese fiscal policy also has been activist, first to stimulate the
economy, and, more recently, to try to control a ballooning public sector
debt. Much of the 1996 pickup in Japanese GDP growth owed to a burst of
public spending. However, this pickup in Japanese GDP growth did little
to help U.S. exports, because U.S. exports to Japan are more sensitive
to the pace of Japanese private domestic consumption and investment than
to the pace of Japanese government spending. More recently, on April 1st
of this year, Japan instituted a large consumption tax increase. Although
first-quarter spending was elevated by consumers efforts to beat the tax
increase, there was a huge second-quarter decline in Japanese consumption
and investment. The 11.2 percent at an annual rate second-quarter decline
in Japanese real GDP more than offset the 5.7 percent at an annual rate
first-quarter increase.
Growth of U.S. exports to the Association of Southeast Asian Nations
(ASEAN) countries of Singapore, Malaysia, Thailand, Phillipines, and Indonesia
also slowed substantially in 1996, and the growth rate of U.S. exports
to these countries remained at a moderate 7.9 percent pace in the first
half of 1997. Subsequently, in the last three months, many of the ASEAN
countries experienced large depreciations in their foreign exchange rates
relative to the U.S. dollar.
Other APEC countries--primarily South Korea, Taiwan, Hong Kong, and
China--are the destination of about 14 percent of U.S. exports. The growth
of U.S. exports to these other APEC countries, as a group, also slowed
substantially in 1996 and remained lower in the first half of 1997. The
swing in export growth has been most pronounced for South Korea, to which
U.S. exports increased 41 percent in 1995 but have increased less than
5 percent per year since then.
Recent Developments in California Exports
The appreciation of the foreign exchange value of the U.S. dollar and
the slowing of growth in Asia-Pacific countries appears to have had a
larger dampening effect on exports from California than on exports from
other U.S. states. For one, California is more dependent than other U.S.
states on Asia-Pacific foreign trade. About 18 percent of exports originating
in California are to Japan, which is almost twice as large as the Japanese
share of overall U.S. exports. California dependency on exports to the
ASEAN countries also is relatively high, at nearly 14 percent, and another
22 percent of California exports go to other APEC countries outside of
North America such as South Korea, Taiwan, Hong Kong, and China. In the
first half of 1997, exports from California to Japan and the ASEAN countries
were down about 9 percent relative to the same period a year earlier.
The growth rate of California exports to the group of countries we have
labelled "Other APEC" slowed in 1996 and early 1997; much of
the recent weakness owed to a substantial drop in California exports to
South Korea. In addition to overall macroeconomic considerations, much
of the 1995-1997 boom and pause pattern in California exports to Japan,
ASEAN, and South Korea reflects recent developments in the computing equipment
and electronics industries. More than half of California exports are from
the industry groups which include the computing equipment and semiconductor
industries, the industry groups called industrial machinery and computing
equipment (SIC 35) and electrical machinery and components (SIC 36). Exports
of these types of products from California increased more than 25 percent
in 1995, slowed substantially in 1996, and actually declined somewhat
in the first half of 1997. Between 1995 and 1997, the swing in the growth
rate of California exports of products of industry groups SIC 35 and SIC
36 was about 32 percentage points; given that these items account for
slghtly more than one-half of California exports, this swing accounted
for all of the roughly 17 percentage point slowing in overall California
export growth between 1995 and 1997.
Figures on exports by destination from California of these types of
products (SIC 35 and SIC 36) indicate noticeable declines to Japan, South
Korea, Singapore, and Malaysia in the first half of 1997. In fact, most
of the recent slowdown in exports from California to these countries owes
to this drop in exports of industrial machinery and computing equipment
(SIC 35) and electrical machinery and components (SIC 36).
Separate, more-detailed high-tech industry statistics also suggest that
much of the recent slowdown in California exports to these Asian countries
arises from developments in the computing equipment and electronics industries.
In dollar terms, overall world absorption of semiconductors increased
very rapidly in each of the three years ending in 1995, with growth rates
in 1993 and 1994 near 30 percent and more than a 40 percent increase in
1995. To meet this growing demand and the ever-present need to remain
on the leading technological edge of fabrication techniques, domestic
and foreign semiconductor producers sharply increased their spending on
fabrication and design equipment, particularly in 1995. Exports in 1995
from California and other western states to Asian countries were boosted
by the large increases in shipments of semiconductors and of equipment
for semiconductor production.
However, early in 1996, as new fabrication capacity came on line and
semiconductor orders softened, prices for some types of semiconductors
plunged. Semiconductor sales fell sharply in nominal terms in 1996, and
overcapacity developed for some types of semiconductors. The resulting
drops in semiconductor and equipment spending appear to have reduced exports
from California to Asia in late 1996 and early 1997.
Outlook for District Exports
Recent foreign exchange rate and international business cycle developments
are likely to reinforce this trend of slowing California exports to Asia.
However, based on recent orders and shipments data, overall foreign demand
for computer and electronics items appears to have picked up in the third
quarter, particularly from Europe. Furthermore, the boom in exports of
Boeing aircraft from Washington state is likely to continue to provide
a substantial offset to any slowdown in exports of other types of products
from other District states.
The Alaskan economy continued to add payroll jobs recently,
as the second quarter pick-up carried into July. Although year-over-year
growth remained sluggish at 0.6 percent, most of the growth has come since
December. The largest employment gains have been in the retail and wholesale
trade, services, and transportation sectors. Combined, these sectors have
added 4,300 new jobs, more than offsetting the 1,400 jobs lost in mining,
manufacturing and construction.
Despite a healthy residential construction market in Anchorage and Fairbanks,
overall construction employment in Alaska has declined since December.
However, a number of large non-residential projects, scheduled to begin
this fall, should boost employment in this sector.
Oregon's economy continued to grow at a rapid pace
in recent months. Payroll employment has increased by 3.6 percent at annual
rate since December, placing Oregon among the fastest growing states in
the nation. Almost all sectors of Oregons economy are expanding, and manufacturers
of high-tech goods and of specialty metals used by Boeing are increasing
employment at double-digit rates. Combined, these two sectors account
for over 70 percent of Oregons new manufacturing jobs created in 1997.
Employment growth in retail trade, finance and real estate, and business
and consulting services also has been strong in recent months and shows
few signs of slowing. Even the government sector in Oregon is expanding.
Large state revenues and the expansion of Indian Gaming Centers, which
are classified as local government enterprises, have boosted employment
in the non-federal government sector.
Over the past two years income and population growth in Oregon have
fueled expansion of the financial services and real estate sector. Population
and income growth also have produced rapid increases in home prices. The
Office of Federal Housing Oversight reports that between the first quarter
of 1996 and the first quarter of 1997 the median house price in Oregon
rose by 8.8 percent, making Oregon second only to Michigan in home price
appreciation over the period.
Employment growth in Washington surged in recent months,
boosting growth over the last seven months to 4.6 percent at an annual
rate. The recent employment surge reduced the state unemployment rate
to just 4.7 percent in July and preserved Washingtons place as the 4th
fastest growing state in the nation. Aircraft and computer software and
hardware production continued to drive the states growth. During June
and July these sectors created 54 percent of all private sector jobs added,
with most of these in the aerospace industry. Local governments also hired
at a rapid pace, increasing employment by 11,000 during June and July.
Boeings torrid production pace may be slowed by reported bottlenecks
in parts and materials delivery. Lags in receiving ordered raw materials,
such as titanium alloy forgings, are delaying Boeings parts suppliers
and causing the company to push back some delivery dates. Shortages of
skilled employees also are hindering Boeings manufacturing schedule. Stiff
competition for skilled workers among Boeing, Microsoft, and computer
hardware manufacturers in the Puget Sound area has depleted the supply
of trained workers and prompted employers to launch national recruitment
efforts.
After very strong gains earlier in the year, the rate of job growth
in Arizona slowed a bit in June and July. Payroll employment
increased at a 1 percent average annual pace in those two months to a
level 4.2 percent above a year earlier. In recent months, most of the
major sectors of the Arizona economy continued to expand rapidly, but
these gains were partly offset by lost jobs in the public utilities and
government sectors. Most of the roughly 45,000 jobs added to Arizona payrolls
so far this year are in the services and wholesale and retail trade sectors.
The construction, manufacturing, and finance sectors also have posted
notable job gains, but government payrolls are down about 7,400 jobs.
Other indicators of economic activity confirm that growth in Arizona
is rapid but slowing. Growth of retail sales has slowed to about 5 percent
on a year over year basis. Overall construction activity remains high,
but additional gains in the value of non-residential construction have
been offset by declines in residential building. Population growth is
slowing, and the labor force is not keeping up with job growth. Help-wanted
advertising remains high, and the Arizona unemployment rate is only about
4 percent.
The pace of expansion in California remained strong
in recent months but no longer appears to be accelerating. Payroll employment
increased at about a 2 percent average annual pace in June and July, down
from about a 3 percent gain in the preceding twelve months. In August,
the underlying rate of employment growth was similar to the June-July
pace, but the UPS strike temporarily reduced the transportation sector
job count, holding overall state employment growth down by about 1 percentage
point at an annual rate last month.
The sources of fast job growth in California appear to be shifting.
Manufacturing employment growth has slowed recently, whereas construction,
real estate, and local government employment growth have picked up. Job
growth has slowed a little but remains fast in the motion picture industry
and the business services sector, which includes software development.
Regionally, job growth in the San Francisco Bay Area remains faster than
in the Los Angeles Area, but the Bay Area pace has held steady, whereas
growth in the Los Angeles Area is picking up. In Los Angeles County, the
unemployment rate fell about 1½ percentage points over the past year
to 6.6 percent in August.
Hawaii's economy remains weak. Payroll employment declined
about 1 percent at an annual rate in June and July, as the construction
and retail trade sectors continued to shed jobs. The recent pace of job
declines is similar to that in 1995. Overall economic conditions stabilized
in 1996, when visitor arrivals and hotel occupancy improved, but the visitor
flow dropped back a bit in the first half of 1997, and occupancy rates
have declined recently.
Hawaiis retail trade sector also has been hurt by the weakened purchasing
power of the Japanese yen. Visitors from Japan are not staying as long
in Hawaii as they did in earlier years, and spending per visitor reportedly
has declined.
The Idaho economy remains on a moderate growth path.
Total payroll employment expanded by 2 percent at an annual rate during
the four months ending in July, continuing a trend established earlier
this year. Recent growth in construction payrolls has been very rapid,
following a rise in both residential and nonresidential construction permits
this year. However, substantial job losses in the lumber and logging industries
offset sharp gains in high-tech manufacturing employment in recent months.
The result was weak overall job gains in durable manufacturing. This pattern
of industrial job growth also has contributed to more rapid economic expansion
in the immediate Boise area than in the rest of the state this year.
After struggling somewhat last year, the states key potato industry
has been boosted this year by price increases arising from declining potato
production in other states. However, the recent appearance of potato blight
in Eastern Idaho poses a challenge for farmers. To avoid widespread infestation
and consequent crop losses, potato farmers there have planned for early
harvesting.
Nevada still leads all other states in its rate of
job creation, with payroll employment growth holding steady around 6 percent
on an annual basis this year. All major sectors posted substantial gains
in recent months, although a July decline in manufacturing payrolls contributed
to slowed growth in that sector this year. Growth in service sector employment
has been rapid overall, but it has been held back by job losses over the
past four months in the states huge hotel and gaming sector.
Construction employment in Nevada continues to soar. Although growth
slowed in July following the commencement of two large gaming hotel projects
in June, this sector is poised for rapid expansion later in the year,
due to a recent dramatic increase in non-residential construction awards.
Planned construction projects include the creation of three million square
feet of retail shopping space, reflecting the strength of the states retail
trade sector. Retail trade employment has grown by 6.2 percent on an annual
basis thus far in 1997, up from last years pace of 5.3 percent.
Utah's economy remains on a fast growth track. Total
payroll employment expanded by four percent on an annual basis thus far
in 1997, with an acceleration in recent months. Most major sectors, except
manufacturing and government, have expanded rapidly this year. Recent
job gains have been particularly strong in the states retail trade sector,
which expanded by 6.4 percent at an annual pace during the four months
ending in July. Although Utahs manufacturing sector has been up and down
this year, the outlook for its key high-tech sector remains favorable;
this outlook has been aided by developments such as Gateway 2000s plan
to begin production of personal computers in Salt Lake City later this
year.
The states housing market remains hot, although construction and sales
activity have slowed. Total home sales fell 3.1 percent in the second
quarter of this year, marking the third consecutive quarterly decline,
and residential construction permits are well below their year- earlier
levels. The recent slowing in construction and sales may be due to a combination
of high existing rates of home ownership and earlier rapid price appreciation.
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